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China is swimming in credit,...unlike the G5

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cash_1(Oct. 14, 2009 - Erwan Mahe) Day after day, we continue to receive contradictory data on the state of the world economy, which is already improvement from the beginning of the year all the stats were horrible, but with a marked difference between figures coming from China (and its satellites in the zone) and those from the G5 countries.

In the Middle Kingdom

  • Foreign trade statistics, published this morning, were surprisingly good, with a monthly hike of 6.3% in exports and an 8.3% lift in imports, although these two items are still down by a respective 20.1% and 11.4% compared to the same time last year.

But there is no point in turning up our nose, as these figures are good in that they slightly correct the Chinese trade surplus, which nonetheless stands at $12.93bn, following +$15.71bn in August.

  • In the meantime, the country’s currency reserves continue to increase, between the surplus in current accounts and interest received, as FX reserves surged $36.2bn in August and $61.8bn in September, to total….$2.27 trillion!
  • First the first time ever, auto sales exceeded 1 million vehicles in September, up 86.3% on an annual basis!Commercial vehicles sales climbed by an annual 61.7% to 316 700 units, also a record.
  • In view of this situation, GM now says it will not sell its assets and installations in the country.
  • And what has really excited the optimists is that the monetary stimulus measures are still at work, with new loans totalling 516.7bn yuan in September, up from 410.4bn yuan in August.

Although this figure is less impressive than the 1.5bn yuan of June, that nonetheless brings the growth in loans since the beginning to the year to +34.16%!

G5 economies:

  • In Europe, industrial production for August was less vigorous than expected at +0.9%, vs +1.2%, while July figures were revised to +0.2% from -0.3%, but that didn’t stop the annual change from totalling -15.40%.

However, beware of optical effects, because we are beginning to compare y/y statistics with those of 2008 when the economic correction was already well on its way. This effect will continue in the months ahead, as the base months of 2008 continue to worsen. This may give the impression that we are undergoing a rebound in economic activity, but don’t forget the low basis of comparison!

I examined the breakdown of these industrial production figures this morning between capital, durable and non-durable goods and their changes since 1990 so as to compare the impact of the current crisis with those of 1992 and 2001.

As you can see in the three slopes in the graph, below, and the changes in these components compared to their activity peaks, I used the logarithmic scale to account for the orders of magnitude.

Aside from the fact that this crisis has been particularly harsh, what really shocks me is that it would appear that Europe is only able to manufacture non-durable items.). I have not been able to find such a historically low level of durable goods production!

Another significant point is that these industrial productions statistics, out this morning, do not include construction, which must also suit …

The next statistics publications will not benefit from the government paid car rebate plans in Germany or France, so we have every reason to be cautious.

Eurozone industrial production by components

Can't we produce anything more than cotton candy these days?

TC_10141

·        In France, September retail sales declined 1.2%, bringing the yearly contraction to 4.7%.

·        In Spain, the CPI, published this morning, falls right into line with the prevailing deflationist process (core index +0.1% !) -- with my not very sincere apologies to Mr Stark and friends.

·        Angela Merkel has just contradicted these sad saps with her comment that the risk of a credit crunch was a real worry for her! (more apologies to the same suspects!).

·        Mr Nowotny of the Austrian Central Bank, who deserted the Austrian school camp (Hayek, Mises) some time ago, declared in response to a question this morning if he saw a risk of inflation on the eurozone, replied:

I see none whatsoever.

·        In Japan, the descent into deflationary Hell continues on its merry way, even with the support of their Chinese neighbours. Check out the rather edifying graph, released this morning, below, showing changes in production prices (CGPI), down 7.9% y/y at end September, the 9th consecutive month of decline.

A member of the BoJ simply explained that, given weak demand, businesses were unable to pass on recent hikes in raw materials prices to customers.

I find the Final Goods component of the Production Prices index to be particularly interesting, since the correlation is stronger with the later changes in consumer prices.

This index, which has been declining continuously since the beginning of the lost decades (1991), propped up somewhat by the credit bubble (2004/2008) before declining steeply in the wake of the Lehman bankruptcy, has just taken a fresh nose-dive.

One thing is for sure: the strength of the yen hardly help matters.

It is thus easier to understand this morning’s decision by the Bank of Japan to leave its benchmark rates unchanged at 0.10% and to consider prolonging the exceptional CP and corporate bond purchases after 31 December, in view of the economy’s “severe” financing conditions.

Finished goods production prices in Japan

They will always be underpriced by the Chinese

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·        As for the US, given the hour, I will let you enjoy reading for yourself the following instructive articles on wage deflation:

Still on the Job, but Making Only Half as Much

Investment focus unchanged:

  • positive bias toward government debt instruments, especially, on the eurozone 5-10 year segment, which benefits from the ECB's credibility;
  • on stock markets, we prefer limiting hedging operations to small deltas, to theta and to minimum credit.

The October put ladders ended up being sold higher their acquisition prices, despite the market hike, and clients are looking for the optimum entry point to set up equivalent hedging positions on November.



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