Category Archives: Europe Still All the Market Cares About

Is The Chinese Economy Ready To Stand On Its Own Feet?

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GDP growth has been the focus for the past 20 years. China has done what it had to do to keep GDP growth up in the 10% range.

In 2008 when the world fell apart, China wrote a check for $700 Billion in stimulus for its economy to keep from sliding backwards. The money is now seen in roads, bridges, schools, ports, water systems, high rises, etc.

The money has also found its way into the coffers of government officials and businessmen who routinely collect bribes to complete projects. It has also found its way into a very shaky “Shadow Banking” System. Companies and individuals have been borrowing at low rates from banks, and lending that money back out at userous rates to undocumented borrowers. I’ve read estimates the shadow banking system could represent as much as 40% of GDP.

In today’s news, Liu Yuhui, director of the China Economic Evaluation Center under the Institute of Finance and Banking under the Chinese Academy of Social Sciences, predicted China’s GDP will continue to fall to 8% to 9% by Q4, and further from there.

He also believes there will be no recession. More importantly, Yuhui surmises the cost to government of propping up the economy with stimulus has become too expensive. Local governments will not have the funding from the Central government, and the Chinese economy will have to stand on its own. With retail sales rising 17.5% this year, it’s a distinct possibility the domestic economy could start to fill in for any shortfall related to a global recession.

In Europe news -  our Under Secretary of International Affairs- Lael Brainard- testfied before Congress yesterday. She says Europe’s proposed European Financial Stability Fund (EFSF) must have real teeth and be credible to the markets. The need to have the overwhelming resources to take bank defaults off the table.

We’ll see what come out of the big summit meeting on Sunday.

The China markets were lower again overnight- The A Shares down .58%, and the B shares down .62%. – once again hitting new 52 week lows. It’s a mess out there in equities.

 

9.1% is the number- that’s GDP growth in China in Q3

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9.1% is the number- that’s GDP growth in China in Q3. It’s the lowest in 2 years, but that certainly doesn’t seem too bad to me in light of all that’s going on around the globe. Chinese exports were hurt by the slow down in Europe, but retail sales within China grew about 17%- that’s impressive.

One would think the markets would respond positively to this news- not so. Many news services are reporting 9.1% was a disappointing number. However, that’s not why those markets were down. With inflation being the primary enemy of the Chinese economy, a little cooling off of GDP is not the worst thing in the world.

It was news out of Germany that dampened the world’s appetite for risk and equities. German Chancellor Angela Merkel’s chief spokesman said EU leaders won’t provide a quick ending to the debt crisis at an Oct 23 summit. Last week, the market had been optimistic the EU would begin to deal with this problem. The Germans killed the optimism, and down stocks went. It seems all global equities markets are being held hostage to the EU banking crisis.

The Shanghai A shares sold off rather harshly overnight- down 2.35%- the B shares identical at 2.35%- leaving China markets still very deeply in Bear Market territory- down about 20% on the year.

There has been rumors abounding suggesting the Chinese are ready to step in a help with an EU bailout. The rumors say they are just waiting for the enormity of the problem to be defined. This was reported in the UK’s Sunday Times.

We’ll see.

 

 

Europe Still All the Market Cares About

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From time to time, markets become obsessed. Right now, the only news that’s driving markets up and down is news on what’s happening regarding both the European banks and the state of European Sovereign debt.

The market goes through periods of time when the news flow is laser focused on issues that become magnified beyond their true importance. If Greece defaults on its bonds, does that really effect in any major way most US companies, or companies serving the ever growing consumer in China? I think not. Yet- it effects the market in a dramatic way each and every day – this month.

Fortunately, next month the focus will be earnings, and hopefully the out of Europe will have quieter voice in October- the month that has traditionally been the Bear Killer.

Today, the ECB moved to remove doubts about the ability of European banks to borrow dollars by providing new lines of credit for longer periods of time.

Markets globally were up strong on the news.

There isn’t a big news flow out of China, but here’s some items I picked up on:

  • The Chinese markets were down slightly in overnight trading- the Shanghai A shares were down .2%, and the B shares down .12%. The news out of Europe should help these stocks perform better in tonight’s trading.
  • Premier Wen Jiabo is using the European crisis to lobby for trade changes. The European Union has classified China as a “non market” economy- meaning they pursue unfair trade practices. In a speech, Wen “suggested” China would be more amenable to helping with the a European bail out if Europe would re designate China as a “market economy”, thereby allowing China to export to Europe without tariffs. European markets liked the idea, and rebounded on his comments.
  • A study recently released by KPMG suggests China is losing its edge as the world’s greatest manufacturer. According to the report, the minimum wage in China is now 4 times that of other South East Asia countries. Indonesia and Bangladesh are benefiting from this trend. Rising wages in China is a positive with the inflation picture, and a reason China will accelerate to have its GDP growth more domestically focused.
  • Baidu owns travel site Qunar.com. It was announced today Baidu plans to spin out Qunar into a separate division for an US IPO next year.

That’s it for today. Let’s hope for smoother sailing ahead.