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Sancho Panza

Stock Markets Threatened By Collapse In Chinese Consumer Demand

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Telegraph 27/10/14

'The capitulation of the Chinese consumer threatens to drag stock markets around the world into a death spiral as one of the pillars of global growth is undermined.

Figures from the world’s largest consumer goods groups last week laid bare the shocking weakness of consumer demand in China, which threatens to pull down global stock markets that have been priced to perfection by more than five years of extraordinary monetary policy and asset price inflation.

For China to avoid a hard landing it was essential for consumer spending to pick up from where centrally planned infrastructure spending left off, but there are signs this simply isn’t happening. Unilever, the world’s third largest consumer goods company, said they were surprised by the “unusually rapid” slowdown in Chinese consumer demand.

The company said that sales growth had slumped to about 2pc during the nine months ended September, down from about 8pc growth last year. The slowdown in Chinese sales growth to about 2pc is also an average – there are pockets where trading is far worse. The company added that sales to the big hypermarkets in the country are less than 2pc or even negative in some cases.

Nestle, the worlds largest food company, recently reported falling sales for the first nine months of the year and also warned of “challenging” Chinese trading conditions. The fear of China going backwards is now becoming a reality, as the Chinese consumer is not picking up from where capital investment left off.

Immediately after the 2008 banking crisis China launched the largest stimulus package and infrastructure investment program the world has ever seen. China has used 6.6 gigatons of cement in the last three years compared to 4.5 gigatons the USA has used in 100 years.

The stimulus package increased fixed capital investment to 50pc of GDP, while domestic consumption withered to only 35pc. The lopsided economy led Hu Jintao, the President of China until 2012, to call the period of growth “unstable, unbalanced, uncoordinated and unsustainable.” The hope was it would eventually kick start consumer spending.

Those hopes have been shattered by the bursting of the Chinese housing bubble that is having a devastating impact on consumer confidence. Chinese house prices in September have fallen for the fifth month in a row and wiped out all the gains of the past year, according to National Bureau of Statistics (NBS) data last week.

House prices across 70 major Chinese cities declined by 1.3pc in September from a year earlier. The housing correction is widespread with prices falling month-on-month in a record 69 out of 70 major cities, up from 68 in August, according to NBS data. This will have wide ranging effects on the Chinese economy as according to French bank Societe Generale: “the aggregate exposure of China’s financial system to the property market is likely to be as much as 80pc of GDP.”

The unravelling of the China housing bubble is a serious problem for the world economy. China is expected to be the largest constituent with almost $1 trillion of global GDP growth in 2015. Combined with the US the two countries are estimated to generate more than 90pc of growth. In stark contrast the next largest contributor is the UK with less than $200bn.

Undershooting global growth targets wouldn’t usually be a problem but stock markets around the world are priced to perfection after more than five years of extraordinary monetary policy. Last week the S&P 500 rallied by more than 3.7pc to 1,957, and has now nearly erased October’s sharp losses. According to the Shiller price earnings valuation for US markets they are 54pc overvalued.

The US markets cheered signs that the Federal Reserve and the European Central Bank could act in concert to pump more money into the system after the October selloff spooked investors. The Vix, the so-called “fear index” that measures market volatility, has fallen back to more normal levels in a sign investors believe everything is ok. The Vix spiked to two year highs in mid-October as growth fears gripped markets.

UK markets are likewise staging a tentative recovery. The FTSE 100 index of leading shares was up 1.3pc to 6,388 last week, still some way short of highs of 6,904 in early September.

While stock markets may have been lulled into a false sense of security by the soothing words from central bankers, investors should take a look out of the window at the brutal reality in the real world.

The number of UK companies issuing profit warnings in the third quarter has reached the highest total since the 2008 banking crisis, according to this mornings survey from accountants EY. Having spent the past five years pushing through price increases while wages remained static many companies have now hit a profit ceiling.

Consumer’s disposable income is also reaching breaking point. In order to shift goods retailers are facing a deflationary spiral. Unilever last week reported European sales down 4.3pc, far worse than market consensus for a 1pc decline. Worryingly the group reported sales volumes down 1.7pc, and price deflation of 2.7pc during the third quarter.

It is not just those exposed to consumers that are experiencing a sharp slowdown. Engine maker Rolls-Royce, shocked investors with its second profit warning of the year, blaming the shaky economy and the effect of Russian trade sanctions for a revenue crunch this year and no earnings growth next year.

The profit warnings are no longer isolated to one-off weather events, or industries either, the slowdown is engrained in the real economy.

Bellwether corporates in the US such as MacDonald’s, Coca-Cola and Ford have all reported dismal numbers. McDonald’s was particularly eye opening, as last week the company said that U.S. same-store sales fell 4.1pc in September, the worst monthly drop in more than a decade, and that profits plunged 30pc in its third quarter.

Historically the last week in October tends to be good for UK stocks, but investors shouldn’t use this as a buying opportunity. The clouds are gathering and the 2015 global growth story looks holed beneath the water line.'

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Here in plain view are the international property Ponzi schemes each requiring ever larger amounts of debt to prevent collapse.

It shows that when one of these individual and uncoordinated property Ponzi schemes starts collapse it has repercussions for all of the other schemes.

Systematic risk

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Why would the Chinese spend when they need to save because there isn't a social policy safety net? If they spend the savings they are screwed.

I detect a slight flaw in the plan to turn Chinese into mass consumers.

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The bulk of Chinese aren't going to be spending as the only earn $4,755 per year or £207 per month after tax. It's like trying to make a consumer boom driven by wages equivalent to unemployment benefit and people shopping in pound land.

The majority of people will never be able to buy a home in one of those ghost cities, there will never be a consumer boom with people taking home £207 per month!!

If wealth inequality in China wasn't so great consumer demand might be a little better than it currently is, but it's not.

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Here in plain view are the international property Ponzi schemes each requiring ever larger amounts of debt to prevent collapse.

It shows that when one of these individual and uncoordinated property Ponzi schemes starts collapse it has repercussions for all of the other schemes.

Systematic risk

Not really. Chinese market is yuan denominated.

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The bulk of Chinese aren't going to be spending as the only earn $4,755 per year or £207 per month after tax. It's like trying to make a consumer boom driven by wages equivalent to unemployment benefit and people shopping in pound land.

The majority of people will never be able to buy a home in one of those ghost cities, there will never be a consumer boom with people taking home £207 per month!!

If wealth inequality in China wasn't so great consumer demand might be a little better than it currently is, but it's not.

It's a managed economy.

They'll increase wages.

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Why would the Chinese spend when they need to save because there isn't a social policy safety net? If they spend the savings they are screwed.

I detect a slight flaw in the plan to turn Chinese into mass consumers.

That's the solution then isn't it. Improved social welfare. Sorted.

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It's a managed economy.

They'll increase wages.

And increase unemployment, but they don;t have a social warfare system and have no intention on reducing inequality by introducing one as they would immediately lose the salve labour that have ben powering the economy.

Bit of a catch 22 don't you think? Planned economies don't tend to work and lead to collapse where organic growth is what the world has fundamentally grown up on.

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The global corporates have got exactly what they wanted and paid the politicians for. Unfortunately I believe the Chinese have as well asn it is not quite what the corporates had hoped for.

If the Chinese are continuing to invest in capacity, it will be the end game, the turning of all the inherited IP/knowhow to undercut and out-compete the corporates behind their backs.

So now, not only have the corporates destroyed their own markets by shipping out eveything they could they face the backwash back from competitor products and can;t even hope on Chinese demand pulling them out of the mire.

Edited by onlyme2

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The bulk of Chinese aren't going to be spending as the only earn $4,755 per year or £207 per month after tax. It's like trying to make a consumer boom driven by wages equivalent to unemployment benefit and people shopping in pound land.

The majority of people will never be able to buy a home in one of those ghost cities, there will never be a consumer boom with people taking home £207 per month!!

If wealth inequality in China wasn't so great consumer demand might be a little better than it currently is, but it's not.

Means nothing unless its quantified. Thing most people forget is that yes a lot of Chinese are very poor but there are a huge number of them. It only takes 1 in 10 people to be counted and you have an economy roughly the size of Japan.

In the big eastern cities many wages are fast approaching those of the UK. A decent engineer costs the same there as he/she does here.

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I was in Oz back in 2010 and made the comment that their mining boom was based mainly on demand from China which was finite. I was laughed at (politely I hasten to add).... they honestly couldn't see the boom ending.

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I was in Oz back in 2010 and made the comment that their mining boom was based mainly on demand from China which was finite. I was laughed at (politely I hasten to add).... they honestly couldn't see the boom ending.

Has it ended yet?

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I was in Oz back in 2010 and made the comment that their mining boom was based mainly on demand from China which was finite. I was laughed at (politely I hasten to add).... they honestly couldn't see the boom ending.

Chinas still a relatively poor country and more so India, im sure there will be plenty of demand for their minerals over he coming centuries.

A downturn is inevitable to all apart from those who see the LIBLABCON doing all they can to keep the plates spinning as sustainable economics.

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Has it ended yet?

http://dfat.gov.au/publications/tgs/index.html

Biggest exports are

1 Iron ore A$69bn http://www.indexmundi.com/commodities/?commodity=iron-ore&months=360

2 Coal A$39bn http://www.indexmundi.com/commodities/?commodity=coal-australian&months=360

3 Education A$15bn

4 Gold A$14bn

Worth noting both are now in touching distance of 2008 lows.

Edited by Sancho Panza

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