The economy of China is not seeing a V-Shaped recovery

This morning has seen a does of economic news from the epicentre of the current pandemic and hence crisis which is China. This is keenly awaited as we see how the economy responds to the pandemic. Sadly we seem already to be charging into what might be described as Fake News so let us take a look.

BEIJING, March 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector firmed up to 52 in March from 35.7 in February, the National Bureau of Statistics (NBS) said Tuesday.
A reading above 50 indicates expansion, while a reading below reflects contraction.
The rebound came as the country’s arduous efforts in coordinating epidemic control and economic and social development have generally filtered through, NBS senior statistician Zhao Qinghe said.

Okay now first we need to remind ourselves that this is a sentiment indicator not an actual output number although tucked away we do get some clearer  guidance.

With positive changes taking place in domestic epidemic control and prevention, 96.6 percent of China’s large and medium-sized enterprises have resumed production, up 17.7 percentage points from one month ago, NBS survey showed.
A sub-index for production, rallied 26.3 points from one month earlier to 54.1, hinting at reviving production activities.

Below we seem some sectors which we would expect to pick-up and in fact are probably flat-out. Let’s face it demand for some protective equipment may never have been as high as this.

Meanwhile, the PMI for high-tech manufacturing, equipment manufacturing and consumer goods all stood in expansion zone, signaling quickened restoration in the sectors, according to Zhao.

The twitter feed of Xinhua News also continues with the line that things are in some cases back to normal.

As the outbreak of the novel #coronavirus has been basically contained in China, the construction of Xiongan, often billed as China’s “city of the future,” has resumed in an orderly manner.

I am sure some of you have already spotted the difference between “basically contained” and contained already. But the theme is of an economic recovery.

China’s March composite PMI rose significantly to 53, up 24.1 points from February.

This has been reported as being quite a rebound as the two tweet below highlight.

Wow! Impressive V-shape recovery in #China’s Manufacturing #PMI. Up to 52 from 35.7. ( @jsblokland) 

 

So far, data seems to support China’s prospects of a V-shaped economic recovery…. Strong PMI rebound.

The second tweet is from the editor of The Spectator Fraser Nelson.

A V-shaped recovery means that you are very quickly back to where you started. This was what was promised for Greece back in the day which is of course a troubling harbinger. After all the Greek economy promptly collapsed.

The National Bureau of Statistics

It published an explainer which tells a rather different story.

The purchasing manager index is a chain index, which reflects the economic changes in this month compared with the previous month. The magnitude of the change has a great relationship with the base of the previous month.

There was more.

the manufacturing PMI, non-manufacturing business activity index, and the comprehensive PMI output index fell sharply in February, and the base rose from the previous month. These data indicate that the production and operation status of enterprises in March has significantly changed from February.

This gets reinforced here.

Taking the production index as an example, according to the answer of the enterprise purchasing manager to the question “The production volume of the main products of this month has changed from last month”,

So as you can see the situation is likely to be as follows the reading of 52 is an improvement on the 35.7 of February. so for example might be 38 or 39 if we try to impose some sort of absolute moniker in this. Accordingly there has been an improvement but V-shaped?

The mire sanguine view I have expressed is much more in line with this from the South China Morning Post today.

China’s economic situation could get worse before it gets better, amid a second wave of demand shock that is set to hit both domestic and foreign trade, a Chinese government official has warned.Addressing a press conference in Beijing on Monday, the day after President Xi Jinping toured businesses in Zhejiang province, vice-minister of industry and information technology Xin Guobin delivered a candid and downbeat assessment of the economy, in a subtle break from recent optimistic rhetoric about economic recovery.

What is behind his thinking?

“With the further spread of the international epidemic, China’s foreign trade situation may further deteriorate,” Xin said. “Overseas and domestic demand are both slumping, having a significant impact on some export-oriented companies. These companies might face a struggle to survive.”

We also get a clue as to what “barely contained” in terms of the Corona Virus means.

After bringing the domestic epidemic under control, China gave the green light earlier this month for over 600 cinemas, thousands of tourism attractions and half the country’s restaurants to reopen.

But in sudden U-turn last Friday, the National Film Bureau ordered all cinemas to shut down again, without explaining why or when they might hope to reopen.

Shanghai municipal authorities also ordered a number of famous tourist attractions to close over the weekend, including the Oriental Pearl Tower and Shanghai Ocean Aquarium.

Is it back?

Hong Kong

We have looked at Hong Kong before because it had its economic troubles before this pandemic struck. However in terms of today’s subject it does give us something of a clue to what is happening in China and if so today’s Retail Sales numbers speak for themselves.

After netting out the effect of price changes over the same period, the provisional estimate of the volume of total retail sales in February 2020 decreased by 46.7% compared with a year earlier. The revised estimate of the volume of total retail sales in January 2020 decreased by 23.1% compared with a year earlier. For the first two months of 2020 taken together, the provisional estimate of the total retail sales decreased by 33.9% in volume compared with the same period in 2019.

It is not to say that some areas have not seen a boost.

 On the other hand, the value of sales of commodities in supermarkets increased by 11.1% in the first two months of 2020 over the same period a year earlier.  This was followed by sales of fuels (+6.5% in value).

The first part is no surprise but unless people were fleeing the place ( or perhaps preparing to) I am unsure about the second part.

For the other areas of retail sales it was basically the tale of woe you might expect.

Analysed by broad type of retail outlet in descending order of the provisional estimate of the value of sales and comparing the combined total sales for January and February 2020 with the same period a year earlier, the value of sales of food, alcoholic drinks and tobacco decreased by 9.3%. This was followed by sales of jewellery, watches and clocks, and valuable gifts (-58.6% in value); other consumer goods, not elsewhere classified (-21.9%); electrical goods and other consumer durable goods, not elsewhere classified (-25.1%); medicines and cosmetics (-42.7%); commodities in department stores (-41.4%); wearing apparel (-49.9%); motor vehicles and parts (-24.2%); footwear, allied products and other clothing accessories (-43.1%); furniture and fixtures (-19.6%); Chinese drugs and herbs (-23.7%); books, newspapers, stationery and gifts (-35.0%); and optical shops (-28.6%).

Comment

These are highly charged times both in terms of the pandemic and the subsequent economic outlook. As you can see the reports of China bouncing back are in fact beyond optimistic. Indeed even Xhinua News made the point.

However, Zhao said the single-month rise does not necessarily mean the production has been back to pre-outbreak levels, noting that more data should be observed. The upturn of economy, Zhao said, only comes when the PMI moves up for at least three consecutive months.

So today’s song lyrics come from Brian Ferry ( although originally written by Bob Dylan).

It’s a hard and it’s a hard and it’s a hard and it’s a hard
And it’s a hard rain’s a gonna fall

The ECB could be the next central bank to start buying equities

It feels like quite a week already and yet it is only Monday morning! As rumours circulated and fears grew after some pretty shocking data out of China on Sunday the Bank of Japan was limbering up for some open mouth action. Below is the statement from Governor Kuroda.

Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus.
The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.

Actually most people were becoming much clearer about the economic impact of the Corona Virus which I will come to in a moment. You see in the language of central bankers “uncertainties” means exactly the reverse of the common usage and means they now fear a sharp downturn too. This will be a particular issue for Japan which saw its economy shrink by 1.6% in the final quarter of last year.

But there was a chaser to this cocktail which is the clear hint of what in foreign exchange markets the Bank of Japan calls “bold action” or intervention. This not only added to this from Chair Powell of the US Federal Reserve on Friday but came with more.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

As an aside if the fundamentals of the US economy were strong the statement would not be required would it?

The Kuroda Put Option

The problem for the Bank of Japan is that it was providing so much liquidity anyway as Reuters summarises.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and pledges to cap long-term borrowing costs around zero. It also buys government bonds and risky assets, such as ETFs, as part of its massive stimulus program.

The Reuters journalist is a bit shy at the end because the Bank of Japan has been buying equity ETFs for some time as well as smaller commercial property purchases. I have been watching and all last week apart from the public holiday on Monday they bought 70.4 billion Yen each day.

Regular readers will be aware that the Bank of Japan buys on down days in the equity market and that the clip size is as above. Or if you prefer Japan actually has an explicit Plunge Protection Team or PPT and it was active last week. This morning though Governor Kuroda went beyond open mouth operations.

BoJ Bought Japan Stock ETFs On Monday – RTRS Market Sources BoJ Normally Does Not Buy ETFs On Day TOPIX Index Is Up In Morning ( @LiveSquawk )

As you can see they have changed tactics from buying on falls to singing along with Endor.

Don’t you know pump it up
You’ve got to pump it up
Don’t you know pump it up
You’ve got to pump it up

Also there was this.

BANK OF JAPAN BOUGHT RECORD TOTAL 101.4B YEN OF ETFS TODAY ( @russian_market )

Actually about a billion was commercial property but the principle is that the Bank of Japan has increased its operations considerably as well as buying on an up day. So the Nikkei 225 index ended up 201 points at 21,344 as The Tokyo Whale felt hungry.

Coordinated action

The Bank of England has also been indulging in some open mouth operations today.

“The Bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The Bank is working closely with HM Treasury and the FCA – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.” ( The Guardian)

The rumours are that interest-rate cuts will vary from 1% from the Federal Reserve to 0.5% at places like the Bank of England to 0.1% at the ECB and Swiss National Bank. The latter are more constrained because they already have negative interest-rates and frankly cutting by 0.1% just seems silly ( which I guess means that they might….)

There have already been market responses to this. For example the US ten-year Treasury Bond yield has fallen below 1.1%. The ten-year at 0.75% is a full percent below the upper end of the official US interest-rate. So the hints of interest-rate cuts are in full flow as we see Treasuries go to places we were assured by some they could not go. Oh and you can have some full number-crunching as you get your head around reports that expectations of an interest-rate cut in Australia are now over 100%

The Real Economy

China

If we switch now to hat got this central banking party started it was this. From the South China Morning Post on Saturday.

Chinese manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index (PMI) slowed to 35.7, the National Bureau of Statistics (NBS) said on Saturday, having slipped to 50.0 in January when the full impact of the corona virus was not yet evident.

The only brief flicker of humour came from this.

Analysts polled by Bloomberg had expected the February reading to come in at 45.0.

Although you might think that manufacturing would be affected the most there was worse to come.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, below the previous low of 49.7 in November 2011, according to the NBS. Analysts polled by Bloomberg had expected the February reading to come in at 50.5.

To give you an idea of scale Greece saw its PMI ( it only has a manufacturing one) fell into the mid-30s as its economic depression began. So we are now facing not only a decline in economic growth in China but actual falls. This is reinforced by stories that factories are being asked to keep machines running even if there are no workers to properly operate them to conceal the size of the slow down.

Comment

The problem for central banks is that they are already so heavily deployed on what is called extraordinary monetary policy measures. Thus their ammunition locker is depleted and in truth what they have does not work well with a supply shock anyway as I explain in the podcast below. So we can expect them to act anyway but look for new tools and the next one is already being deployed by two central banks. I have covered the Bank of Japan so step forwards the Swiss National Bank.

Total sight deposits at the SNB rose by CHF3.51bn last week… ( @nghrbi)

Adding that to last weeks foreign exchange intervention suggests it has another 1 billion Swiss Francs to invest in (mostly US) equities.

Who might be next? Well the Euro is being strong in this phase partly I think because of the fact it has less scope for interest-rate cuts and partly because of its trade surplus. Could it copy the Swiss and intervene to weaken the Euro and investing some of the Euros into equities? It would be a “soft” way of joining the party. Once the principle is established then it can expand its activities following the model it has established with other policies.

As for other central banks they will be waiting for interest-rates to hit 0% I think. After all then the money created to buy the shares will be “free money” and what can go wrong?

Podcast

 

Can QE defeat the economic impact of the Corona Virus?

The weekend just passed has seen more than a few bits of evidence of the spread of the Corona Virus especially in Japan, South Korea, Italy and Iran. It has been a curious phase in Japan where on that quarantined cruise ship they have seemed determined to follow as closely as they can to the plot of the film Alien. Even China has been forced to admit things are not going well. This is President Xi Jinping in Xinhua News.

The epidemic situation remains grim and complex and it is now a most crucial moment to curb the spread, he noted.

Yet later in the same speech we are told this.

Stressing orderly resumption of work and production, Xi made specific requirements to that end.

Back on February 3rd we looked at the potential impact on the economy of China but today we can look wider. Let us open by seeing the consequences of some of the rhetoric being deployed.

Bond Markets

UST 30-Year yield falls to an all-time low 1.83 ( @fullcarry )

So we see an all-time low for the long bond in the worlds largest sovereign bond market. Rallies in bond markets are a knee-jerk response to signs of financial turmoil except it is supposed to be for the certainty of yield or if you prefer  interest. The catch is that there is not much to be found even in the US now and if we look wider afield we see that in one of the extreme cases of these times there is none to be found at all. This is because even the thirty-year yield in Germany is now -0.04% so in fact it is being paid to borrow all along its maturity spectrum.

It was only on Friday that I pointed out some were suggesting that the “bond vigilantes” might return to the UK whereas the UK Gilt market has surged also today with the 50 year Gilt at a mere 0.76%.

These are extraordinary numbers which come on the back of all the interest-rate cuts and all the central bank QE bond buying. Of course the latter is ongoing in the Euro area and in Japan. So let us look at them in particular.

The ECB has already hinted in the past that a reduction in its deposit rate to -0.6% could be deployed but frankly their situation is highlighted by talking about a 0.1% move. After all if full percentage points have not helped then how will 0.1%? Even they are tilling the ground on this front as they join the central banking rush to claim lower interest-rates are nothing to do with them at all.

Interest rates in advanced economies have been on a broad downward path for more than three decades
and remain close to historical lows.[5]
As has been highlighted in many studies, the drivers of this long-term pattern largely boil down to
demographics, productivity and the elevated net demand for safe assets. ( ECB Chief Economist Lane on Friday )

Next comes the issue that an extension of QE is limited by that fact that there are not so many bonds to buy on Germany and the Netherlands. But the reality is that under pressure this “rules based organisation” has a habit of changing the rules.

Switching to Japan we see that Governor Kuroda has been speaking too.

RIYADH (Reuters) – The Bank of Japan will be fully prepared to take necessary action to mitigate the impact of the coronavirus on the world’s third-largest economy, its Governor Haruhiko Kuroda said.

Okay what?

He also repeated the view that, while the central bank stands ready to ease monetary policy further “without hesitation”, it saw no immediate need to act.

That reminds me of the time he denied any plans to move to negative interest-rates and a mere eight days later he did. The next bit seems to be from a place far,far,away.

Kuroda said there was no major change to the BOJ’s projection that Japan’s economy would keep recovering moderately thanks to an expected rebound in global growth around mid-year.

Perhaps he was hoping that people would forget that GDP fell by 1.6% in the last quarter of 2018 meaning that the economy was 0.4% smaller than a year before.Or that Japanese plans for this year involved an Olympics in Tokyo that is now in doubt, after all the Tokyo Marathon has been dramatically downsized. I write that sadly as there are a couple of people who train at Battersea Park running track with hopes of competing in the Olympics.

But the grand master of expectations here was this from the G 20 conference over the weekend.

“I’m not going to comment on monetary policy, but obviously central bankers will look at various different options as this has an impact on the economy,” Mnuchin said.

Gold

There have been various false dawns for the price of gold and of course enough conspiracy theories about this for anyone. But gold bugs will be singing along with Spandau Ballet as they note a price of US $1688 is up over 23% on a year ago.

Gold
(Gold)
Always believe in your soul
You’ve got the power to know
You’re indestructible, always believe in, ‘cos you are ( Spandau Ballet )

Equity Markets

This have faced something of a conundrum as fears of a slowing world economy have been been by the hopium of even more central bank easing. Last week the Dax 30 of Germany hit an all-time high and today it is down 3.6% at 13,070 as I type this. So for all the media panic today it remains close to its highest ever.

Currencies

There are two main trends here I want to mark. The first is that we seem to be again in a period of what might be called King Dollar. Also there is this.

SNB propping up 1.0600 in $EURCHF ( @RANSquawk )

Trying that at 1.20 imploded rather spectacularly in January 2015. For newer readers the Swiss Franc (CHF) has been strong as the reversal of the pre credit crunch carry trade has been added to by the perceived strength of Switzerland. This was exacerbated as its neighbour the Euro area kept cutting interest-rates and went negative. So the Swiss National Bank are presently intervening against a safe haven flow towards the Swissy.

I have suggested for a while now I could see the Swiss National Bank cutting interest-rates to -1% and expect not to be “so lonely” as The Police put it. Also I would remind you that 20% of the intervention will be reinvested in the US equity market.

Comment

Who knew that interest-rate cuts and QE could be effective cures for the Corona Virus? Especially as they have not worked for much else. Although there are also whispers that it can cure climate change too. This highlights the moral and intellectual bankruptcy at play as central bankers try to offer more central planning to fix the problems of past central planning. The Corona Virus is of course not their fault but anything unexpected was always going to be a problem for a group determined not to allow a recession and thus any reform under creative destruction.

Meanwhile the rest of us wait to see the full economic impact as we mull the flickers of knowledge we get. For example Jaguar Land Rover saying it only has 2 weeks supply of some parts or reports that for some US pharmaceuticals 80% of the basic ingredients come from China. So the latter could see large demand they cannot supply and higher prices just as we see lower demand and inflation elsewhere. More conventionally there is this for France which must send a chill down the spine of Italy to its boot.

The drop off in tourist numbers is an “important impact” on France’s economy, Bruno Le Maire, the country’s finance minister, said…….France is one of the most visited countries in the world, and tourism accounts for nearly 8% of its GDP.

Podcast

 

 

 

 

China is being hit hard by its economic virus

Today brings an opportunity to take a fresh look at the economic story of 2020 which is the impact of the Corona Virus on the Chinese and world economies. We can reverse our normal order and look at the financial market impact but before we do so I think we should also note the suffering and deaths behind this.

Jittery investors erased almost $400 billion from Chinese stocks, with the Shanghai Composite index shedding up to 8% to hit a one-year low, according to Reuters calculations.

As you can see the Reuters journalists were unable to resist the temptation of writing a large number ( $400 billion ) in spite of the fact they are using a marginal price for some to value the total. Actually but for the price limits there would have been further falls.

Stocks tumbled across the board, with nearly 3000 stock closing at limit-down price. ( YuanTalks)

Although not every share fell and I guess you will not be suprised to see who did not.

Mask producers and some medical related companies outperformed.

The traditional response to this is for the bond market to rally and it did not disappoint.

#China’s 10-year #treasury futures closed 1.37% up at the highest level in more than 3 years as investors dump risky assets. ( YuanTalks )

This meant that the benchmark ten-year yield pushed below the 3% barrier to 2.86% at the close. So heading towards the levels seen by us Western Imperialist Capitalists.

The exchange rate has a more mixed picture. Whilst the Yuan fell by more than 1% versus the US Dollar this morning and pushed through the 7 Yuan threshold it is also true that we are where we were three months ago. In the circumstances we had seen a surprising stability as whilst there had been plenty of media rhetoric a move from 6.85 to 6.92 was not a lot. So it is over playing it to say it is the dog that did nor bark it has been quiet.

People’s Bank of China

This stepped up to the plate today according to the South China Morning Post.

In the face of the “epidemic situation”, the People’s Bank of China (PBOC) said on Sunday it would “inject 1.2 trillion yuan via reverse repo operations on February 3 to ensure sufficient liquidity supply.”
“The liquidity of the overall banking system will be 900 billion yuan more than the same period of last year,” the central bank added.It is the first time that the central bank has made such an announcement and also marks the largest single-day reverse repo operation it has ever conducted.

The issue was partly caused by the fact that there were previous operations which were maturing so we need to see the net effect.

According to Reuters calculations, 1.05 trillion yuan (US$151 billion) worth of reverse repos are set to mature on Monday, meaning that 150 billion yuan in net cash will be injected.

This also came with a small interest-rate cut.

SHANGHAI (Reuters) – China’s cut to its reverse repo rate should alleviate the shock to the real economy from a virus outbreak and is a good move to stabilize expectations and restore financial market confidence, a central bank adviser said on Monday.

Ma Jun’s comments followed an unexpected decision by the central bank for a cut of 10 basis points in the interest rate on reverse repurchase agreements.

Thus we have seen the traditional central banking response to an expected equity market decline as well as a reason for today’s fall in the Yuan.

Manufacturing

This is a rather hot topic in the circumstances as we note this morning’s release.

“The Caixin China General Manufacturing PMI stood at
51.1 in January, down from 51.5 in the previous month. The
manufacturing sector expanded at the slowest pace since August, despite growing for six consecutive months, indicating a mild economic recovery.”

It is hard what to know to make of that and even more so this.

That said, business confidence continued to improve, with the gauge for future output expectations on the rise and tending to recover after two years of depression, due chiefly to the phase one trade deal between China and the U.S

Looking at the dates this gives us a snapshot just before the virus hit and perhaps we should be expecting something more like this bit going forwards.

Production growth slowed, with the output subindex posting its lowest reading since last August. The employment subindex returned to negative territory.

Whilst it also covers other sectors of the economy the official industrial data for December was somewhat downbeat.

BEIJING (Reuters) – China’s industrial firms posted their first annual decline in profits in four years in 2019, as the slowest economic growth in almost 30 years and a bruising trade war with the United States hit the country’s factories.

Official data released on Monday showed industrial profits declining 3.3% on an annual basis to 6.1996 trillion yuan ($897.96 billion) in 2019, compared with the 2.1% dip in the January-November period, the National Bureau of Statistics (NBS) said on its website. It was first full-year decline since 2015 when profits fell 2.3%.

Hong Kong

This has a role as a type of offshore hybrid for the Chinese economy. Even before the Corona Virus it had been seeing economic problems due to the protests there.

According to the advance estimates, GDP decreased by 2.9% in real terms in the fourth quarter of 2019 from a year earlier, compared with the decrease of 2.8% in the third quarter of 2019. The decline of was mainly attributable to the weak performance in both domestic and external demand. For 2019 as a whole, GDP decreased by 1.2% in real terms from 2018. ( Hong Kong Statistics )

The situation is presently in flux with @fastFT announcinng this earlier.

Hong Kong closes border crossings with China

Comment

The issue here twists on the fact that the Corona Virus is new. After all a flu epidemic would be considered not that major on this scale, but it is the fear of the unknown driving this. But the quarantining response has hit the Chinese economy and is being felt around the world. For example the reduction in oil demand has led to this.

OPEC+ IS CONSIDERING FURTHER OIL OUTPUT CUT OF 500,000 BPD DUE TO VIRUS IMPACT ON DEMAND – TWO OPEC SOURCES MOST OPEC MEMBERS AGREE ON NEED TO CUT OIL OUTPUT FURTHER || OPEC+ NOW CONSIDERING MEETING ON FEB. 14-15 – OPEC SOURCE ( @FirstSquawk )

This is in reply to a price for a barrel of Brent Crude Oil which has fallen below US 57 Dollars today. Those who just follow the headlines will be a bit surprised as we have in recent times twice had headlines of it exceeding 70 US Dollars but the truth is that without something special to boost it the oil price has been slip-sliding away.

Switching to Dr. Copper then a futures price of US $2.53 suggests trouble ahead. As to Iron Ore the price falls are already impacting on the South China Territories. From Commodity News.

THE deadly coronavirus outbreak threatens to put a significant dent in Western Australia’s finances amid a plunge in the iron ore market.

Premier Mark McGowan says a 13 per cent decline in the iron ore price over the past fortnight to $US81 ($A121) per tonne is one of several concerns for a state economy heavily dependent on a lucrative trade partnership with China.

Construction has ground to a halt across China amid travel restrictions and port closures, prompting investors to dump iron ore shares.

Meanwhile if you want some positive news here is an example from planet ECB.

ECB’s De Guindos: Starting To See Signs Of Stabilisation On A Global Level. ( @LiveSquawk )

Podcast

Both China and the world economy are being impacted by the Corona Virus

The weekend just gone was one where an epidemic began to have more economic consequences. In a world where there appears to be a Trump Tweet for pretty much everything this one from Friday is not going so well.

China has been working very hard to contain the Coronavirus. The United States greatly appreciates their efforts and transparency. It will all work out well. In particular, on behalf of the American People, I want to thank President Xi!

The media has revved itself up about the Corona virus and is in some cases treating it like a television series I remember from my childhood called Survivors.

 It concerns the plight of a group of people who have survived an apocalyptic plague pandemic, which was accidentally released by a Chinese scientist and quickly spread across the world via air travel. Referred to as “The Death”, the plague kills approximately 4,999 out of every 5,000 human beings on the planet within a matter of weeks of being released. ( Wiki)

Fortunately we are a long way away from that situation although it must be awful for those affected. Let us switch our emphasis to the economic affects as we live up to the description of economics as the dismal science.

China

More and more cities are in lock down and this morning there has been this announcement.

SHANGHAI (Reuters) – The Shanghai government has said companies in the city are not allowed to resume operations before Feb. 9, an official at the municipality announced at a press conference on Monday.

The measure is applicable to government and private companies but is not applicable to utilities and some other firms such as medical equipment companies and pharmaceutical companies, the official said.

China’s cabinet has announced it will extend the Lunar New Year holidays to Feb. 2, to strengthen the prevention and control of the new coronavirus, state broadcaster CCTV reported early on Monday.

This will mean a lot of economic disruption as highlighted here by the Financial Times.

the manufacturing hub of Suzhou has postponed the return to work of millions of migrant labourers for up to a week. Suzhou is one of the world’s largest manufacturing hubs where companies such as iPhone contractor Foxconn, Johnson & Johnson and Samsung Electronics have factories.

One can see a situation where supply chains will be interrupted and presumably inventories will rise until there is not more room to store them. This may add to what has been something of a Perfect Storm for manufacturing over the past year or so.

According to the FT there is another area which has been hit hard.

Railway transport on Saturday, the first day of the lunar new year, fell about 42 per cent compared with the same day last year, according to the transportation ministry. Passenger flights were down by roughly 42 per cent and overall transportation across the country declined about 29 per cent.

If Chinese travel forms are anything like those of the western capitalist imperialists with their rather thin margins it may not be long before some are in trouble which may be why we have seen this being announced.

Companies would receive support “through measures such as encouraging appropriate lowering of loan interest rates, improving arrangements for loan renewal policies and increasing medium-term and credit loans”, the China Banking Regulatory Commission said.

We get an idea of the feared impact on the travel industry worldwide via the @RANSquawk update on share price moves today.

Air France (AF FP) -4.6%

Kering (KER FP) -4.6%

easyJet (EZJ LN) -4.0%

LVMH (MC FP) -3.5%

Ryanair (RYA LN) -3.0%

Airbus (AIR FP) -2.5%

So the initial impact is on manufacturing and consumption especially travel. That will be hitting a Chinese economy that was already slowing with reported economic growth falling to 6.1% at the end of last year.

The World

It may not be the best time for the FT to run with this.

Signs of a global recovery in manufacturing are starting to show

For example should the announcement below come to pass you would think it would have to affect trade between Germany and China.

GERMAN FOREIGN MINISTER MAAS SAYS WE ARE CONSIDERING EVACUATING GERMAN CITIZENS FROM CHINESE REGION AFFECTED BY CORONAVIRUS  ( @DeltaOne )

That is certainly the picture being picked up by the price of crude oil which has been falling the past few days.

The coronavirus could cut into demand by around 260,000 bpd and reduce oil prices by about $3 per barrel, according to a report from Goldman Sachs. However, in the days following the publication of that estimate, oil prices fell by even more than $3. ( OilPrice.com ).

In fact the price of a barrel of Brent Crude Oil has fallen to US $58 as I type this as it tries to factor in lower travel demand and manufacturing. It would be even lower if the disastrous intervention by the West in Libya had not meant its output was so unreliable. Also the medical diagnosis of Dr. Copper is clear as we see it at US $2.63 this morning as opposed to the US $2.87 of as recently as the 16th of this month.

Bond Markets

These have been given yet another leg up as lower growth prospects mean they are more attractive. Although of course that theme is troubled these days as for example in Germany you do not get any yield and instead have to pay! As its bond market rallies we see that its benchmark ten-year yield has fallen to -0.37%. In my home country the UK the situation is also complex as it looks as though we are setting for a Bank of England interest-rate cut later this week as the Gilt market rallies and the ten-year yield falls to 0.53%. But I think it is really following other markets and perhaps trying to price the prospect of lower inflation as oil and commodity prices fall.

Stock Markets

These attract media attention much more.

FTSE 100 ‘in panic mode’ as coronavirus fears push it into red ( City-AM )

Actually it is down a bit over 2% and for context is above 7400 as I type this. so it is an odd type of panic that leaves it not far from the highs. Of course, equity market falls are persona non grata in the era of QE so let us remind ourselves that with the Nikkei 225 index falling 2% in Japan the Tokyo Whale will have had its buying boots on. Thus the Bank of Japan will have edged ever nearer to owning 100% of the exchange traded fund indices it buys.

Comment

We see a form of domino theory here.There are clear impacts on the travel and manufacturing sectors of China in particular. This will reduce economic growth although there will be an offset from the medical sector which will be at a maximum. Those who rely on Chinese economic output will be the first affected and once we move beyond airlines it is hard not to think of the South China Territory otherwise known as Australia. Lower iron ore demand for instance.

World manufacturing supply chains will be affected and as we have already noted this is another problem for that sector. If we look at a specific example all sorts of things may or may not happen to the planned Tesla gigafactory in Shanghai. Meanwhile central banking Ivory Towers are being instructed to research whether QE and lower interest-rates can battle the Corona virus.

Podcast

The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,
Satisfied.

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.

Comment

It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.

 

 

There are major problems brewing in the Pacific for the world economy

It has been something of an economic tenet for a while now that the most dynamic part of the world economy is to be found in the Pacific region. However the credit crunch era has thrown up all sorts of challenges to what were established ideas and it is doing so again right now. The particular issue is what was supposed to be a strength which is trade and we saw another worrying sign on Wednesday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

That is South Korea as we continue our journey past 750 interest-rate cuts in the credit crunch era. Here is their answer to Carly Simon’s famous question, why?

Economic growth in Korea has continued to slow. Private consumption has slowed somewhat, while investment has remained weak. Exports have sustained their sluggish trend as the export prices of semiconductors, petroleum products and chemicals have continued to fall amid the weakening of global trade.

So we see that the economy has been hit by trade issues and that unsurprisingly this has hit investment but also that it has fed through into domestic consumption. Next we got further confirmation that they are blaming trade as we wonder what is Korean for Johnny Foreigner?

Affected mainly by worsening global economic conditions, the growth of the Korean economy is expected to fall back below the July projection…….. The downside risks include a spread of  global trade disputes, a heightening of geopolitical risks and a deepening global
economic slowdown.

We also see that the Korean government has already acted.

Among the upside risks to the growth outlook are an improvement in domestic demand thanks to a strengthening of government policies to shore up the economy and progress in US-China trade negotiations.

 

Quarterly economic growth has been erratic so far this year but Xinhuanet gives us an idea of the trend.

From a year earlier, the real GDP grew 2 percent in the second quarter. It was lower than an increase of 2.8 percent for the same quarter of 2017 and a growth of 2.9 percent for the same quarter of 2018.

Singapore

On the one hand the outlook is supposed to be bright.

Singapore has knocked the United States out of the top spot in the World Economic Forum’s annual competitiveness report. The index, published on Wednesday, takes stock of an economy’s competitive landscape, measuring factors such as macroeconomic stability, infrastructure, the labor market and innovation capability. ( CNN )

The good cheer was not repeated in this from the Monetary Authority of Singapore on Monday.

According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 0.1% year-on-year in Q3 2019, similar to the preceding quarter. In the last six months, the drag on GDP growth exerted by the manufacturing sector has intensified, reflecting the ongoing downturn in the global electronics cycle as well as the pullback in investment spending, caused in part by the uncertainty in US-China relations.

They are very sharp with the GDP number perhaps helped by being a City state. The future does not look too bright either if we look through the rhetoric.

On the whole, Singapore’s GDP growth is projected to come in at around the mid-point of the 0–1% forecast range in 2019 and improve modestly in 2020.

The Straits Times has fone a heroic job trying to make the data below look positive.

Non-oil domestic exports (Nodx) fell by 8.1 per cent in September, a somewhat better showing than the 9 percent fall in August, according to data released by Enterprise Singapore on Thursday (Oct 17).

This was the third month in a row where shipments improved, and the August figure – revised downwards from the 8.9 per cent fall previously reported – also marked a return to single-digit territory after five consecutive months of double-digit declines.

But many eyes will have turned to this bit.

Electronics products weighed down Nodx, shrinking 24.8 per cent year-on-year in September, following a 25.9 per cent contraction in August.

China

This morning has brought the news we were pretty much expecting.

China’s economic growth slowed in the third quarter amid weak demand at home and as the trade war with the U.S. drags on exports.

Gross domestic product rose 6% in the July-September period from a year ago, the slowest pace since the early 1990s and weaker than the consensus forecast of 6.1%. Factory output rose 5.8% in September, retail sales expanded 7.8%, while investment gained 5.4% in the first nine months of the year. ( Bloomberg ).

Back on the 21st of January I pointed out this.

The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

The numbers have been slipping away ever since although Bloomberg tries to put a brave face on it. After all you fo not want to upset the Chinese as you might find yourself like the NBA.

Even with the slowdown, year to date growth of 6.2% suggests the government can hit its 6% and 6.5% for 2019.

Actually M1 money supply growth picked up after January to as high as 4.4% but has now fallen back to 3.4%. So the easing has helped and we are not looking at an “end of the world as we know it” scenario in domestic terms but rather caution.

Before I move on let me point out the consequences of the African swine fever outbreak in the pig industry.

Of which, livestock meat price up by 46.9 percent, affecting nearly 2.03 percentage points increase in the CPI (price of pork was up by 69.3 percent, affecting nearly 1.65 percentage points increase in the CPI), poultry meat up by 14.7 percent, affecting nearly 0.18 percentage point increase in the CPI. ( China Bureau of Statistics )

Japan

Overnight the Cabinet Office has informed us that the Bank of Japan is getting ever further away from its inflation target.

  The consumer price index for Japan in September 2019 was 101.9 (2015=100), up 0.2% over the year before seasonal adjustment, and the same level as  the previous month on a seasonally adjusted basis.

They will of course torture the numbers to find any flicker so if you here about furniture and household utensils ( up 2.7%) that will be why.

Next month the issue will be solved by the Consumption Tax rise but of course that takes money out of workers and consumers pockets at a time of economic trouble. What could go wrong?

Comment

As you can see there are plenty of signs of economic trouble in the Pacific region. Many of these countries are used to much higher rates of economic growth than us in the west. According to Bloomberg Indonesia is worried too.

Indonesia‘s central bank has room to cut interest rates further, perhaps as soon as next week, says its deputy governor

Then of course there is the Reserve Bank of Australia which is cutting interest-rates at a rapid rate. In fact Deputy Governor Debelle gave a speech in Sydney updating us on his priority.

The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the housing market is the Australian economy.[1] That clearly is not the case. But at the same time, developments in the housing market, both the established market and housing construction, have a broader impact than the simple numbers would suggest.