China's Market is Happy Again

This is turning out to be a great week for the Chinese stock markets.  After pausing for breath – it rose a mere 0.8% yesterday – the SSE Composite continued Monday’s 4.6% rally to gain another 3.8%, all of which rise came in the morning.

 

What drove it?  Aside from lower international oil prices, largely two things, I think.  First, the markets continued to be buoyed by Premier Wen’s comments over the week-end that suggested that the government was more interested in policies to boost growth than in policies to combat inflation and overheating (the “two prevents”).  Second, there are strong rumors that June year-on-year CPI inflation is going to come in at 7.1%, a big decline from its March 8.7% year-on-year increase.

 

These are both terrible reasons to be bullish.  I’ve already written Monday why I think the government’s reorientation from anti-inflation to pro-growth is a bad thing.  For very similar reasons I think the “moderation” in CPI inflation indicates very little of value.

 

The CPI numbers have become less and less valuable as an indication of China’s underlying inflation pressures because they have become so tainted by the under-counting of the food component of the basket as well as by the many price controls on goods in the CPI basket, which have had the effect of converting inflation from overtly rising prices into hidden rising prices, shortages and unbearable subsidies.  Increasingly PPI inflation has become the more robust indicator.  That is what we should be watching.

 

In addition if you believe, as I do, that the underlying cause of inflation is China’s out-of-control money growth, it is hard to be anything but dazed by the latest numbers.  Chinese reserve accumulation continues at its fastest pace ever.  I expect June numbers will be “low” – I expect around $20 billion or so – but that will have been caused almost wholly by the impact of the redenomination of last month’s hike in minimum reserve requirements into dollars.  That should bring headline reserve growth down by $40-45 billion. 

 

That means that headline reserve growth for the first half of the year should come out a little under $300 billion (versus $462 for all of last year and $247 the year before).  When we adjust the headline numbers for the various transactions that reduced headline reserve growth but had little to no impact on real inflows and, more importantly, the PBoC monetization of those inflows, reserve accumulation this year will be around $500 billion (versus around $500-550 for all of last year).

 

Under those conditions how confident can we be of any proxy that indicates inflationary pressures are declining?

Comments

[mmbc]

Chinese market looks to be in a bad shape at the moment. If you look at all the Chinese ETFs here:
www.maxmoneyblog.com/b...
all of them have lost their trend and has been like that for sometime.

2008 Jul 09 10:29 AM

[rlirph]

Michael, what does one invest in China? Both the real estate and stock market have been decimated. Keeping money in the bank yields 3.5% but inflation depreciates the buying power of the Chinese dollar.
Any suggestion besides loaning money to fund the underground finance companies at 5% per month?

2008 Jul 09 12:42 PM

[James Lewis]

The olympic rally is here...

Shanghai developers are cetainly in the spirit, I have never seen so many ex-council (government owned) local housing being knocked down to make way for new projects.

After seeing the building booms in 2003+2004 and then again in 2007, I can say that what I am seeing now takes the prize.

Office Buildings
Luxury Appartments
Retail buildings
Shopping Centres
Subways

Where ever you go, all you can here is demolition, drilling and building. It truly is amazing. It seems that the policy makers only concern and foucs is food prices, property prices and making sure hotmoney does not increase the speed of revalaution of the RMB beyond their control. The second they see these things stabilising for a month (even if through manipulation) they become pro-growth again.

Anyone that studies the price of goods in China knows that Inflation is not decreasing accross the board. We have some decreases in food prices. And cab fares are still stupidly cheap. But everything else is going up. If its not going up in price the quality is going down.

Inflation is getting so bad, that Japanese goods are starting to look fairly priced now!!

A lot of the domestic factories are raising the prices of their goods right now that are sold through their agent networks. Especially furniture, air conditioning and other home goods. This is at the current time of deminishing demand due to seasonal factors. When aggregate demand booms even higher during the Olympic period prices are going to skyrocket across the board. I see this period starting in a matter of days not weeks.

I can not see how prices have any chance of stabilising going forward until at least march 2009. Between the Olympics, Hot Money Inflows, Shanghai Expo construction spending, peak manufacturing demand from international customers stocking up for Christmas. We have huge demand to the end of 2008.

Bringing us around to Spring Festival which starts slightly earlier this year.

Unless the Chinese government speed up revaluation of the Yuan post olympics. Then it seems to me it is a one way bet. Who knows it may be cheaper to live in the Uk soon.

2008 Jul 09 01:16 PM

[johnthebear]

The way to play the decline in FXI is ProShares FXP. It is my judgment that FXI is headed to $60, down from the 120-130 range during the next month. FXP is headed to $200. (FXP is 2:1 inverse of FXI)

The bubble has burst in China... Europe, Asia and USA are all heading to a slowdown that popped the bubble. I expect the people are beginning to feel like Japan in 1990 when their market began declining from a high of 40,000 and went down to 8,000 over very long period before finally going back to 20,000 and now back to 13,000. The China markets are down 54% so far, but have not seen anything yet.

Can you imagine all the bad luck that China has faced this year?

Worst Blizzard in 50 years

Worst Earthquake in 54 years

Worst flooding in ___ years

Highest Fuel prices ever, Plane fares ^^^ higher

The earthquake has affected the preparations for the Olympics, reducing profit potential.

Olympics will be a huge disaster, very hot and muggy. Taxis will be tangled in huge traffic jams, tourist will hate it.

Just learned that there is a problem of Algae in waterways planned for Olympic boating events. 10,000 workers are now clearing the river.

Also learned they are expecting locust, 35,000 workers from Outer Mongolia have been hired to try to do something about the problem. How do you fix this? Finally heard about this on FOX news.

I wonder if the Chinese are beginning to feel like ancient Egypt when Moses asked the Pharaoh to "Let my People Go." The Nile filled with blood, fish died and began to stink and they had to dig wells as the water was too bad to drink, then came frogs, gnats, flies, livestock died, they all got boils, hail storms, locust, total darkness for 3 days and then death of firstborn?

So maybe the idea really is "Let my People Go"

When things really go south after the games, I wonder if there will be a rebellion from the communist government? It would be about time!

2008 Jul 09 10:26 PM

[rlirph]

To user222522 - No advertisement please...this is not a Chinese website.

2008 Jul 10 10:39 AM

[HeF]

Rlirph, it depends on several things, including your reference investment. If you are a US resident, the fact that Chinese real interest rates are negative doesn't matter. As long as your expected dollar return is high (in real US terms), it still makes sense to put your money in a RMB bank deposit.

If you are a Chinese resident it is much more difficult. If you believe, as I do, that we are in the final stages of a liqudidity-induced bubble, the best thing to own is cash, but of course the cost of holding cash in China is very high.

When Vietnam got into trouble, Vietnamese investors, whose ability to take money out of the country was limited, swarmed into gold so quickly that Vietnam overtook China and India as the world's largest bullion market. This is a country whose economy is, I would guess, about 2.5% that of China. If Chinese react the same way that the Vietnamese did, it might be a good idea to buy precious metals (such as gold) that are traded in China.

2008 Jul 10 11:09 AM