What happens when an economic butterfly flaps its wings in China?

One of the accepted truisms of the modern era is that the economic world is shifting eastwards to the Pacific. The emerging vibrant nations there will push forwards and eclipse the old sclerotic developed nations in the west. Well out of that it is true that the western world has looked sclerotic but 2015 has not been especially kind to economies in the Pacific region. It was only on Wednesday that I analysed the problems and travails of the Japanese economy the same problems and travails that so many told us would be cured by the Abenomics arrows of the current government.

But there is an even bigger story in the Pacific region right now and that is the emerging crisis in China. This morning has seen disappointing news from the business survey about its important manufacturing sector.

Flash China General Manufacturing PMI™ at 47.1 in August (47.8 in July). 77-month low.

Eyes will immediately turn to the 77 month low part if the number which takes us back towards the beginning of the credit crunch and we all know what happened then. As to the number then officially 50 is the benchmark for contraction expansion but even if we use 49/51 to allow for uncertainty we can see that Chinese manufacturing is slowing according to this measure.

If we look into the detail I note that output is dropping as are orders and stocks/inventories are rising which suggest further trouble ahead. Thus the accompanying notes from Dr. He Fan, Chief Economist at Caixin Insight Group indicate someone who has either drunk too much Kool-Aid or took the Matrix style red pill.

But overall, the likelihood of a systemic risk remains under control and the structure of the economy is still improving…… This will lead the market to confidence and renew the vigour of the economy.

This means that there is now quite a gap between this survey and the official one as we wonder if fear stops companies from reporting the truth to officials

Unemployment in China

There has long been doubt over China’s economic statistics and The Economist has pointed out some obvious issues.

The registered urban jobless rate is just 4.1% now. This would seem to point to economic vigour, but the problem is that it has sat at that precise level, without moving, since late 2010. And it has stayed within an absurdly narrow range of 4.0-4.3% since 2002, even at the depths of the global financial crisis.

It adds some research from the National Bureau of Economic Research which uses other survey data.

They find that China’s unemployment rate averaged 10.9% from 2002-2009, nearly seven percentage points higher than the registered jobless rate over that period.

There are issues actually with both approaches and some now consider this to be better.

Another alternative is a surveyed unemployment rate that in its methodology more closely resembles the unemployment rates reported by developed economies. According to this, China’s jobless rate is now 5.1%

Now unemployment statistics have their flaws wherever we look as I am again reminded of Yes Minister telling us that manipulation of them was a common theme in the UK back in 1983. But we move on realising that we have evidence China is slowing but that the picture is far from crystal clear.

Commodity Prices

These are another potential signal for slow down signs in China and the price of crude oil has been very weak again this week. As I type this WTI (West Texas Intermediate) has dropped below US $41 and Brent Crude is in the low US $46s. Whilst there was a rally yesterday Dr.Copper’s price is 27% lower than a year ago. Iron Ore has been more stable  recently at US $55.60 according to The Australian but I note that this is for delivery to Tianjin and I think most would not be especially keen to visit there right now. From CNN.

Chinese emergency workers were working to extinguish four fires Friday that broke out at the site of last week’s fatal blasts in the northern city of Tianjin, the state-run Xinhua News Agency reported.

This is in addition to the millions of dead fish which have washed up on local shores.

Although of course fans of the economics of Paul Krugman will see this as a boost to GDP.

Underlying all this are fears for the western corner of the South China Territories who at least had a better day in the Ashes cricket at the Oval yesterday.

Currency Wars

The recent devaluations which I discussed on August 11th have stopped with the Yuan  stable for now at 6.39 to the US Dollar. However there have been impacts ricocheting around the emerging markets or EM complex. From RANsquawk.

Deutsche Bank note that 17 countries have seen their currencies depreciate by >3% since devalued the last monday

We also have the complex issue of the petro-currency nations hitting trouble which is interrelated. Yesterday saw Kazakhstan devalue as the currency world swings its axis but I would like to point out that this is a zero-sum game and ironically a recent riser has been the Euro as it nudges 1.12 to the US Dollar. The UK Pound £ has been strong for the past couple of years something that you get to write relatively rarely.

Equity Markets

These generate headlines but underlying the situation is modern central banking theory which operates to boost asset prices often explicitly. We have plenty of countries offering implicit support via QE policies but more than a few offering explicit support such as Japan,Switzerland and now China. From The Australian.

the more than $US90 billion the Beijing government has earmarked to rescue its stock market.

Today it has not gone so well as the Shanghai Composite Index fell by 4.2% to 3510. However there was a lot of speculation that The Plunge Protection Team did appear at the close. From Lim Chee Tiong.

ALERT: Here comes plunge protection team … spike

Although whilst a close above 3500 was achieved the PPT was unable to keep the market above various averages which chartists consider important. So watch this space! Although markets of course can spin on a sixpence.

Comment

Sometimes things are not as you might think at least for short periods and on this front I bring you this from Simon Rabinovitch.

So much for mini-stimulus. China to try mini-recession: will shut 10000 factories, 9000 construction sites week before Sep 3 military parade.

Although rumours are already swirling of more stimulus and monetary easing. From Live Squawk.

Speculation surrounds PBoC RRR cut could come this weekend, last cut was 50bp on Sat June 27, the third in 5 months.

Like all weekend moves it would have the advantage of catching the lazy western capitalist imperialists on the hope as they take time off to relax. Although it would appear that an old enemy is already on the case. From The Japan Times.

Finance Minister Taro Aso said Friday that recent moves by China to allow its currency to depreciate are a concern and could pose problems for Tokyo.

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16 thoughts on “What happens when an economic butterfly flaps its wings in China?

  1. Well Shaun ,

    It seems I thought that oil prices would have peaked and caused this recession , but it seems even at $45 its still too much

    cyclic recession is now starting

    going to be an interesting next few months as it swings into action

    Forbin

    • Hi Forbin

      If you allow or the lags in the process we are still being affected to some extent by the period when crude oil oscillated around US $108. Although there has been a boost from lower oil prices too which get even more complex as I note that Canadian oil seems to be about half the price everywhere else! Who said that there was one price for things? As I am reminded about my earliest articles on here on what is a price and hence inflation…?

      If there are signs of a cyclical recession then the Fed and the Bank of England are in screeching U-Turn territory and we are headed for the negative interest-rates I have long feared.

  2. Hi Shaun

    Can one trust any of the stats out of China? It seems to me that we don’t really know much more than TPTB want us to know which makes any sensible comment somewhat difficult.

    Notwithstanding the travails of the Chinese economy and the concerns about low growth there is one thing (amongst many) I do not understand. See the attached chart:

    http://www.macrobusiness.com.au/2011/10/chart-of-the-day-china-gdp-composition/

    Admittedly this only goes to 2010 but I suspect that the magnitudes are the same relatively now. The point about the figures is that consumption is low and a great deal of growth has been in the trade and investment sectors. If growth falters the I would have thought that a switch could be made to home consumption and away from investment and trade. The two obvious advantages to this is that it keeps the growth show on the road and also, and more importantly, keeps the peasants quiet as both they and the elite must be seriously unchuffed by some of the latest developments. After all in an autocracy this sort of switch is relatively easy as they do not need to rationalise their policies to anyone but just concentrate on keeping order and the existing structure intact.

  3. Hi Shaun,

    It looks to me like the Chinese authorities are trying to engineer a soft landing. I’m not sure that they will succeed. The 1990’s Asian financial crisis had very little effect in the Western hemisphere and I think the same will be true if China suffers a hard landing.

    I have read since the 1990s that China is going to have to switch from an export led economy to a much more mixed one with much higher internal consumption. Have we now reached that point what this transition has to happen and will it happen smoothly?

    Looking at pollution charts for China is not a pretty sight and I can see why they are trying to gain inroads into crop production in many other areas of the world, especially Africa, South America and Eastern Europe. With an estimated 4,000 people dying per day from respiratory diseases from their chronic air pollution, this is another problem they are going to have to tackle sooner rather than later.

    Those that are hoping that the decreasing oil price will result in more expensive US fracking rapidly declining to remove the current oil glut maybe disappointed. The current low prices are driving much technical innovation in this sector, which is driving down exploration and production costs.

    http://www.forbes.com/sites/christopherhelman/2015/08/19/the-robot-roughnecks-out-of-the-oil-bust-comes-a-golden-age-of-drilling-technology/

    With oil and gas consumption beginning to fall in many Western markets and the rate of growth slowing down in Asia, are we now close to peak consumption for hydrocarbon energy?

    • I would not trust Forbes – they sell

      please no confusion re: hydro carbons /oil oil is one but just one hydrocarbon. The hydrocarbon energy isn’t going away soon.

      I think you’ll find nat gas will take up the slack , coal is still king in electrical generation as well as the Chinese full well know

      back to oil, go talk to the oil hands about LTO , you might find there’s a lot of debt tied up there in those fields , frankly most would be considered insolvent but then again most governments are as well as the Banks .

      As for Forbes hand-waving “The current low prices are driving much technical innovation in this sector” actually means little or no exploration and cost cutting .

      The debt ratio is scary , expect many to go bust and be picked up at cents on the dollar , just like in Denver 1982 ……

      Interesting times

      Forbin

        • define the word “glut”

          excess supply to demand

          supply is rocketing away but demand is not catching up with 45$ oil

          call me when its $20 then I’ll agree

          Forbin

        • Forbin, my question was designed to solicit one of three possible answers;
          1) The cartel wants these prices to destroy competition.
          2) Supply has rocketed.
          3) Demand has collapsed.
          and perhaps the reasons behind.

        • hmm seems I cant add to too many nested replies with atleast my browser

          buzzin , supply of 45API oil is roughly the same as 2005 , LTO is higher API and is used as naptha, drip gas and of all things , a feedstock of napalm. It can be refined to gasoline easier than desiel ( why the current desiel stock is high is because of refiners missing the market) .

          KSA pumps oil at this current levels because it has to, currently now in teriary recovery of its fields there is a risk if they cut back then they will not get back to the same level . ergo as a government owned oil company and not subject to net present value dynamics , it has the remit to goto maximum extraction and not maximun flow rate .

          Also they need the money , that war in Yemen is costing them a pretty penny or two .

          Demand is currently platued and I would posit due a fall because of

          1, China economy is spluttering

          2, fuel oil and nat gas will be in greater supply as Japan continues to re-start it’s nukes

          3, Iran – getting back into the main market – theres approx 2 million barrels potential there – at far lower cost than any LTO play

          I do not discount that even LTO will go away as if the price stays arounf the $50 mark then the initial capex will be written off as companies go bust but the plays will be picked up on cents on the dollar .

          if we drop to $20 then LTO will be mothballed until it rises again.

          Doed this mean we’ve reached the dreaded Peak Oil ?

          perhaps , mind you everyone in MSM will call it peak demand – a turd by any other name will smell as sweet 🙂

          interesting times

          Forbin

          music – the world is entering the stage of

          looking after No1 – boomtown rats

    • Hi therrawbuzzin

      The Japanese must be looking at this with a lot of concern which is why I included the quote from the Finance Minister. They have their own troubles as I discussed on Monday and can do without any Chinese slow down. The Yuan devaluation brings the Abenomics policy of a lower Yen under challenge and of course the issues in the South China Sea means that upwards pressure is being applied to defence spending.

  4. “What happens when an economic butterfly flaps its wings in China?” – We’re about to find out. The authorities have made their moves and now M1 has started increasing, If it continues increasing China should start to recover in early 2016, if it doesn’t, the falling growth intensifies.

    Whichever way it goes it will be interesting to see what effect China’s travails or successes have on the rest of the world and individual countries. Meanwhile current indicators are that the US growth rate will significantly reduce in 2016….

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