Wednesday, December 30, 2015

Prediction of Slow Global Growth

IMF chief Christine Lagarde predicts low global economic growth in 2016, with slower U.S. consumption spending and a stagnation in Chinese manufacturing. The Guardian story quotes a story in Handelsblatt:

As with other such predictions, the IMF may be lending too much credence to the manufacturing slowdown as a proxy for broader trends.

Friday, December 25, 2015

Criminal Investigation in Mudslide Dump

The follow-up to the deadly landslide in an industrial park in Shenzhen has revealed the situation to be more serious than initially thought. Only a single survivor was rescued from the buried buildings. Seven deaths are confirmed. After five days there is only a slight chance that more survivors could be found. The rescue effort has been hampered by a lack of suitable power equipment, so most of the digging has had to be done using hand shovels, leading to questions about the adequacy of the disaster response.

Officially, the event has been reclassified as a work safety failure rather than a natural disaster. The hill that collapsed in heavy rain was not a natural hill, but a very tall dump of construction debris and surplus soil. Local officials had ignored safety complaints about the dump for more than a year. Construction crews had not sought permission to pile the soil in a hill more than 100 meters tall, a strategy that directly violated construction safety laws and led to the mudslide. Government officials today announced a criminal investigation.

Telesur provides a roundup of recent developments:

Sunday, December 20, 2015

Mudslide and Explosion in Shenzhen

Disaster struck an industrial area in China again today, but this time it was a natural disaster, a mudslide burying several blocks of industrial facilities and triggering an explosion, either in a gas plant or in a pipeline. Various reports in recent hours put the number of people missing between 29 and 73. The mudslide struck an industrial park in Shenzhen near the border with Hong Kong. Around 1,000 people escaped ahead of the mudflow, which struck in the late morning. Several buildings collapsed, some were buried, and one was shown close to tipping over after being dislodged by the flowing mud. Economic Times: 59 missing as massive landslide hits China's Shenzhen BBC News: China landslide: Many missing after buildings collapse in Shenzhen

Sunday, December 13, 2015

Schwarzenegger Asks for Broad Approach to Climate Impact of Manufacturing

At the climate talks former California governor Arnold Schwarzenegger was one of the loudest voices calling for broad participation in the problems of fossil fuel use in manufacturing. It’s a problem that many had hoped that China, as the global leader in manufacturing, would take on, but as Schwarzenegger argued, that may not be realistic:

The whole world is (asking) China to produce their products so therefore we’re basically sending all the pollution to China and so now they have to deal with it and we all have to work together with them. It’s not like finger-pointing (at China) or like ‘them versus us,’ it’s more like ‘how can we do this together?'

Schwarzenegger also suggested that eating less meat, or becoming a “part-time vegetarian” as he put it, was one of the keys to climate success. A summary of his comments at the summit can be found at ZME Science:

While the whole world must take on the problem, China will lose customers if the climate costs of manufactured goods are seen as too high. Indeed, this must already be happening to a slight extent. Therefore, China must take a leading role in reducing the costs of the goods made in its factories.

Friday, December 11, 2015

Manufacturing Leads Stock Market Decline

This month’s stock market rout focused initially on manufacturing, materials, energy, and mining. Only in the last two days has the decline caught up to tech and retail stocks. The Australian stock market, heavily dependent on materials used in manufacturing, has taken the biggest hit this month. Apart from stocks, there have been sharp declines in oil, iron ore, and the yuan, all closely tied to manufacturing.

The declining yuan and other inflationary factors should in theory support the Chinese stock market, but that is a market that at this point is controlled more by a tangled knot of government interventions than by market forces. We saw another example of this today as one of China’s most prominent business executives disappeared today without any public explanation. Reportedly he was taken away by police, and the timing of the arrest suggests that he was suspected of selling stocks last week during a run-up in the Chinese stock market. The rumors reminded would-be stock investors that they too might be taken away (or their investment funds frozen) if they someday try to cash out of their “successful” stock investments, one of the many contradictions in the current Chinese stock market. The associated jitters helped drive Chinese stocks lower again today.

Sunday, December 6, 2015

Manufacturing Fools People Into Seeing Recession

With global manufacturing in decline, observers who mistakenly equate manufacturing with the total economy are already calling a global recession. An example is Raoul Pal in a CNBC appearance who looks only at manufacturing and monetary policy and considers that evidence enough to predict a recession in the coming months. If the trends continue we will see hundreds of these unfounded recession predictions, and the view could even become a consensus. Set manufacturing aside, though, and indications point to global growth continuing along the lines of the last three years.

Saturday, December 5, 2015

China Adds Index-Based Circuit Breaker

China will add a stock index circuit breaker next year. The latest and apparently final version of the plan will pause stock trading for 15 minutes after a 5 percent move in the large-cap CSI 300 index. A move of 7 percent would stop trading for the day. These changes are set to take effect in January. There are already similar circuit breakers for individual stocks that move more than 10 percent in one day. These trading rules are meant to slow, but not prohibit, a stock market crash. They may also limit speculators’ ability to manipulate stock prices.

Tuesday, December 1, 2015

Retail and Manufacturing Numbers

We anxiously await numbers from U.S. retail as a measure of the mood of the U.S. consumer. Indications so far suggest healthy growth compared to last year on the extended weekend between Thanksgiving and Cyber Monday. It looks like a cautious mood among shoppers, with slow sales of clothing but strong car sales. In my own local area I saw a muted Black Friday, though there were two malls that filled their primary parking areas Friday morning. Partly making up for the Friday slowdown, I saw surprisingly strong traffic at retail on Saturday afternoon.

It is manufacturing that is showing distinct signs of a global slowdown. Much of the recent slowdown in manufacturing is taken up by Volkswagen, which saw U.S. sales fall 24.7 percent in November compared to a year ago. Volkswagen is expected to face a formal criminal investigation in Germany after its diesel cars were found to be optimizing emission performance during emissions tests, but polluting ten times as much during normal driving.

Brazil is trudging through a year-long contraction that has seen employment levels fall by close to 10 percent. Brazil is affected most by its own dysfunctional political system, but is also disproportionately hit by the downturn in Chinese manufacturing, causing reduced exports and lower prices for materials such as copper. The latest PMI for Brazil came in at 43.8, revisiting levels of 2009. The survey showed manufacturers reduced production because of a broad decline in orders.

U.S. manufacturing is also showing a decline, with the ISM index at 48.6. November is the first month in which surveys of U.S. manufacturing have showed a decline, and it is only a slight decline, but perhaps large enough to take away the even smaller increases that U.S. manufacturing showed between July and October. The positive note in this survey was an increase in hiring as factories anticipate increases in production within the next two months.

Wednesday, November 25, 2015

Huge Accounting Error

Here’s an accounting failure large enough to startle, but with little consequence in the end. Citic, one of the largest brokers in China, claimed more than 1 trillion yuan in over-the-counter derivatives it didn’t actually hold, in monthly financial reports this year. A regulatory body found the error, and Citic is in the process of filing amended reports. The story at Reuters:

The accounting error does not affect Citic’s financial results. Contracts were apparently double-counted after a technical change in a database. The timing of the error suggests that it could have been related to the stock market rout, though few details are available.

Monday, November 16, 2015

Reserve Currency Status Won’t Stop Yuan’s Slide

In two weeks the IMF is expected to vote to add the yuan as an international reserve currency, but this move is not likely to lend much short-term support to the Chinese currency. It is an awkward time for a fund manager to bet on the yuan, with authorities in China probably obliged to pursue inflationary policies for several years to support an overheated stock market and a flagging economy, with weakness in both domestic and overseas demand. Indeed, if there is a collapse in the yuan, the timing of the reserve currency vote could become an embarrassment to the IMF. A roundup from Nyshka Chandran at CNBC:

Friday, November 13, 2015

With Stock Recovery, IPO Ban Lifted

The Chinese stock market has had an impressive run this month, enough for regulators to lift the ban on IPOs. The high stock prices, now more than 50 percent above the levels suggested by the values of the underlying businesses, cause increased concern about a stock market crash.

Wednesday, November 11, 2015

U.S. Consumers Forget to Go Shopping

A buildup in U.S. retail inventory sheds a new light on the departure from seasonality this year in shipments from China to the United States. The holiday-season peak arrived two months early. It’s possible that orders were placed early as retailers and wholesalers remembered the U.S. West Coast port delays of a year ago. However, it now looks highly likely that retailers simply had less money to spend as the year wore on, having overbought earlier expecting a shopping boost that still hasn’t arrived. The late holiday-season orders, then, could have been scaled back or canceled as retailers lowered their expectations for the season at the same time that they cut their budgets.

If it turns out to be true that consumers are “forgetting” to go shopping, that will represent a new and unexpected dimension in consumer behavior that will have to be factored into future planning at retail and in economic policy.

Monday, November 9, 2015

Global Recession Fears As Trade Slows

While not quite predicting a global recession, OECD points out that current trends in global trade have never occurred without a recession following within the next year. Market analysts are picking up on this risk. A summary of the economic modeling and reaction at CNNMoney:

This is a different situation that seen in the past, but mere fears of a recession can cause a recession to come about. Will that happen this time?

Sunday, November 8, 2015

Exports Tumble

Exports from China are declining more rapidly than expected, reflecting a weak global demand for manufactured goods. In the latest official monthly report, imports declined even faster, giving China its largest monthly trade surplus ever. A summary from Bloomberg at The Straits Times:

Exports declined 6.9 percent compared to the year before. The figures suggest that earlier holiday-season orders this year from North America and Europe may have propped up last month’s manufacturing, which already showed a decline of 3.7 percent from the year before.

Other countries are also showing declines in industrial output, though global purchases of manufactured goods seem to be growing ever so slightly.

Monday, November 2, 2015

More Measures from Asia, U.S.

Economic measures and anecdotes continue to point to a global manufacturing slowdown, though it still doesn’t look like anything sudden. At International Business Times, factory activity is soft across East Asia, with some analysts looking at global demand and commodities and others looking at the manufacturing slowdown in China as the cause:

In the United States, the ISM PMI fell to 50.1, indicating a barely measurable expansion in manufacturing in October. Details at

Wednesday, October 28, 2015

Apple Reports Strong iPhone Sales

The Apple earnings report, which showed a nice jump in China sales of iPhones, seems to have reassured global stock markets about the state of the Chinese consumer, and to some extent that of Chinese manufacturing. Chinese stock were down today but remain at elevated levels and well above the levels of September.

Sunday, October 25, 2015

The Slower Growth Talking Point

Officials in China are working to lower expectations of economic growth. After years of promoting the ideal of 7 percent GDP growth year after year, statements now hint at the reduced goal of 6 percent growth for maybe four more years, followed by a more conventional 4 percent rate.

China’s 7 percent growth rate was possible only because it was replacing its own traditional business methods with business plans copied from the rest of the world. That’s an approach that can’t go on forever. What do you do after you’ve copied everything you can copy? If you are hopelessly optimistic, you try to copy the things you can’t copy, leading to widespread business failures and a crash. If you are more pragmatic, you copy the incremental improvements, but of course, that leads to a more incremental growth rate. In the end, China will have to lean more heavily on its own native ability to design business processes, and then it will be slowed down by the same resistance to change that the rest of the world contends with when it tries to grow.

In the short run, there remains the question of whether the economy in China is legitimately growing at all in the second half of this year. Talk of lower growth rates sets the stage for bringing the official figures more in line with what’s really going on.

Tuesday, October 20, 2015

Yum Brands to Spin Off China Operations

Yum Brands is preparing to sell its entire China operations to investors. Yum faced food-quality scandals in China that have hurt sales, and nearly two years later, perceptions of the KFC brand in particular have not recovered. A sale of the restaurant chain and changes in the concept, recipes, and way of operating is probably the easiest way to restore diners’ confidence in the restaurants.

Monday, October 19, 2015

IBM Posts 14th Straight Decline, Sees Sharpest Drop in China; A Measure of Corporate Decline

When IBM reported its quarterly earnings tonight, everyone knew revenue would show a decline. After all, IBM had declining revenue in the previous 13 quarters and showed no sign of a sudden turnaround. Revenue was down more than expected this time, down 19 percent from a year ago. The sharpest drop in sales came in China, IBM said, while the strongest increase, or perhaps the only large increase, was in India.

IBM sells mostly to the large-enterprise sector, so its long-term decline speaks to the declining fortunes of large corporations collectively. That China was where IBM saw the steepest decline hints that China may not be immune to the misfortunes of the large-corporate sector.

Official Figures Show Slow Manufacturing; Stimulus Measures Expected

Official figures show third quarter China GDP in line with official plans and market estimates, growing at an annual rate of 6.9 percent, but with slowing growth in manufacturing. Analysts looking at other measures say the economy is growing at a slower rate than official figures indicate and that manufacturing is nearly flat and more likely to be declining than expanding. MarketWatch summarizes analyst reaction:

Economists looking at policy in China expect a boost in stimulus and inflationary measures. At The Australian:

Thursday, October 15, 2015

Declining U.S. Factories, Weak Retail

Two Fed surveys found slightly weaker manufacturing activity. Manufacturing employment also declined slightly. This suggests that the United States is not immune from the global decline in manufactured goods. At Calculated Risk:

A poor report yesterday from retailer Walmart, which sells more consumer goods made in Chinese factories than most U.S. retail chains, points to weak demand as consumers mostly hold on to the “windfall” from lower fuel prices. Walmart also issued a profit warning for next year, citing the strength of the U.S. dollar as a concern. RTT News at Nasdaq:

Wednesday, October 14, 2015

Low Inflation

Low inflation brought a week-long stock rally to a stop. Investors are counting on rising prices to eventually catch up to the elevated prices of stocks, but producer prices fell for the 43rd month in a row and consumer prices were up just 1.6 percent from the year before. From Xinhua:

The China inflation report dampened global markets. U.S. bond yields dipped below 2 percent on this news and a report of declining imports in China. A decline in imports and exports was expected, but China imports fell a surprising 17 percent in nominal terms from the year before.

Sunday, October 11, 2015

Slow Consumer Spending in Japan

Retail reports from Japan suggest consumers in that country are being more restrained in their purchases of clothing and manufactured goods. Retailers’ reports tell the story: Japanese consumers continue to spend on food and transportation, but with food prices rising and tax increases on the way, “Consumer spending has ground to a halt.” Economic outlook summary from Reuters:

Japan is one of the key markets for consumer goods, but it cannot be expected to contribute to global growth in that area within the next year.

Wednesday, October 7, 2015

Talk of a Crash

Speculation about a sharp economic downturn in China has become almost routine. It is quite a change in outlook from four months ago when the Chinese economy was seen as unshakable in the consensus view. This roundup by Rose Powell in the Sydney Morning Herald is one of the more cautious and reserved looks at what might be happening in China:

Tuesday, October 6, 2015

China Consumers Turn Away From Yum Brands

Yum Brands is blaming a strong U.S. dollar for its weak sales in China, but you can’t tell that to Nike or Apple. It looks as if Chinese consumers are becoming more practical in their spending, and you don’t have become very practical to look for an alternative to the food company that brought you KFC, Taco Bell, and Pizza Hut. Investors looking for a bounce back from the meat scandal that killed sales a year ago were disappointed at China same-store traffic up only 2 percent and expected to reverse before the year is over. From BBC News: KFC owner Yum shares down 17% on China forecast.

Of course, some analysts are saying weak demand for deep-fried chicken is a sign of a recession in China. That’s a bit of a stretch, but perhaps a fair question to ask at this point.

Thursday, October 1, 2015

IIF Points to China Crash Worries

Fears of a crash in China could be self-fulfilling, says Institute of International Finance (IIF). As investors pull money from developing economies, particularly China, because of worries of a crash, the shortage of capital could create a slowdown. The IIF says the current outflow of capital is a continuation of trends it has been following since 2012. Heather Stewart writing at The Guardian:

Manufacturing Slowdown Reaches U.S.

The global slowdown in manufacturing has reached the U.S., with a PMI of 50.2 indicating no more than a slight expansion in manufacturing activity. This is happening in spite of the tightest labor market in nearly a decade. Jason Lange writing at Reuters:

The unusual combination of increasing employment while manufacturing holds steady, essentially the same pattern found in China, lends credence to the idea of a global shift away from manufactured goods.

Official PMI Shows Contraction

China’s manufacturing sector was in contraction in September according to an official survey. PMI was 49.8 in September, indicating a continuing contraction in manufacturing activity. From Xinhua:

Similar reports in nearby countries also showed slowing manufacturing. However, the reports are not as bad as feared and shouldn’t interrupt this week’s relief rally in stocks.

Monday, September 28, 2015

Apple Weekend Figures Confirm Strong China Demand

Apple released new iPhone models over the weekend and reported record sales. When the new phones were announced, analysts expected Apple to narrowly beat its previous record product release weekend, with the inclusion of China this year outweighing generally softening demand worldwide. Instead, Apple was up 30 percent over its previous record. Results show that Apple was not exaggerating early in August when it saw strong demand in China. The iPhone is an interesting product to watch, as it has a history of defying consumer trends. This also means that solid sales from Apple should not be taken to indicate that consumer demand for more ephemeral products is strong, whether in China or elsewhere.

Saturday, September 26, 2015

U.S. and China Say the Right Things on Industrial Espionage

It is hard to put much stock into the agreement between the United States and China in which the two countries agree to stop stealing industrial secrets from each other. The United States, after all, is the owner of the NSA, which based on its scale and method of operation is the unacknowledged largest industrial espionage organization ever. Meanwhile, dozens of the largest and most famous Internet-era break-ins have been controlled from China and could only have been accomplished by criminal enterprises collaborating with the Chinese central government. Neither government admits to any wrongdoing. Neither has signaled any imminent change.

Trade secrets also are not the key to economic growth. The rhetoric of the new agreement is nonetheless welcome. The heads of state of two of the most successful countries in the world are essentially saying that a legitimate enterprise ought to be able to prosper without stealing secrets from its competitors. That is certainly true. A business predicated on stealing secrets is not only a criminal enterprise, but one on the brink of collapse. Now Xi and Obama are saying we must do better. Rhetoric often precedes reality, and that is a truism that may hold in this case too.

Wednesday, September 23, 2015

China Factory Orders Decline Again

Today’s Purchasing Managers’ Index shows a sharpening contraction in manufacturing in China. Koh Gui Qing reporting at Reuters:

The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) fell to 47.0 in September, the worst since March 2009 . . . the survey showed business conditions deteriorating almost across the board . . .

The index points to a slight decline in orders placed at Chinese factories, most of them from other countries. A one-month contraction would not indicate a trend, but the PMI has indicated a contraction almost all year. When added up, it is likely that global manufacturing is expanding slightly, but it is hard to be sure.

Global stock markets have fallen on the manufacturing news, though Europe so far is not following the trend. Europe, though, was already down sharply yesterday on details of a diesel software defect at Volkswagen. The Volkswagen scandal is also a negative for global manufacturing, as Volkswagen has suspended sales and production of some of its diesel cars.

Tuesday, September 22, 2015

China Manufacturing Just Responding to Global Economy

Appearing on CNBC, Dick Kovacevich said a slowdown in China manufacturing is just a response to global economic trends.

"Until they have their domestic economy more dominant, they're simply reacting to the worldwide economy," he told CNBC's "Squawk Box," referring to the country's effort to transition to a consumer-led economy rather than one fueled by exports and investment.

"Everyone says China is slowing. No, the world's economy is slowing."

Monday, September 21, 2015

The Biggest Apple App Store Failure

Apple’s iOS App Store for mobile devices had been remarkably clean of malware until last week, when a cluster of infected apps made it past Apple’s controls, and engineers at Apple had to spend half a day cleaning up the problem. It happened after a criminal group in China posted an altered version of Xcode on Baidu. Some developers downloaded the tainted version, in part because the national firewall makes it difficult to obtain the official version. China Digital quoted in Fortune:

Xcode is usually obtained directly from Apple’s Mac App Store, but because large cross-border downloads can be slow and unreliable in China, in large part because of the government’s Internet controls, many users there turn to potentially unsafe unofficial sources.

Apple can surely find a way around this problem, perhaps by providing a way to download Xcode in smaller pieces that are easy for developers to verify. For China, though, similar security problems will continue to occur as long as the country’s Internet remains relatively isolated from the global Internet. These network security issues often prevent sales transactions from going through. It is ultimately an unacceptable problem for a country that is otherwise seeking to boost exports at all costs.

Sunday, September 20, 2015

China’s U.K. Nuclear Plant

As China reduces its reliance on manufacturing, one surprising new investment is a nuclear power plant in England. BBC News says a U.K. loan guarantee has been promised, bringing the project closer to construction.

Friday, September 18, 2015

Fed Inaction Reinforces Global Economy Worries

The Fed interest rate action, keeping rates at zero for at least another month, did not provide much cheer to stocks in China, which were up less than 1 percent today. Stock markets globally are, in general, down sharply as traders digest the news, and now North American markets are also pointing down. Traders look at both the effects and the implications of any Fed move, and in this case, both are ugly. The crisis footing of the artificially low rates stifles workers and businesses alike and encourages safe, slow-yielding capital investments over faster, more innovative ventures. At the same time, the failure to raise rates as previously signaled tells us that the Fed believes the global economy is in a perilous state. There was nothing in the commentary from the Fed to take away that impression.

The global economy does face difficult changes ahead if indeed the world is starting to move away from manufactured goods. There is nothing about that transition that should provoke a crisis, but there is also no historical precedent that might serve as a road map. If the manufacturing transition is not a crisis in itself, the fear and uncertainty surrounding it could trigger a crisis along the way.

Thursday, September 17, 2015

Fed Stays at Zero, Partly Because of China

The Fed was bound to surprise someone no matter what it decided about interest rates today. The decision in the end was to keep interest rates steady around zero. The economic turmoil in China is thought to have weighed heavily on the Fed’s decision, though it did not specifically mention China in its commentary, only “recent global economic and financial developments.” That vaguely worded rationale was clear enough for China to make it into some of the headlines on the Fed decision. It is rare for the Fed to reference developments outside the country in its interest rate actions, though it has happened before.

Tuesday, September 15, 2015

IPhone Sign of Consumer Strength in China

Numbers from the iPhone launch suggest that consumers in China are still spending. It was a record weekend for Apple, but perhaps only because of China. From Bloomberg Business:

The strong demand was aided by orders from China, which this year was added as one of the countries to sell the smartphone at its introduction. Gene Munster, an analyst at Piper Jaffray Cos., said orders may be roughly flat if customers in China weren’t included in the initial availability.

Monday, September 14, 2015

Investor Confidence Sags

Investor confidence is low in China as the central government is doing a larger share of investing. Investor confidence is down in most of the world, though Egypt and Saudi Arabia are buoyed by recent reforms.

Measuring China’s Stock Market Support

Prosecutors in China announced more convictions of stock-sellers today. There is an obvious problem with the official strategy of harassing traders who sell stocks. If selling stocks is a de facto crime, then where will the incentive to buy stocks come from? According to a story in Financial Times, today was the worst day yet in the Chinese stock market if you discount the major stocks that the central government focuses on. The Shanghai Composite was down 3 percent at the end of the day, but the average stock declined 7 percent, a jarring disconnect that shows how important the central government has become in day-to-day stock trading in China.

Sunday, September 13, 2015

Sluggish Manufacturing, Hot Retail in Reports

It was a mixed set of economic reports today. Factory output in China was up 6.1 percent in August compared to the year before, a healthy pace but well below expectations. Retail sales were strong, but it is hard to imagine where the products were coming from, with wholesalers and manufacturers uniformly reporting slowing growth. China’s economic growth is slowing, everyone agrees, but causes and details are far from clear.

Friday, September 11, 2015

Iranian Consumers to the Rescue?

With the Iran nuclear deal days away from being ratified, will Iranian consumers rescue the global market for manufactured goods? Some analysts expect so, but there are reasons to be cautious. World oil prices are low, so most of Iran’s new revenue from oil will have to go to operate its oil fields. Relatively little of the profit from government enterprises in Iran trickles down to the consumer. Iran will be importing and exporting more, but it is too soon to say if this will be enough to counter recent global trends.

Tuesday, September 8, 2015

The Cost of a Stock Market Bailout

A Goldman Sachs analysis reported at CNN estimates that

The Chinese government has spent 1.5 trillion yuan ($236 billion) trying to prop up the country's plunging stock market . . .

If the analysis is correct, the cost of the stock market bailout is not as large as some had imagined. China might feel that it is money well spent if the central government controls a 4 percent share of the total stock market halfway through the crash.

China Exports Decline 6.1%

China’s foreign trade remains the most solid indication that something new and different is happening in the economy. Customs data for August showed exports down 6.1 percent, a change that strongly suggests declines not just in total manufacturing in China but also in global consumption of manufactured goods. Imports were down more sharply, 14.3 percent. Part of this may be explained by lower prices for fossil fuels and a few other commodities, and part by manufacturing process improvements that result in better manufacturing yield, but such a sharp decline makes it seem unlikely that manufacturing is holding steady or growing.

Monday, September 7, 2015

Record Drop in Reserves, Stock Market Resumes Decline

Official reassurances and stock purchases might have stabilized the Chinese stock market in the morning, but then stocks fell 3 percent in the afternoon. One of the reasons for the decline was the news about currency reserves. In August China spent 3 percent of its reserves, $94 billion. It is the largest monthly decline in reserves ever and adds to the trend of the past year as China tries to support its currency and stock market.

Traders worry that the Chinese central government could eventually feel like it is running out of money. If that day were to come, the yuan and stocks could fall quickly. Without official support, the yuan would fall an estimated 20 percent, and stocks, about 25 percent before leveling off.

The depletion of reserves also shows that analysts who were talking about a currency war in August misunderstood the situation or simply weren’t paying attention.

Meanwhile there are fresh indications of a contracting economy in China. General Motors reported sales in China 5 percent lower than last year, a bigger drop than other automakers had reported.

From Friday, German factory orders might have been little changed in July, but foreign orders were down 5 percent and orders from outside the EU were down 10 percent, in line with other measures showing a declining global demand for manufactured goods.

Sunday, September 6, 2015

“Unprecedented” Statement of Stock Market Support from Central Bank

How far do stocks in China still have to fall? I figure stocks should retreat to the level of last August, which for the Shanghai Composite Index is around 2,200, before anyone would have any real confidence in them. With the index at 3,160 at latest report, it is still a long way down. The central bank sees it differently, making a statement during international meetings this weekend that the stock market rout is nearly over. It is unusual enough for a central bank to take such a specific position on stock prices, though not so strange for an official to make a general statement of confidence in a market. What is strange is seeing a central bank voicing such specific support for such artificially elevated prices. It may be that the central bank believes it has a way of supporting stock prices, something new that goes beyond everything we’ve seen already.

I’ve found a range of views on this. Here are two that seem representative, starting with James Mayger at Bloomberg, who sees signs of China’s frustration with its stock market:

Gordon G. Chang at Forbes sees the statement as either bold or foolish — it is perhaps too soon to say which.

Thursday, September 3, 2015

U.S. Treasury Talks Currency War

Tough talk from the U.S. on China has to be mainly for domestic political consumption, but still . . .

Tuesday, September 1, 2015

PMI Says Manufacturing Contraction

After a few quiet days, today the news headlines point emphatically toward a global slowdown in manufacturing. This Reuters story sums it up best:

China's giant manufacturing industry contracted while British and euro zone growth eased in August, rattling markets and reinforcing expectations interest rates may fall again or stay near zero for longer. . . . "It's all consistent with a global economy which clearly is struggling to make any significant headway," said Peter Dixon at Commerzbank. . . . Other surveys by Markit showed manufacturers struggling across Asia: an 11th successive contraction in Indonesia, a sixth contraction in South Korea and the weakest reading in nearly three years in Taiwan. Activity in India also slowed from July, although it was still expanding. Even China's services sector, which has been one of the few bright spots in the sputtering economy, showed signs of cooling, expanding at its slowest rate in more than a year, Markit said.

A few more details can be found in these earlier Reuters stories:

Activity in China's factory sector shrank at its fastest rate in at least three years in August as domestic and export orders tumbled . . .
Euro zone manufacturing growth eased last month, despite factories barely raising prices . . .

Separately, a U.K. hedge fund group’s China stock trades are being investigated; oil and global stocks fell sharply after the China news; officials were forced to deny reports that Foxconn was pulling out of Indonesia. Oil is down about 3 percent today countering an unexplained run up yesterday, and surely influenced by a huge natural gas discovery in Egypt. Later data from North America will either calm fears of a global slowdown or reinforce them.

Monday, August 31, 2015

“Hearsay” Blamed As China Faces Recession

The prosecution of a financial reporter in China for writing news reports based in part on hearsay is a sign of how deep the economic distress in China has become. Philip Wen writing at The Sydney Morning Herald:

Obviously, if reporters cannot report based on what people tell them, then there is no real news media. The shoot-the-messenger approach is something China has tried to stay away from in the last quarter century, so the fact that the central government is resorting to this tactic now is a sign of how desperate things are. The central government has to try to explain away an impending recession, a recession that the public and the world believes is impossible. This is an impossible task, so it will fire whatever shots it can, in any direction.

Friday, August 28, 2015

Ups and Downs

In two days stocks in China have recovered by 10 percent, or two thirds of the declines of the previous three days. Ups and downs like this are historically part of any stock market crash. Some traders in China are likely to assume that the market has hit bottom and can only go up from here, but history says that would not be a safe assumption.

Thursday, August 27, 2015

U.S. Interest Rates Affect Chinese Stocks

A Chinese central bank official suggests that the stock market crash has nothing to do with speculation, fundamentals, or currency moves, but instead is founded in concerns about U.S. interest rates. At Reuters:

Tianjin Updates

News from Tianjin: Toyota restarts production at its Tianjin plant, where thousands of cars were destroyed by the explosions (BBC News). It will be a slow ramp-up for the factory and another factory 70 kilometers away.

Authorities investigating safety violations have detained 11 officials, including a senior port official who is thought to have improperly helped the chemical warehouse pass inspections (Xinhua).

Wednesday, August 26, 2015

A Volatile Day in Stocks

The rate cut and other inflation moves failed to stabilize stocks today, but at least markets were undecided. Stocks were up and down, but ultimately down, a pattern that seems likely to repeat across most of the world today.

Tuesday, August 25, 2015

Signs of Stability

Why are U.S. stocks up so decisively today after another historic selloff in China? Part of it, of course, is that Wall Street gives a great deal of credence to monetary moves. But there are two other reasons for investor optimism. One was a note from Apple indicating that it sees continuing growth in its operations in China. Another is a surprisingly strong report from Best Buy, a U.S. consumer electronics retailer. Both are indications that consumers continue to be interested in electronics. If consumers are moving away from manufactured goods, as investors fear, it couldn’t be happening very broadly or quickly.

Moves Signal Inflation for China

Stocks were down sharply again today. After a 16 percent decline in two days, the central bank took steps to boost inflation with at 0.25 interest rate cut and a 0.50 percent cut in reserve requirements for banks.

There was other news (via Reuters). China will be tightening enforcement of existing capital controls, focusing especially on shadow banking:

China said it would launch a three-month crackdown on underground banking to curb money-laundering and illegal funds transfers as unstable markets stoke fears of capital flight.

Combined, the moves point to inflation ahead for China as authorities try to stabilize the economy and the stock market. Inflation is the right move, but it is not without problems. Inflation is fundamentally unfavorable for investors and will reduce foreign investment in facilities in China. There is a risk that an easy-money approach leads to more speculation, whether in the stock market or elsewhere. It will be a difficult tightrope to walk.

Monday, August 24, 2015

Worst Day in 8 Years for Stocks

It was the worst day since 2007 for stocks in China, with the Shanghai Composite down 9 percent at several points during the day, closing down 8.5 percent. It is impossible for stocks to fall much faster than this. Trading rules in China stop trading for stocks that fall 10 percent in one day. Combined with the declines of the last two months, the Chinese stock market has retreated to the level of the start of 2015.

The selloff is far from over. Stocks in China are still overvalued by roughly 50 percent and may need to retreat to the levels of August 2014, when the latest bubble began, to find a sustainable level. That could take months of choppy declines, or it could happen faster if a consensus emerges.

Social media suggests that there is still a degree of disbelief among stock investors. Reaction on Weibo summarized for CNN suggests that the stock market is like a cheating boyfriend who “disappoints and hurts you.” There are calls for prosecution of “manipulators” who are imagined to be causing stock prices to decline. Some writers complain about regulators’ statements blaming the declines on events on foreign stock markets. None of this is the measure of a market that will find a bottom quickly.

The selloff today extended to oil and global stock markets, down about 4 to 5 percent.

Sunday, August 23, 2015

Explosion Levels Paint Factory

There is considerable confusion about what is going on in China. An IMF director said that the situation in China cannot be called a crisis and reiterated a prediction of 7 percent growth this year. It is a view that is very much at odds with other measures that suggest no growth at all in manufacturing for perhaps three months.

Meanwhile, China faces a crisis of industrial safety. That is at least the view of those who live near a factory, which is most of the people in China. On Saturday night an explosion leveled a paint factory in Shandong. This disaster was on a smaller scale than the chemical explosion in Tianjin, but reminiscent, with windows shattered in a 1-kilometer radius and the blast felt 5 kilometers away. The series of industrial accidents suggest that factories are under unusual financial pressure leading managers to depart from prudent operating procedures, resulting in more mistakes.

Friday, August 21, 2015

Bad Manufacturing News, Stocks Down

It is a rough day in markets worldwide after troubling manufacturing news from China:

  • A low reading of manufacturing sentiment in China. PMI was 47.1, the lowest in six years, and a level consistent with a contraction in manufacturing activity.
  • Safety hazards are being found everywhere, including two thirds of industrial facilities in Beijing that handle volatile chemicals. Meanwhile, fires continue in Tianjin and dangerous levels of sodium cyanide are confirmed in the area.

As markets react, the yuan is choppy, gold is up, oil is down, and stocks are down everywhere. China stocks fell 4 percent, making this one of the worst weeks ever in the Chinese stock market, down 12 percent from last Friday.

Update, 4 pm ET: The selloff reached the U.S. stock market, with stocks down 3 percent today and 6 percent in the last three days. The Dow Jones Industrial Average closed down more than 500 points, a psychologically significant level.

Thursday, August 20, 2015

Cell Phone Saturation?

If China’s economy is in for a radical change, it is because the world is slowing its purchases of manufactured products. Phones are a case in point. People first bought smartphones to replace earlier technology, then more capable replacements as the technology improved. The pace of purchases can slow as the technology matures. People also buy smartphones as replacements for phones that break down. Improved designs with better durability result in fewer sales.

In the second quarter total smartphone sales in China declined for the first time. Unit sales were down 4 percent from the year before, according to Gartner. China is the most important market for smartphones, and the decline there was almost large enough to cancel out the global gains in smartphone sales for the quarter. This is not a measure of economic weakness in China, but saturation. So many people have smartphones already that it is hard to find new customers.

We have seen this pattern before, of course. Global PC sales increased relentlessly for years, then declined. Televisions, a hot market five years ago, are a shadow of what they used to be. U.S. auto sales remain below the bubble levels of 2005-2007. In any durable goods market, economic theory says, if you sell enough of something, subsequent sales will slow down.

Kazakhstan’s Currency Drops

Kazakhstan allowed its currency to trade freely today for essentially the first time ever, and it fell 23 percent. The currency move was mainly the result of the decline in the price of oil, the biggest export, but the decline in the yuan in neighboring China added pressure and must have hastened Kazakhstan’s move.

The story at CNNMoney:

Wednesday, August 19, 2015

Yuan Volatility Weighs on Reserve Currency Decision

The current volatility in the yuan and concerns about the stability of the Chinese economy may have affected the IMF’s reserve currency decisions. The IMF said today it will keep the current basket of reserve currencies through September 2016.

The IMF wants to add the yuan as a reserve currency, but it cannot credibly do so with the turmoil we are seeing now in the Chinese economy and currency. The IMF reviews its reserve currency allocations every five years, so if it does not add the yuan in its review this year, it is obliged to wait until its next review in 2020. The nine-month extension gives the IMF some extra leeway to add the yuan as a reserve currency without that move taking effect during an ongoing market crash or in its immediate aftermath. However, that makes a difference only if China can stabilize its economy and relax the rules surrounding yuan trading in the next three months.

It is a lot to ask. Trading restrictions are one of the first tools the Chinese central government would think of as it seeks to stabilize the economy, yet the current level of trading restrictions surrounding the yuan are already probably too restrictive to allow its use as a reserve currency. The IMF has said several times that it is important for China to loosen up on its currency so that foreign holders can have more confidence in the value of the currency they hold. The yuan is still unofficially tied to the U.S. dollar, and that is not a characteristic of a reserve currency.

Currency questions aside, it is not certain that China can right its economy in time to persuade the IMF to take action this time around. The combination of a stock market crash, policy leaning toward inflation, and an abrupt pause in manufacturing growth, all happening during a period of social turmoil and political weakness, may not give the central government the leverage it needs to right the economy so quickly. The wishful thinking seen in some recent policy decisions in China is not a favorable sign. It suggests that there is not much more that the central government can do right now.

Monday, August 17, 2015

A Call for Safety

The call for workplace safety is the right message, but then the rest of the statement suggested that safety precautions are a nuisance in a country preoccupied with growth. The call for prosecutions, apparently before investigations are done, also calls the initiative into question. Still, the government does not have to be entirely sincere for the program of safety inspections to prevent a few new disasters.

Sunday, August 16, 2015

Currency Warmongering

Looking at last week’s China currency moves, some analysts are a little too eager to declare a war. Part of this is that a good old-fashioned war might provide some excitement in a news media sense. A good case in point is Greg Ip at Wall Street Journal, writing “China Fires the First Shot in a Currency War.” Ip’s headline invents ammunition to try to make a made-up war seem real.

The unexciting reality of the situation is that there is no war, only a worrisome decline. When you see the more sensationalist kind of currency-war analysis this weekend, consider that there is nothing in it to tell you when it was written. Ip’s piece could have been written at any point in the last ten years. It is based, after all, entirely on preconceptions, with no concession to or even mention of what actually just happened in China or the way the world reacted.

There are, to be sure, currency wars from time to time, but this is not one of them, at least not so far. China’s moves come from weakness and desperation and do not carry the energy or bluster of an attack on the world. For a more nuanced, if still worried, view of the currency moves and their impact, see Zoe Hu’s interview with Rajiv Biswas at Al Jazeera:

In the current circumstances, the China devaluation probably will not revive Chinese exports, but will surely cut into manufacturing efforts in emerging economies. Thailand is an example of the kind of country that may suffer the worst if there is a global manufacturing slump. China has already cut into Thailand’s position in computer components and may try to use its position to further erode Thailand’s share of the market. For its part, Thailand says if there is a currency war, it will stay out. Finance Minister Kittiratt Na-Ranong quoted in Bloomberg:

“I will never encourage Bank of Thailand to go and trade against the market-determined rate unless it’s only part of the daily stability, the weekly stability.”

Some inflation could follow across East Asia, but all this talk of a currency war will fade by next month when it becomes clear that there are real problems at issue more serious than the currency war so many are imagining right now.

Friday, August 14, 2015

Scale of Tianjin Disaster

The biggest story in China is the chemical explosions and fire in Tianjin. The fire may have started with a defective shipping container containing a volatile chemical. A fire affected several containers and the heat from the fire was probably the cause of two explosions. The second explosion was much larger than the first and caused extensive damage to buildings in a radius of 2 kilometers, with window damage found 6 kilometers away. The fire continues and a large area has been evacuated because of the chemical risk.

It seems likely that many hearing the news have not heard of Tianjin before. The initial New York Times story used valuable headline space to describe Tianjin as “a port in China,” a pragmatic editorial decision conveying an essential detail the average reader probably did not know. The unfamiliarity can make it difficult to understand the scale. Tianjin is a major city and an important northern port, considered the 10th largest port in the world, comparable in U.S. terms to New York City combined with half of New Jersey. The extent of the disruption may not come across in news reports that focus first on the size of the explosion and the subsequent death toll.

Thursday, August 13, 2015

Central Bank Intervenes As Yuan Floats Lower

The yuan is down for a third day in a row, and the central bank says it is taking action to stabilize the currency, starting with the formula by which the daily pricing range is set. The story at CNBC, from the Reuters report:

It is a touchy situation for the central bank, which wants to support the stock market with inflation and a downwardly revised currency, but would like to take away the sign of broad economic weakness that the currency decline implies.

Wednesday, August 12, 2015

Another Day, Another Devaluation

Yesterday’s “one-time depreciation” of China’s currency was repeated today, and global markets are nearly as shocked by today’s 1.6 percent move down as they were by yesterday’s 1.9 percent. The positive side of this, as reflected in this morning’s reports, is China’s commitment to follow the currency markets instead of trying to keep them inside the box. The negative side is that China’s national economy is far weaker than analysts imagined. It was less than two months ago that we saw the first inkling that the manufacturing sector in China might actually be declining, and of course no one took that initial indication seriously. Now there is every reason to believe Chinese manufacturing is in a slump, and the question is whether there is anything the government can do to stop it. After two months of negative indicators, the summary today from Bloomberg (at Japan Times) has set aside any skepticism about the downturn:

Weaker-than-expected reports Wednesday on Chinese industrial output and retail sales in July lowered the outlook for the economy, putting additional downward pressure on an already weakening currency.

If a 2 percent devaluation would be barely noticeable, 4 percent is certainly enough to spark inflation in China and boost sales of its manufactured goods worldwide, and both moves should eventually help bolster the stock market. Today, though, fears that China’s economic growth has come to a stop are dominating. The stock rally of last week is over.

Update: Weak traffic at Alibaba may be another sign of stalling industrial activity.

Tuesday, August 11, 2015

Lowest Oil Prices in a Decade?

A pullback in industrial demand for oil in China has led to falling oil prices worldwide, and now OPEC has decided not to cut production in response to declining demand. The result could be the lowest oil prices in a decade, some analysts believe. Prices fell near $43 today and could fall another 10 percent or more if demand remains soft. Analysis from Patti Domm at CNBC:

Will the China Devaluation Rescue the Stock Market?

China loosened controls on its currency today leading to a surprise sharp decline. This has the effect of a currency devaluation and is being widely characterized as such. A currency devaluation is by nature inflationary because the prices of imports go up. At the same time, it can make exports of manufactured products more competitive by lowering prices of everything exported from the country. That seems like a sensible strategy from the leading manufacturing country at a time when the prices of its largest imports, especially fossil fuels, are unusually low.

The currency move must also be seen in terms of the stock market. For a country committed to stop its stock market crash by any means necessary, inflation cannot be far away, and a currency devaluation is a logical step in that direction. The lower yuan will boost exports in the short run, though it won’t have much impact in the long run. Inflation will threaten the yuan’s status as a reserve currency, and the increase in prices for imports puts more pressure on China to attain energy self-sufficiency sooner, but these are problems for another day.

A Reuters story on the devaluation and its effect on global markets:

A different take and a different set of worries in a Q&A at Financial Times:

Friday, August 7, 2015

Shadow Bank Shakeout

The stock market decline in China has been tough on shadow banks that were active in making stock market loans, before such loans were banned. At Bloomberg:

Thursday, August 6, 2015

New Online Censorship Initiative in China

A Fortune story in Time says that there is a large-scale move by “network security officers” in China to squelch online rumors unfavorable to the state.

Some skepticism is called for with this news. Previous efforts in China to prevent Internet users from communicating with each other have met with mixed results.

Tuesday, August 4, 2015

Day Traders Face Short Selling Restrictions

It’s not an outright ban on short selling, but new rules make it very difficult for day traders in China to sell short. At International Business Times:

The country’s two biggest stock exchanges . . . said that investors who borrow shares must now wait one day to pay back the loans, preventing them from selling and buying back stocks on the same day . . .

The IBT story:

CNBC talked to two analysts about the implications of this move, and they agreed it will add to the confusion.

The short-selling restrictions led to a modest gain in stocks today, and more rule changes are sure to follow as China continues efforts to stabilize its stock market.

Monday, August 3, 2015

To Intervene or Not

The stock market in Greece reopened after a month off, and stocks in the morning are down about 20 percent. Regulators have said they will carefully observe the stock market but will not directly intervene in trading. This is the opposite of the approach in China, where regulators have promised to stabilize the market by any means necessary. So far, it appears that the hands-off stance in Greece has led to less volatility, though traders are still trying to get a feel for the market’s natural level after a morning of trading. In China government intervention essentially is the market, and traders have to digest the near-daily rule changes and second-guess government intervention tactics and timing to try to determine the direction of the market. The comparison has its limits, but it is an interesting comparison to make, and the relative calm in Greece suggests that the destabilizing effects of the stock market intervention in China may outweigh the stabilizing effects.

Friday, July 31, 2015

China Stocks in One Chart

A thumbnail chart of the Shanghai Composite index is enough to tell the story: stocks doubled between November and May, then in a few weeks fell halfway back.

Some analysts are comparing the chart to the Nasdaq composite in the 2000 dot-com bubble. Others see echoes of 1929. No one has proposed a historical point of reference that would have the market bouncing right back.

Thursday, July 30, 2015

Fantasy Logic in China’s Stock Market Intervention

The central government has gone so far to prop up the flailing stock market in China that it effectively isn’t a stock market anymore. The restrictions on selling are such that holders of most shares of listed stocks are prohibited from selling, and not just briefly, but indefinitely (officially, for the next year, but the restrictions could be extended at the stroke of a pen). After a few vague threats this week, there is speculation now that prosecutors will start arresting executives of companies whose stocks have declined. Obviously, this won’t stop the decline in stocks, but it will make it more difficult for the stock market to continue into the future.

Government blundering in the stock market intervention underscores the thought that China’s problems are not merely a stock market problem, but are grounded in a fantasy view of economics at the highest levels of government. China’s special advantage has long been that it can intervene quickly and decisively to overrule the conclusions of the free market when the market is in error. In the stock market, though, government leaders seem to feel they can overrule correct economic decisions of the market without paying a price. In effect, China wants to buy all the overvalued shares without paying anything out of its own treasury. The overvaluation in total is an estimated 3 years of national GDP, a sum no government could possibly pay, so it is sensible that this approach is not being considered. One way or another, then, stock values have to decline. The notion of supporting them at current levels is unrealistic, and policy should be pointed toward a soft landing rather than a sustained bubble.

All this could be smoothed over eventually if the economy just kept growing, but there are hints of a recession in China this year: surprisingly soft import and export numbers, the largest housing vacancy rate in history, the ballooning of shadow banking balance sheets. The response to the stock market crash has cost the central government some credibility. If policymakers apply the same kind of fantasy logic to problems in more fundamental sectors of the economy, whether real estate development, manufacturing, or shadow banking, the results could be chaos.

Wednesday, July 29, 2015

Why China Is Bubble-Happy

China has a major bubble problem” says a new story by Sophia Yan at CNNMoney. There aren’t many places for retail investors in China to put their money, and until that problem is solved, there will always be a bubble somewhere in China. Investors are now getting out of the stock market, which is in a scary-looking decline since its peak in June and is subject to new trading restrictions as the central government tries to stop the decline by any means necessary. With stocks in China obviously overvalued, does that mean a new real estate bubble is inevitable?