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.