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Sancho Panza

4 Signs Of Economic Slowdown In China

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'The thesis of China facing weaker nearterm economic growth is widely accepted at this point. Moreover, the slowdown in the nation's manufacturing sector this month (see chart) has provided some support for this view. But as we have seen in recent years, it could be a temporary correction related to some seasonal patterns. Given the difficulty in obtaining reliable data out of China, what other evidence do we have that the nation's economy is actually slowing? Here are four signs that seem to support the "slowdown" thesis.

1. For the first time China's "insiders" are calling for weaker growth:

: -
China’s state media have long accused foreign analysts of being too bearish on the Chinese economy.
Those analysts looking in from the outside are often said to be too eager to be “chanting decline”—chang shuai—when it comes to the economy’s prospects.
This time around, China’s own economists seem to be chanting a pessimistic tune about growth prospects.
Perhaps they are not quite as negative as those pesky foreign counterparts—who according to at least one report China’s state media are being told to avoid—but they are increasingly outspoken about slowing growth and rising financial risk.
“We are now in a painful stage,” economist Wang Luolin told a seminar this week. “Let’s not try to dress things up,” said the consultant to the Chinese Academy of Social Sciences, a government think tank.
Yu Bin, a senior researcher at the influential Development Research Center under the State Council, took a similarly pessimistic view.
“The fact is, China’s economic growth is facing substantial downward pressure,” he said. “I don’t think we should get our hopes up for this year’s growth.”

2. The nation's central bank has once again halted the currency appreciation. The authorities tend to do this during periods of economic uncertainty in order to provide some support for China's exporters.

USDCNY.PNG Chart shows USD appreciating against CNY (Source: Reuters)

3. Australian coal prices have been under some pressure - mostly due to mediocre demand from China.

Australian+coal.PNG Australian thermal coal price (source: Ycharts)

Similarly iron ore price has been weaker recently, with China having stockpiled massive amounts of the commodity (inventories at highest level since 2010). This could be an indication of slack in industrial demand.

4. Perhaps the most significant indicator of slowing growth in China is the decline in longer term interest rates combined with an inverted yield curve.

SHIBOR+Rate+swap+curve.PNG

Why is the yield curve inversion (short term rates higher than long term rates) so important to watch? In many countries an inverted yield curve is often a harbinger of an economic slowdown. Just to put this in perspective, here is what the US yield curve looked like in the middle of 2007 (about six months before the start of the Great Recession).

US+yield+curve.PNG

Of course nobody is calling for a major recession in China, but a slowdown looks increasingly likely.'

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Fascinating. Every day there are new stories of how horrific China is.

Some of us have been saying it for the last 3 years. Now the media is focussed on it - and AFTER the stock mkt has collapsed I have to wonder if it's time to invest in it. See Investment Markets section/thread for blog links on the subject.

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The PBoC has spent the last four years half-heartedly trying to rein in China's property lending. With January prices still rising at nearly 10%/yr, they now appear to be having another go. Around 90% of Chinese households already own their own homes. An additional 15 million new units, most of them apartments, are being constructed every single year. Approx. 65% of Chinese household wealth is tied up with real estate.

HONG KONG, Feb 24 (Reuters) - China shares suffered their biggest loss in seven weeks on Monday, hurting Hong Kong markets, after mainland news reports stoked fears that banks have tightened loans to property developers.

Monday's losses, which erased a recent rebound for Chinese property shares, were rooted in fears of new moves by authorities in their four-year campaign to rein in risks of a possible asset-bubble as home prices have surged.

"I would get out of interest rate-sensitive sectors. It's very hard to navigate right now with policy risk on the rise," said Hong Hao, Hong Kong-based chief equity strategist at Bank of Communication International.

"Property prices in many cities are still rising and that's not a good sign coming ahead of the annual parliamentary meetings," Hong added.

Those meetings are due to start March 5 in Beijing.

In January, average new home prices in China's 70 major cities rose 9.6 percent from a year earlier, easing from the previous month's 9.9 percent rise, according to Reuters calculations based on data released by the National Bureau of Statistics (NBS) on Monday.

In a front page editorial on Monday, the official China Securities Journal said that unusually high investment in China's property market over the past decade will "for certain" cool as part of the broader slowdown in the world's second-largest economy.

http://www.reuters.com/article/2014/02/24/markets-hongkong-china-stocks-idUSL3N0LT1JO20140224

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Fascinating. Every day there are new stories of how horrific China is.

Some of us have been saying it for the last 3 years. Now the media is focussed on it - and AFTER the stock mkt has collapsed I have to wonder if it's time to invest in it. See Investment Markets section/thread for blog links on the subject.

http://blog.mpettis.com/2014/02/what-do-bank-share-prices-tell-us-about-growth/

'Tom Holland had an interesting piece in the South China Morning Post three weeks ago in which he discusses the low valuations of Chinese banks. About a decade ago, if I remember correctly, Chinese banks were trading between three and four times book. Those valuations have dropped considerably since then: On Monday, the weighted average price-book value ratio for the 10 Chinese banks listed in Hong Kong fell to just 0.98. In other words, as an investor you would have been able to buy shares in Chinese banks for less than the cash you would have received – in theory – if the companies were wound up the following day and the residual value returned to shareholders. That’s a highly unusual state of affairs, especially in a rapidly developing economy like China’s where banks have traditionally been regarded as a geared play on future growth.

Holland goes on the argue that this has important implications about the quality of the banking balance sheets:

Some observers argue that the current abnormally low valuation of China’s banks is an aberration which represents a great buying opportunity. There is, however, another interpretation.

Imagine that the market has got the pricing of Chinese bank shares about right. That would imply the value at which they are carrying assets on their books is far too high. Or, to put it another way, the proportion of non-performing loans on the balance sheets of China’s commercial banks is a lot greater than they are admitting. A very rough back of an envelope calculation suggests how high the true level of bad loans might be.

If the long-term price-book ratio were an accurate representation, it would imply the real value of bank net assets should be some 40 per cent below their declared level.'

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Similarly iron ore price has been weaker recently, with China having stockpiled massive amounts of the commodity (inventories at highest level since 2010). This could be an indication of slack in industrial demand.

At a 5 year low....

Article%20Lead%20-%20wide6117622310f8541

The May federal budget forecast a price of $US100 a tonne, compared to Wednesday's $US82.20.

Junior miners are also feeling the heat, with high-profile Perth entrepreneur Tony Sage saying that higher-cost players at the smaller end of the market may struggle to stay afloat.

"Companies [producing iron ore] in the $US70 and $US80 range that can't reduce their costs and get extra tonnes out are really going to hurt," Mr Sage told Fairfax Media. "Companies that are suffering from infrastructure bottlenecks and can't get a product to port are going to be in trouble."

Australia news September 11, 2014: http://www.smh.com.au/business/markets/iron-ore-continues-slide-20140911-10f7vj.html

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