China reports year on year economic growth

This has been a year where China has been especially in focus. Even before it began there were plenty of eyes on its economic performance but the Coronavirus pandemic that looks to have emerged from the Huhan Province upped the ante. Today gives us the opportunity to note the official view on economic developments since then.

The economic growth of the first three quarters shifted from negative to positive, the relations between supply and demand gradually improved, the vitality and dynamic of market were enhanced, and the employment and people’s livelihood were well guaranteed. The national economy continued the steady recovery and the overall social stability was maintained.

So quite an apparent triumph with the pattern for the year show below.

Specifically, the GDP for the first quarter declined by 6.8 percent year on year, increased by 3.2 percent for the second quarter, and up by by 4.9 percent for the third quarter.

They use numbers that are compared to the previous year for that quarter so let us now switch to looking at quarterly and annual growth.

The GDP for the third quarter grew by 2.7 percent quarter on quarter……..According to the preliminary estimates, the gross domestic product (GDP) of China was 72,278.6 billion yuan in the first three quarters, a year-on-year growth of 0.7 percent at comparable prices.

So the overall picture we are left with her is of an economy which has weathered the pandemic and in fact grown albeit very slightly. If you want the pattern which has brought us here it is shown below.

The quarter-on-quarter growth of quarterly GDP since 2019 were 1.9 percent, 1.3 percent, 1.0 percent, 1.6 percent, -10.0 percent, 11.7 percent and 2.7 percent respectively.

The Breakdown

In terms of industry China is emphasising that there has been plenty of high-tech growth.

 In the first three quarters, the value added of high-tech manufacturing and equipment manufacturing grew by 5.9 percent and 4.7 percent year on year. In terms of the output of products, in the first three quarters, the production of trucks, excavators and shoveling machinery, industrial robots, and integrated circuits grew by 23.4 percent, 20.2 percent, 18.2 percent and 14.7 percent year on year respectively.

I am not quite sure why they needed so many extra trucks, excavators and shovelling machinery. Unless of course they were dealing with the swine flu problems of pork production.

Specifically, the output of poultry grew by 6.5 percent, and output of beef, mutton and pork dropped by 1.7 percent, 1.8 percent and 10.8 percent respectively, a decline narrowed by 1.7 percentage points, 0.7 percentage points and 8.3 percentage points compared with that of the first half of this year. The pig production capacity gradually recovered. By the end of the third quarter, 370.39 million pigs were registered in stock, up by 20.7 percent year on year, among which, 38.22 million were breeding sows, up by 28.0 percent.

Overall industry was an outperformer.

Specifically, that of the third quarter grew by 5.8 percent year on year, 1.4 percentage points faster than that of the second quarter.

Services

Again the picture here is of a modern thriving economy.

In the first three quarters, of modern service industries, the value added of the information transmission, software and information technology services, and financial services grew by 15.9 percent and 7.0 percent respectively, or 1.4 percentage points and 0.4 percentage points higher than that of the first half of this year.

However the overall position like elsewhere is of a services sector in decline.

The Index of Services Production dropped by 2.6 percent year on year, a decline narrowed by 3.5 percentage point compared with that of the first half of the year; specifically, that of September grew by 5.4 percent, 1.4 percentage points faster than that of August.

We see that retail sales have had their struggles by the way we are guided towards September rather than the whole third quarter.

In September, the total retail sales of consumer goods reached 3,529.5 billion yuan, up by 3.3 percent year on year, 2.8 percentage points faster than that of August, maintaining the growth for two consecutive months.

Investment

This has managed to just become positive.

In the first three quarters, the investment in fixed assets (excluding rural households) reached 43,653.0 billion yuan, up by 0.8 percent year on year, shifting from negative to positive for the first time in 2020, while that of the first half of this year was down by 3.1 percent.

Looking into the detail we see that one definition of investment ( manufacturing) fell but construction carried on growing.

the investment in manufacturing dropped by 6.5 percent, a decline narrowed by 5.2 percentage points compared with that of the first half of 2020; the investment in real estate development grew by 5.6 percent, 3.7 percentage points faster than that of the first half of 2020.

The latter is very different to what we have seen elsewhere.

Trade

This of course was a contributor to the imbalances that led to the credit crunch. As you can see it has got worse rather than better this year.

In the first three quarters…….The value of exports was 12,710.3 billion yuan, up by 1.8 percent, and the value of imports was 10,404.8 billion yuan, down by 0.6 percent.

I note that they use value rather than volume but suspect this may just be a translation issue. The imbalance situation did improve in September but as ever we need to be cautious about trade figures for a single month.

The Exchange-Rate

This merits a mention as it has not behaved as people continue to expect.There have been plenty of reports published about a weaker Renminbi but in fact in the second half of this year it has been strengthening. The nadir was on the 28th of May at 7.17 versus the US Dollar compared to 6.7 this morning.

What this means beyond the obvious is complex because the Renminbi is neither fixed nor floating and is a managed currency.

Comment

There are several layers in an analysis of this. So let me start from the beginning which is that GDP is calculated differently in China to elsewhere.

While GDP growth in most countries is a measured output that depends on volatile real economic activity, Chinese GDP is an input into the economic process in which local governments are required to add whatever additional economic activity is needed to achieve the targeted GDP growth rate, whether or not this activity adds to welfare or productive capacity ( Michael Pettis )

So a version of “tractor production is always rising” if you like. The debate has gone on for years and a new view on it is around inflation measurement which if you look at the thrust of my work raises a wry smile. Essentially it is not the basic numbers used but it is the inflation measure or deflator that has “smoothed” things since 2012. Taking that view Capital Economics in China suggest GDP has been overstated by around 12%. They back up their view in this way.

For example, the formerly tight link between construction activity and cement output stops working. (See the chart.) Industrial value-added (and monthly IP) become eerily stable, but direct measures of output from industry don’t.

It’s harder to find proxies for services (partly because much of it is lumped together as “other” services, which have apparently been growing very fast). But we see the same abrupt drop in volatility as in industry.

This fits with what we have noted in the past as for example the phase whereby electricity production did not fit what we were told. However, this is a movable feat as once the Chinese noticed this they became “smoothed” too.

So China looks as though it is doing better than us western capitalist imperialists in 2020 which I guess is no great surprise.After all they have much more experience of running a centrally planned economy.We keep stopping ours. However they have been to coin a phrase “somewhat economical with the figures” since around 2012.

There is a subplot to that too as back on the 12th of August I pointed out a really odd move in the UK Deflator.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020.

We failed to follow what Level 42 would call The Chinese Way however as we reduced our GDP by around 5%.

Podcast

 

Will the economy of France shrink again?

The pandemic era has thrown up so many economic questions, but now we seem to be entering a new phase. Over the past day or two it has been La Belle France which has been exhibiting this. I have pointed out more than a few times that the tendency for forecasters official and otherwise to assume a strong economic bounce back in 2021 and 2022 was based on little more than Hopium, as we are still less than certain about 2020. An example of the issues facing this year came from the BBC a couple of days ago.

Paris will shut all bars completely from Tuesday after the French government raised the city’s coronavirus alert to maximum following a period of high infection rates.
Bars, gyms and swimming pools will all be closed for two weeks in a bid to curb the spread of the virus, the city’s police chief said.

But restaurants will remain open if strict hygiene rules are in place.

On Sunday France reported 12,565 cases of Covid-19.

France24 added to the theme only yesterday.

Covid-19: France records new all-time high of nearly 19,000 cases in 24 hours.

As it goes onto point out there are economic consequences as it highlights a French tradition.

They form part of a centuries-old tradition and are an iconic feature of the French capital, but Paris’s historic riverside booksellers, known as ‘bouquinistes’ are under threat. Like many other businesses that rely on tourism, Covid-19 has taken a devastating toll on their income.
A total of 227 bouquinistes, who sell second-hand books as well as sometimes souvenirs, line the embankment of the River Seine.

This returns us to a point we looked at when the pandemic began which is the impact of such an event on economies which rely on a lot of tourism.

The Economic Situation

France’s official statistical body Insee has tried to allow for the changing situation.

Alongside “barrier gestures”, more restrictive containment measures which more directly affect economic activity (closures of bars, restaurants, sports halls, etc.) are, at this stage, more targeted territorially and sectorally than in the spring. Air passenger transport remains severely affected, as it has since the start of the health crisis.

We have seen an example of the latter issue in the news today with Easyjet suggesting it will lose more than £800 million this year with passenger numbers halved.

Their analysis leads to a change in their view and the emphasis is mine.

In September, the continued improvement in the business climate in France is mainly due, in most sectors, to improved judgment on past production, while the business outlook for the next three months is down. , according to business leaders interviewed in business surveys.

Below is where they think we are.

After the sharp rebound associated with deconfinement (+ 16% expected in the third quarter, after – 13.8% in the second and – 5.9% in the first), economic activity could thus slow down at the end of the year under the effect of the resurgence of the epidemic.

What might slow down? Again the emphasis is mine.

In a scenario where, in the fourth quarter, the most affected services (hotels and restaurants, transport services, recreational and leisure activities) would return, after an improvement during the summer, to their level of activity of last June and where investment should remain, by a wait-and-see policy, at a level close to that of the third quarter, growth would be zero at the end of the year.

That is more than a little uncomfortable for the official predictions for 2021 as we should be rebounding rather than flat-lining. In terms of numbers we have this.

In this scenario, French GDP would remain, at the end of the year, 5% below its pre-crisis level, as on average during the summer……..In total for the year 2020, the forecast of GDP contraction remains in the order of -9%.

The swing factor here is consumption. We will see stellar levels of growth for the third quarter based on the numbers we know. But like in A Question of Sport the real issue is what happens next?

The continuation of these restrictions,
and the dissipation of catch-up effects by
elsewhere, would lead in the fourth quarter to
consumption slightly lower than
in the previous quarter. On the whole of
the year, consumption would decrease by 7%
compared to 2019.

It has been an extraordinary year with normal incomes hammered but government intervention leading to this.

With the rebound in consumption – even attenuated at the end of the year – the household savings rate, which had almost doubled in the second quarter (due to forced savings), should come back to around 17% in the second half, a level slightly higher than before the crisis.

At some point this will end and then consumption will face the consequences of this.

The unemployment rate should jump in the third quarter and reach 9.7% at the end of the year.

Bank of France

It has joined the fray this morning with this.

According to the business leaders interviewed, activity is, as expected a month ago, stable in September in
industry as in services and construction. It remains overall below its previous level
crisis, but still with a strong heterogeneity between sectors. Outlook for the month of October
also show a relative stability of activity in industry, services and construction.

It points out that there is a wide disparity in sectors but at least in some areas it suggests falls last month.

The production capacity utilization rate slipped slightly to 73% on average in September after 75% in August (and 79% before the crisis). It is on the rise in the chemical industry but falls significantly in the aeronautics and other transport sector.

Comment

If we take a look at the position it is not the overall situation that is the issue it is the structure. The 9% fall in GDP is well within the margin of error at a time like this from the Europa summer forecast.

but the forecast for 2020 has been revised down to about –
10 ½% from close to -8 ¼% in the spring.

The issue is the direction of travel which began hopefully with a strong recovery push. But now we see that rather than recovering towards the end of the year we may see stagnation or if the latest numbers are any guide a further decline. This poses quite a challenge to the next part of the summer forecast.

The projected economic recovery is set to remain on track in 2021, with GDP expanding by some 7 ½%.

We should of course have realised via the use of the phrase “on track” which meant anything but in the Greek crisis. In terms of specifics as we have noted today this part is being questioned.

After sinking in the first half of the year, private consumption is projected to gather momentum from the second half onwards.

If we now switch to what this means? We have two major consequences. The first is that the depression starting in 2020 looks set to be longer than expected just like wars which invariably are predicted to be over by Christmas. Sadly that means more people will be unemployed for longer.Should the French economy contract again it will be four out of the latest five. Also it means that there will be no end in sight to central bank intervention and we may see even more negative interest-rates and QE bond buying.

 

The problem for supporters of an expansion of the IMF is its track record

As the Corona Virus pandemic rages many eyes turn towards world bodies for help. In the financial world a major one is the International Monetary Fund and there have been some grand suggestions for its role in the years ahead. Let me take you to FT Alphaville from a last month.

It is time for the IMF to act, like it did in mid-2009. At that point in time, the IMF issued 183bn SDRs, which at the time amounted to $287bn. While on paper, those SDRs are promises against local currency promises of each member-country, in reality the IMF creates them out of thin air.

Let us park for the moment the danger in creating money out of thin air and consider the impact of the words of Andres Arauz, Ecuador’s former minister of knowledge. In fact he then went even further.

This time, the IMF should forget about conditionality or loan-facilities and should straight up issue 10 times the amount of SDRs that were issued in the midst of the Global Financial Crisis a decade ago. We have no time to make the allocation shares more just, but we have no restriction as to the amounts issued. Out of the 3tn SDRs, almost 167bn SDRs would flow to African countries; that is a little over $230bn in fresh foreign exchange for all of Africa.

For those unaware an SDR is a Special Drawing Right and is defined as follows.

The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi)

As of yesterday the expansion suggested above would be worth US $4.1 trillion which even in these inflated times is a tidy sum. If we stay with the rationale there is a suggested change on the 2009 expansion because of this.

Most of that amount went to rich countries who just parked the SDRs in the most remote and inaccessible part of their balance sheets. In contrast, all of Africa got about USD 16 billion worth of fresh SDR and all of South America received about USD 15 billion.

There is an interesting side issue in that the much trumpeted expansion mostly went on a road to nowhere. But sticking with the African issue Mr.Aruaz thinks a relative little went a long way.

However, for many countries of the Global South, those newly created SDRs were crucial for their balance of payments needs. For example, the fresh USD 668 million allocated to the Democratic Republic of Congo were 860 per cent of their international reserves at the time….. $38m amounted to 33 per cent of Gambia’s.

Actually I think that he has somewhat undermined his own argument here because if you can do a lot of good with relatively small sums why is his request so large?

The Media

They portray the IMF in a favourable light especially when it plugs arguments they agree with as here is Faisal Islam of the BBC.

The IMF has suggested the UK and the EU should not “add to uncertainty” from coronavirus by refusing to extend the period to negotiate a post-Brexit trade deal.

You would think that she has much bigger fish to fry right now although her preoccupation is explained later as she heaps praise on the Bank of England.

The IMF chief, a former vice-president of the European Commission, also heaped praise on the UK Treasury and Bank of England’s “early” and well co-ordinated economic response to the crisis.

She said: “That very strong package of measures is helping the UK, but given the UK’s sizeable role in the world economy, it’s actually helping everyone.”

Tell that to smaller businesses.

The fawning continued with the acceptance of the World Economic Outlook earlier this week which told us this.

As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.

A fair counterpoint would be to note what they told us in January.

Global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021.

Things have changed since then but only 3 months ago they were completely wrong which raises two issues. The dangers in such analysis in an uncertain world and the fact that the IMF isn’t very good at it.

Debt Relief

This is more of a positive for the IMF as we note this announcement from Monday.

The countries that will receive debt service relief today are: Afghanistan, Benin, Burkina Faso, Central African Republic, Chad, Comoros, Congo, D.R., The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo, and Yemen.

So a long list of poor countries will get this.

The CCRT can currently provide about US$500 million in grant-based debt service relief, including the recent US$185 million pledge by the U.K. and US$100 million provided by Japan as immediately available resources. Others, including China and the Netherlands, are also stepping forward with important contributions.

Nice to see my country the UK taking a lead here

Comment

The IMF is often presented as something of a saviour but there are a lot of problems with this view. From time to time it is but the presentation of it as being something of a “free good”in the line of an expansion of SDRs has problems. We are in effect raising the world’s money supply which is likely over time to lead to inflation so there are costs ahead. If only just creating money solved all our problems! The credit crunch would have ended in 2011 if that was so.

Also as I have written before this ignores the way that the role of the IMF has been twisted. It used to be an organisation which dealt with trade issues and whilst it had troubles it also has successes. However under two French Managing Directors it was pushed towards fiscal problems and thereby involved in the Euro area crisis. This to my mind was inappropriate on two levels. Firstly the change in the role of the organisation and secondly aiding an area which had plenty of resources but did not want to use them on the scale required. It is part of world realpolitik that we get European leaders of the IMF and sadly they have bent it to their own ends. They have involved themselves in creating one of the greatest economic depressions in a first world country with their austerity policies in Greece. Now they wish people to take them seriously about fiscal stimulus when the track record there has been a disaster and of course is about to get even worse.

Then there is the issue of Argentina which is the largest programme the IMF has ever had and was reviewed in glowing terms by Christine Lagarde when she was managing director of the IMF.

Argentina’s public debt is unsustainable

Actually even when it was lending the money it thought this.

At that time, the IMF assessed Argentina’s public debt to be sustainable, but not with high probability

Eh? Anyway this is what happened next.

Since July 2019, the peso has depreciated by over 40 percent, sovereign spreads have risen by
over 2700 basis points (Figure 1), net international
reserves fell by half, and real GDP contracted more
than previously anticipated.

The Buenos Aires Times put it like this on Tuesday.

Argentina has been gripped by recession for two years. GDP contracted by 2.2 percent in 2019. During a currency crisis in 2018, the Mauricio Macri government tapped the IMF for the largest credit-line in the Fund’s history, worth some US$57 billion. The country has received US$44 billion to date.

So can the IMF help in individual cases? Yes and I hope it does as some poor countries will be hurt dreadfully by this crisis. Would I give it anything like a blank cheque? No based on its rather poor track record and the way its objectives have been twisted.

Italy faces yet more economic hardship

Italy is the country in Europe that is being most affected by the Corona Virus and according to the Football Italia website is dealing with it in Italian fashion.

In yet another change of plan, it’s reported tomorrow’s Juventus-Milan Coppa Italia semi-final will be called off due to the Corona virus outbreak.

In fact that may just be the start of it.

News agency ANSA claim the Government is considering a suspension of all sporting events in Italy for a month due to the Coronavirus outbreak, as another 27 people died over the last 24 hours.

Thus the sad human cost is being added to by disruption elsewhere which reminds us that only last week we noted that tourism represents about 13% of the Italian economy. Again sticking with recent news there cannot be much demand for Italian cars from China right now.

China has also suffered its biggest monthly drop in car sales ever, in another sign of economic pain.

New auto sales slumped by 80% year-on-year in February, the China Passenger Car Association reports. ( The Guardian )

Actually that,believe it or not is a minor improvement on what it might have been.

Astonishingly, that’s an improvement on the 92% slump recorded in the first two weeks of February. It underlines just how much economic activity has been wiped out by Beijing’s efforts to contain the coronavirus.

Backing this up was a services PMI reading of 26.5 in China and if I recall correctly even Greece only went into the low thirties.

GDP

The outlook here looks grim according to the Confederation of Italian industry.

ITALY‘S BUSINESS LOBBY CONFINDUSTRIA SEES ITALIAN GDP FALLING IN Q1, CONTRACTING MORE STRONGLY IN Q2 DUE TO CORONAVIRUS OUTBREAK ( @DeltaOne )

This comes on the back of this morning’s final report on the last quarter of 2019.

In the fourth quarter of 2019, gross domestic product (GDP), expressed in chain-linked values ​​with reference year 2015, adjusted for calendar effects and seasonally adjusted, decreased by 0.3% compared to the previous quarter and increased by 0.1 % against the fourth quarter of 2018.

That is actually an improvement for the annual picture as it was previously 0% but the follow through for this year is not exactly optimistic.

The carry-over annual GDP growth for 2020 is equal to -0.2%.

That was not the only piece of bad news as the detail of the numbers is even worse than it initially appeared.

Compared to previous quarter, final consumption expenditure decreased by 0.2 per cent, gross fixed capital formation by 0.1 per cent and imports by 1.7 per cent, whereas exports increased by 0.3 per cent.

There is a small positive in exports rising in a trade war but the domestic numbers especially the fall in imports are really rather poor. If you crunch the numbers then the lower level of imports boosted GDP by 0.5% on a quarterly basis.

The long-term chart provided with the data is also rather chilling. It shows an Italian quarterly economic output which peaked at around 453 billion Euros in early 2008 which then fell to around 420 billion. So far so bad, but then it gets worse as Italy has just recorded 430.1 billion so nowhere near a recovery. All these are numbers chain-linked to 2015.

Markit Business Survey

This feels like something from a place far, far away but this is what they have reported this morning.

Italian services firms recorded a further increase in business activity during February, extending the current sequence of growth to nine months. Moreover, the expansion was the quickest since October last year, as order book volumes rose at the fastest rate for four months. Signs of improved demand led firms to take on more staff and job creation accelerated to a moderate pace.

They go further with this.

The Composite Output Index* posted 50.7 in February, up
from 50.4 in January, to signal a back-to-back expansion in
Italian private sector output. The reading signalled a modest monthly increase in business activity.

Mind you even they seem rather unsure about it all.

“Nonetheless, Italian private sector growth remains
historically subdued”

You mean a number which has been “historically subdued” is now a sort of historically subdued squared?

ECB

This is rather stuck between a rock and a hard place. It has already cut interest-rates to -0.5% and is doing some 20 billion Euros of QE bond buying a month. Thus it has little scope to respond which is presumably why there are reports it did not discuss monetary policy on its emergency conference call yesterday. In spite of that there are expectations of a cut to -0.6% at its meeting next week.

Has it come to this? ( The Streets)

As you can see this would be an example of to coin a phrase fiddling while Rome Burns. Does anybody seriously believe a 0.1% interest-rate cut would really make any difference when we have had so many much larger cuts already? Indeed if they do as CNBC has just suggested they will look even sillier as why did they not join the US Federal Reserve yesterday?

ECB and BOE expected to take immediate policy action on coronavirus impact.

Those in charge of the Euro area must so regret leaving the ECB in the hands of two politicians. No doubt it seemed clever at the time with Mario Draghi essentially setting policy for them. But now things have changed.

Fiscal Policy

This is the new toy for central bankers and there is a new Euro area vibe for this.

French Finance Minister Bruno Le Maire says the euro-area must prepare fiscal stimulus to use if the economic situation deteriorates due to the coronavirus outbreak ( Bloomberg)

That is a case of suggesting what you are doing because as we have previously noted France had a fiscal stimulus of around 1% of GDP last year. But of course back when she was the French Finance Minister Christine Lagarde was an enthusiast “shock and awe” for exactly the reverse being applied to Greece and others.

The ECB has already oiled the wheels for some fiscal expansionism by the way its QE bond buying has reduced bond yields. It could expand its monthly purchases again but would run into “trouble,trouble,trouble” in Germany and the Netherlands, pretty quickly.

Comment

If we return to a purely Italian perspective we see some of the policy elements are already in play. For example the ten-year yield is a mere 0.94% although things get more awkward as the period over which it has fallen has also seen a fall in economic growth. The fiscal policy change below is relatively minor.

Italy is planning to hike its 2020 budget deficit target to 2.4% of its GDP from 2.2% to provide the economy with the funds it needs to battle the impact of coronavirus outbreak, Reuters reported on Monday, citing senior officials familiar with the matter.

By contrast according to CNBC the Corona Virus situation continues to deteriorate.

Italy is now the worst-affected country from the coronavirus outside Asia, overtaking Iran in terms of the number of deaths and infections from the virus.

The death toll in Italy jumped to 79 on Tuesday, up from an official total of 52 on Monday. As of Wednesday morning, there are 2,502 cases of the virus in Italy, according to Italian media reports that are updated ahead of the daily official count, published by Italy’s Civil Protection Agency every evening.

Now what about a regular topic the Italian banks? From Axa.

and banks such as Unicredit and Intesa have offered “payment holidays” to some of their affected borrowers.

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.

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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 )

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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.

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