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.