Increasingly, the Chinese economy has grown in importance and stature. Economic growth globally certainly depends on the Chinese economy to a greater extent than ever before.
The reason is twofold: the first is that the Chinese economy is a large buyer of resources, which impacts many nations around the world; and the second and new dynamic for economic growth globally is that the Chinese economy is now becoming more domestically oriented.
Both characteristics of the Chinese economy are important for economic growth—not only within that nation, but even here in America.
The Chinese economy can certainly have an impact on many American companies, from resource firms to companies selling goods into the Chinese economy as the domestic market continues to grow.
Recent economic data have shown that there appears to be a decrease in demand globally, as manufacturing activity within the Chinese economy dropped for the month of May, which marks the first drop in seven months.
The HSBC/Markit Purchasing Managers’ Index (PMI) during the month of May dropped below the all-important 50 level down to 49.2. A PMI reading below 50 means a contraction in activity. (Source: “HSBC China Manufacturing PMI,” Markit Economics web site, June 3, 2013.)
A negative sign regarding economic growth globally was that demand for new export orders dropped for the second month in a row. Especially worrisome for Americans was that the report indicated that U.S. demand in particular dropped significantly during the month.
While many are optimistic that economic growth in the U.S. will appear shortly, these types of data certainly throw into doubt that theory. With the stock market at such lofty … Read More
One of the common questions I get asked is: where are the long-term opportunities for growth? We all know that the American economy is growing extremely slowly, yet most people don’t realize how international many of the S&P 500 companies really are.
As an example, while we all think of Kentucky Fried Chicken (KFC) and Pizza Hut as American restaurants, the parent company, YUM! Brands, Inc. (NYSE/YUM), has a growth plan that is not based domestically and is instead focused on the Chinese economy.
Because S&P 500 companies are increasingly focusing on growth potential around the world, the one economy that has seen consistent increases in gross domestic product (GDP) has been the Chinese economy.
However, recent data are showing signs that the Chinese economy might be slowing down. According to the National Bureau of Statistics, industrial profits in March increased by 5.3% year-over-year, but it marks a drop from the 17.2% increase in industrial profits recorded during January and February. (Source: Orlik, T., et al., “Chinese Industrial Profit Growth Slows,” Wall Street Journal, April 28, 2013.)
Earlier this year, we received information that the Chinese economy did post a lower-than-expected GDP increase of 7.7%, down from 7.9% during the fourth quarter of 2012. The leadership in China is trying to engineer a slower Chinese economy to prevent bubbles.
So, what does this mean for S&P 500 companies?
Many S&P 500 stocks are looking toward the Chinese economy as the next great growth generator. YUM! Brands opened almost 2,000 restaurants in 2012, of which 889 were based in China. (Source: “YUM! Staying the Course: China and a Whole Lot More, … Read More
One of the most closely watched parts of the global financial system is the Chinese economy. I don’t need to tell you that the economic recovery in America and the rest of the world is quite sluggish. Many had hoped that China could help propel the global economy higher; however, there are now concerns that this might not occur.
Recent data on the Chinese economy are signs that economic growth is not accelerating. For the first three months of 2013, the Chinese economy posted growth of 7.7%, a lower rate than the fourth quarter of 2012, in which the Chinese economy grew at 7.9%. (Source: Yao, K., et al., “China growth risks in focus as first quarter data falls short,” Reuters, April 15, 2013, accessed April 16, 2013.)
The Chinese economy is a huge player within the international financial system. If the nation was to regain its economic growth rate of the past, this would have a substantial impact on many people and companies around the world.
The Chinese economy posted industrial production growth of 8.9% year-over-year, below expectations of 10% growth. Power generation was up only 2.1% year-over-year in March, and steel output declined 3.2%, both below expectations.
Don’t forget, China is a huge buyer of many raw materials, including copper and iron ore. This latest data is additional evidence that economic growth is not accelerating, and investors need to reallocate their portfolios in accordance with this information.
One slight positive note was that retail sales within the Chinese economy increased 12.6% year-over-year in March, above expectations of 12.5% and higher than the recorded 12.3% increase for February.
The … Read More
For many years, people from all over the world have been envious of the economic growth in the Chinese economy. Since leaders of that nation have transformed the Chinese economy from purely state-controlled to more capitalistic, China’s growth has been astounding.
Looking back, it is easy today to think of the Chinese economy in terms of the allocation of funds for long-term investing—hindsight is always 20/20. However, the trick is to look forward over the next decade and determine the most likely scenario for long-term investing possibilities.
A common complaint by outsiders regarding the Chinese economy has been the use of cheap wages to increase its competitiveness. It is true that the Chinese economy has benefited greatly from much lower wages than many other nations around the world. Additionally, the size of the working population is huge.
However, it appears that the demographics and costs are now beginning to shift against the Chinese economy, and those interested in long-term investing might be able to create a portfolio that will benefit from this change.
The Asian Development Bank (ADB) recently noted that wages adjusted for inflation have more than tripled over the past decade in the Chinese economy. Additionally, new labor laws have increased costs for businesses to hire and fire people. (Source: “China surging wages threaten economy’s competitiveness, ADB says,” Bloomberg, April 9, 2013.)
Additionally, ADB reports that wages are being pushed higher, as the pool of working-age people shrinks. Because the one child policy has been in place for so many years, China is entering a troubling demographic scenario, as there will be far less people available to work … Read More
One of the most difficult aspects of investing is adjusting one’s economic forecast to the dynamic and ever-changing global economic environment. An investor cannot be so dogmatic that they are unable to shift their economic forecast as new data come out.
For much of the second half of last year, there were many fears that China was going to encounter a significant slowdown, and many analysts had been lowering their economic forecast for that nation. Recent data, however, show that perhaps the Chinese economy might be able to rebound, at least in the short term.
China recently reported that exports grew a better-than-expected 25.0% and imports rose a substantial 28.8% from the year-ago period in January. This was in addition to much higher credit issuance, and an inflation rate that was quite subdued at only two percent. (Source: “China trade tops forecasts in holiday distorted month,” Bloomberg BusinessWeek, February 8, 2013.)
There are some issues with the data: the 2012 Chinese New Year began on January 23 and, in 2013, the Chinese New Year began on February 10; this shift in holidays, which result in business closures, needs to be taken into account when making year-over-year comparisons. However, analysts calculating their economic forecast did take this into consideration, predicting exports of 17.5% and imports of 23.5%, according to the median estimates taken by Bloomberg News. (Source: Ibid.)
If the Chinese economy continues to outperform, not only will analysts increase their economic forecast for the remainder of the year, but certain sectors will also benefit, including oil prices.
International oil prices are set based on Brent crude, as opposed to American-produced … Read More
While many people are aware that the Chinese economy is now the second-largest in the world, China’s currency, the yuan or renminbi, is also moving upward in the world rankings in terms of global transactions.
According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the world’s global payment system, the yuan has moved up from 20th in the rankings in January 2012 to 14th position in December 2012. The Chinese yuan is now above the Danish kroner in terms of global payments. (Source: “RMB Tracker: January 2013,” Society for Worldwide Interbank Financial Telecommunication web site, January 24, 2013.)
That is a significant move and an indication that the Chinese economy is becoming more integrated worldwide.
Why does this matter to the average American?
For a long time, America’s economy has been the global leader and the U.S. dollar has been the global reserve currency. Every other nation was seen as secondary to America’s dominance. This is now starting to shift.
As the U.S. national debt level continues to grow, the strength of the Chinese economy is enabling considerable efforts to be made at developing globally interconnected markets that can survive and thrive without the U.S. dollar.
While the Chinese economy is certainly not perfect, it doesn’t have to be. With the rising level of U.S. national debt, the Chinese economy just needs to be relatively better than the U.S. economy, though not in absolute terms.
The point is that the rise of the Chinese economy over the past decade and the looser restrictions that the Chinese government is placing on the yuan mean that global businesses and investors have … Read More
Recently, we have heard and seen some data stating that the Chinese economy is beginning to rebound. Many analysts have started to raise their economic forecast for the Chinese economy in 2013.
One of the difficult aspects when calculating an economic forecast for the Chinese economy is that much of the official data from China are questionable.
While recent data have shown that the Chinese economy has begun re-accelerating during the fourth quarter 2012, new information raises some questions.
The China Beige Book (CBB) International states that, in its analysis of the fourth quarter, it sees a significant decline in corporate loans. As the CBB states, its editors were “shocked” that new loans accounted for less than 20% of the total lending. (Source: Harjani, A., “The China Beige Book Has Some ‘Shocking’ Data,” CNBC, January 16, 2013.)
The CBB interviews over 2,000 business executives across the country to come up with its survey results. Another worrying sign in the report for the Chinese economy that will certainly cloud any economic forecast is that the percentage of surveyed companies borrowing money continues to decline, even though interest rates have been cut by the People’s Bank of China.
While the Chinese economy is trying to become more consumer-oriented and domestic, exports still play a very large role. With the buildup in their inventory, manufacturing firms appear to be anticipating growth worldwide for 2013.
If this doesn’t occur, the Chinese economy could be vulnerable to a significant pullback. The difficulty in all of this analysis when trying to calculate an economic forecast is that so many variables and so much questionable data make … Read More
Last week the Chinese stock market, represented by the Shanghai Composite Index, jumped a massive 4.3% in one day on heavy volume, as investor sentiment soared on the belief that the Chinese economy is beginning to recover. (Source: “China Stocks Jump Most Since 2009 on Support Speculation,” Bloomberg, December 14, 2012.)
There were also indications that the government is going to allow more institutions to purchase equities outright. This followed a better-than-expected Purchasing Managers’ Index (PMI), developed by Markit Group Limited, of 50.9, compared to November’s reading of 50.5. (Source: “China Stocks Jump Most Since 2009 on Support Speculation,” Bloomberg, December 14, 2012.)
Investor sentiment is trying hard to pick up signs that perhaps the Chinese economy is entering a recovery stage. While it is possible that the Chinese stock market has become oversold, there are still large structural issues for the Chinese economy to address.
I think one of the most serious problems for the Chinese economy that perhaps investor sentiment is not fully realizing is the shocking extent of debt levels within that nation.
According to estimates by a Chinese economic consultancy GK Dragonomics, corporate debt in China has risen from 108% of the entire economy in 2011 to 122% in 2012. (Source: “Corporate China’s Black Hole of Debt,” Bloomberg BusinessWeek, November 19, 2012, last accessed December 15, 2012.)
The problem is greater than just a few companies within the Chinese economy having large debt. GK Dragonomics calculates that when combining public, household, and corporate debt, the total amount is approximately 206% of gross domestic product (GDP). (Source: “Corporate China’s Black Hole of Debt,” Bloomberg BusinessWeek, November 19, … Read More
China appears to have avoided a much-feared “hard landing” via aggressive interest rate cuts, heavy infrastructure spending, and a climate of promoting consumer spending to drive gross domestic product (GDP) growth.
The most recent evidence of the economic reversal was an expansionary HSBC Flash Purchasing Managers Index of 50.4 in November, the highest reading in 13 months. While the index needs to continue to deliver positive readings, it’s a good start and it suggests that the Chinese economy and the country’s GDP growth are mending, on their way to better times ahead.
China’s industrial production surged 9.6% in October, up from 9.2% in September. The key retail sales reading showed sales increasing 14.5% in October versus 14.2% in September. (“Data shows Chinese economy expanded in October,” China Economic Review, November 12, 2012.) And in another positive reading, the country’s trade surplus of $32.0 billion in October represented a four-year high. (“China trade surplus hits four-year high,” China Economic Review, November 12, 2102.)
The task of helping China to solidify its identity as the world’s next big economic superpower lies with the new President Xi Jinping and Premier Li Keqiang, who will take control in March 2013.
To say these are not exciting times for China is an understatement as this could be a special decade for the country. The world and China will welcome the next more youthful leaders at a time when China’s political and economic role has intensified on the world stage.
For China, the change at the helm comes at a critical juncture, as the country is attempting to turn its economy around following years of explosive … Read More
With investor confidence still relatively weak, many are looking for any signs of a rebound in the global economy. One area many are looking to is the Chinese economy. Not only has the Chinese economy become a greater force within the world economically, but many U.S.-based companies are generating a significant amount of earnings from that nation. Investor confidence is partially being predicated on the hope that the Chinese economy can offer some glimmer of optimism, as opposed to the still anemic gross domestic product (GDP) growth levels in America.
Recent data from China offers a bit of a mixed picture. Exports in October rose at the fastest pace in five months, coming in 11.6% higher than the previous year. This compares to 9.9% year-over-year growth for September. That is certainly a good sign for the Chinese economy, and some investor confidence might be rallied off such figures. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.) However, the sky is not all clear yet.
The head of the National Development and Reform Commission, Zhang Ping, stated that he believes the Chinese economy must be prepared for increased turmoil from various nations around the world. In addition, domestic issues still are quite serious. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.)
This is a difficult way to build up investor confidence. On the one hand, there are some signs the Chinese economy and the global economy might be moving upward off the floor. However, there are still numerous indicators pointing to the fact that things could quickly unravel and … Read More
Many investors around the world are keeping a close eye on the Chinese economy. This is because a growing number of companies depend on the Chinese economy for their corporate earnings growth. One of the most important events in China is the transfer of power within the Communist Party that happens once a decade. The 18th National Congress starts on Thursday and ends next week.
Many are hoping that the new leaders for the Chinese economy are reform-minded, continuing to open markets and the possibilities for the corporate earnings growth of foreign firms. However, new sources are stating that a large number of conservative members will be making up the leadership of the Communist Party. (Source: “Conservatives dominate latest line-up for new Communist Party leadership,” South China Morning Post November 2, 2012.)
It appears that several reform-minded members have been opposed by conservative party elites, which will most likely eliminate them from senior posts. The greater the number of conservatives within the leadership structure, the less likely it is that any large reforms will be made. This will clearly impact the growth of international companies, especially many American firms, and their corporate earnings. From fast food services to carmakers, many American firms are generating a large number of corporate earnings from the Chinese economy and are expecting sustained levels of growth for a long period of time.
Banking is one area in which the foreign firms were looking at expanding their reach and corporate earnings growth. Some remain quite positive, such as the President of the American Chamber of Commerce in China, Christian Murch, who stated that while the near … Read More
The strength of the Chinese economy over the past two decades has been nothing short of amazing. Because of this Chinese boom, we’ve seen one nation’s large consumption have a heavy impact on global commodity prices. The Chinese economy also has been a large driving force for lowering inflation levels for Western nations. As Western countries like America import cheaper products, the average consumer can buy a lot more goods for the same price.
However, things are certainly changing. The Chinese boom is still growing, but at a decelerated rate. Higher labor costs are one issue; another issue consists of the higher input prices for the commodities that feed the Chinese economy, resulting in higher costs to the final consumer.
What is shocking is the level of corruption and tax evasion within that nation over the past decade. A recent report by Global Financial Integrity stated that $3.8 trillion was smuggled out of China over the past decade. That is a truly massive amount. In 2000, approximately $204 billion was smuggled out of China; in 2011, that number was $472 billion, or 8.3% gross domestic product (GDP). (Source: “Dirty money cost China $3.8 trillion 2000–2011: report,” Reuters, October 25, 2012.)
This amount comes from tax evasion, corruption, or criminal enterprises. While the Chinese economy is growing, it’s still in its infancy. The Chinese boom needs to be nurtured with additional funding and reinvestment. If Chinese nationals are evading taxes and pulling money out of that nation, this certainly isn’t positive for the Chinese economy over the long term.
This also skews many markets around the world. If people are pulling … Read More
Three strikes and you’re out! Too bad the Federal Reserve doesn’t follow this; otherwise, Chairman Ben Bernanke would be on the phone with Wall Street looking for another job.
The key stock indices surged to their highest levels in years after the Federal Reserve launched a third round of quantitative easing (QE3) at the September meeting; yet the follow-through has been non-existent, as stocks are back where they were prior to the announcement.
All quotations and figures in this article are from a Federal Reserve press release regarding the Federal Open Market Committee meeting in September 2012, dated September 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm).
At that meeting, the Fed said, “Information received since the Federal Open Market Committee (FOMC) met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated.”
The Fed is spending $40.0 billion a month to buy mortgage-backed securities and, in theory, to lower the financing rates. This is the theory, but the yield on the 10-year Treasury stands at 1.76% versus 1.84% prior to the establishment of QE3. Something isn’t working.
But maybe it’s still too early to judge the success of QE3. Give it a few months to filter through the system and we’ll see. Jobs creation is expected to be a major benefactor of QE3.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed despite the unemployment rate falling to 7.8% in September. We still have over 22 million Americans looking for work.
“The Committee seeks to foster maximum … Read More
Have you read or heard the recent economic data from China? Chinese exports for September grew 9.9% from the same period last year, almost double what the investment community expected.
The Chinese economy is extremely dependent on exports while it’s slowly developing its domestic economy. To get a better gauge of global economic growth, if China’s exports are indeed improving, then some economies around the world also must be improving, as the Chinese economy has grown to become a significant part of the global economy over the past decade. China makes up a large portion of many industries, and supplies numerous products to many parts of the world. Regardless of what one thinks about the Chinese economy, there is no question that it has a large influence on worldwide economic growth.
The European Union (EU) is a disproportionately large and important destination for the Chinese economy. With economic growth anemic within the EU, it was no surprise that exports to the Union fell 10.7% in September. This makes the overall increase of 9.9% that much more startling. It means that economic growth outside of the EU appears to be far stronger than anyone thought it would be so far.
Exports to America were up 5.5% for the September period as compared to year-ago levels. Neighboring South East Asian countries saw the biggest jump in exports at 25.5% for the month. This included Taiwan, up 19.9%, and South Korea, up nine percent. (Source: “China Sept. Exports Jump 9.9%, Imports up 2.4%,” The China Post, October 14, 2012.)
We will hear shortly from government officials regarding gross domestic product (GDP) numbers for … Read More
When it comes to corporate earnings, people look to firms that can generate growth for many years. Long-term investing is about making inroads either in new markets or in new technologies that will take market share from competitors. When it comes to expanding in new markets, American restaurants have a tremendous potential in foreign countries.
The latest example of international expansion—as well as a recent rebound in the U.S. market—helping to drive corporate earnings is YUM! Brands, Inc. (NYSE/YUM). YUM! is the parent company of Kentucky Fried Chicken (KFC), Taco Bell, and Pizza Hut. The company recently posted corporate earnings growth of 23% for the quarter year-over-year. While some people are worried about higher costs, the company was able to actually increase its restaurant margin to 18.9%, up 1.9% from last year.
Interestingly, the company cited that, compared to last year, the U.S. market is having a rebound. Part of this, I believe, is due to its expanded menu and offering consumers an alternative choice to Chipotle Mexican Grill, Inc. (NYSE/CMG). YUM!’s Cantina Bell restaurant is showing strong signs of domestic growth, helping drive the stock’s corporate earnings. Taco Bell’s same-store sales in the U.S. rose six percent, compared to the year-ago period; obviously, demand is increasing domestically.
When it comes to long-term investing, corporations that can continually innovate with product offerings and can grow in new markets should be on one’s radar screen. YUM! has just over 4,900 stores in China and roughly 500 in India, as compared to approximately 18,000 American stores. Obviously, there is a significant growth potential for long-term investing in these emerging markets, which will … Read More
I’ve been warning about the slowdown taking place within the Chinese economy. Moreover, official statistics reported by China may not be reflecting the scope of the slowdown that is taking place within the Chinese economy. However, there are many signs indicating that the country’s slowdown is actually worsening. What are these signs and what do they mean?
First of all, Chinese companies’ results were worse in the first six months of 2012 than they were in the first six months of 2009, when the financial crisis reached its height.
The Premier of China, realizing the scope of the problem, is considering tax cuts to help alleviate the crunch that Chinese companies are experiencing with this slowdown in the Chinese economy.
SANY Group is the biggest maker of concrete pumps in the world and the largest maker of construction machinery in the Chinese economy. This company reported weaker results and lowered its forecast for the remainder of 2012. The company was hoping to raise $2.0 billion in cash by issuing shares in the market, but had to pull the offering because demand was simply not there. Investors are worried that the slowdown in the Chinese economy could manifest itself into a hard landing, and so are adopting a wait-and-see-attitude.
China’s airlines, including Air China and China Eastern Airlines, are reporting a 50% drop in profits due to the declining demand within the Chinese economy. These are certainly not results reflective of a strong Chinese economy, and there are other measures that are indicating that things are getting worse, not better.
China’s central bank publishes a sentiment survey from companies to get … Read More
There is little doubt that the Chinese economy will be one of the major economies of this century. There is no question either that China’s growth will go through difficult periods. Right now, the Chinese economy is experiencing a slowdown and a property bubble that could cause severe economic repercussions to China’s growth story.
One knock against the Chinese economy is that it is too centralized. This culture of strict rules and discipline stifles creativity. It is creativity and the “animal spirits” of capitalism that have been the staple of the U.S.’s economic success story. Such brash attitudes will be difficult to nourish in a “command economy” like the Chinese economy. This is an economy that is strictly controlled by the government, rather than a free market like here in the U.S.
Certainly, China’s growth will have to be based on the country’s ability to innovate and create products and services that the world wants. The leaders in China understand this dynamic and have decided to take a different approach to improve the Chinese economy.
One thing China has that many other economies do not is a good chunk of reserves—money or capital—that Chinese companies can access to buy technology and expertise from around the world. That is exactly what the leaders of the Chinese economy are encouraging their companies to do.
The Financial Times reports that from 2010 to 2011, China tripled its investment in Europe to $10.0 billion, with that number expected to skyrocket by the end of the decade to over $250 billion. In the first quarter of 2012, China made $1.7 billion in deals in Europe, … Read More
With the U.S. economy slowing down, many investors are looking to the Chinese economy to help pull the world back out of stall speed. Growth needs to emerge somewhere in the world, and with the economic data coming from the U.S. being quite weak, the hope is that the Chinese economy can forestall a global recession.
The authorities in China have seen their data and are now aware that the slowdown might be accelerating. This appears evident as the government is looking to increase state spending to kick-start the Chinese economy, and avoid a global recession. Since so many nations are now interlinked and most of the large superpowers are on the brink of an accelerated economic decline, any significant pullback in one economy might bring about a global recession.
Chinese Premier Wen Jiabao just announced that the Chinese government will do what it can to promote investment and increase internal consumption. The Chinese economy has been primarily export-oriented, but the authorities there are trying to generate a more consumer-based economy.
To promote growth and arrest a decline in the Chinese economy, the government is increasing construction projects in various sectors. This does raise some concern as to the long-term viability of such projects, particularly production plants. While it might help in the short term to give the Chinese economy a boost, certain sectors that are set to increase production, like steel and solar power, already have overcapacity issues. Once new plants are built, will they just sit empty? That doesn’t bode well for the Chinese economy down the road, but at least in the meantime it provides jobs for … Read More
A month ago, the People’s Bank of China cut interest rates for the first time since 2008. In an obvious response to the slowing Chinese economy, the People’s Bank of China took what it felt was a necessary step to stem the tide of slow growth.
It looks like the People’s Bank of China is more concerned about growth than many people thought, because, just last week, it lowered interest rates for a second time. Clearly the manufacturing data out of China have shown a steady decline for almost a year. The consensus, even among those in the People’s Bank of China, is that the Chinese economy is experiencing a slowdown due to the recession in Europe and the faltering U.S. economy.
The question many investors are asking in relation to the Chinese economy is: will it experience a hard landing?
The world’s biggest maker of concrete pumps in the world and the largest maker of construction machinery in China is Sany Group. Sany Group has roughly 51,000 employees and for the last 10 years Sany has been increasing its payroll within the Chinese economy.
Well, for the first time in a decade, there are reports that Sany Group is laying off workers in the Chinese economy (source: Financial Times, July 4, 2012). The company denies it. However, to put perspective on this possible scenario, Sany didn’t even lay off workers when the financial crisis hit in 2008.
Analysts are well aware that the People’s Bank of China is notorious in carefully managing economic data. In all fairness, most central banks around the world can be accused of the same … Read More
In 2010, when commodity prices fell due to the trouble in Europe, Chinese businessmen defaulted on their shipments of commodities.
This was not a sign of trouble with the Chinese economy. This was simply the Chinese businessmen rebooking their cancelled freight at cheaper prices a few weeks later (source: Forbes, June 3, 2012).
In 2012, Chinese businessmen have begun the same practice. The heated debate is whether they are doing so to book cheaper commodity prices, as commodity prices have fallen dramatically thanks to the global economic contraction, or whether this is the economic contraction visiting the ports of the Chinese economy.
There are reports that China’s steel mills have postponed orders for iron ore. In one port, reports are that there is so much iron ore filling the warehouses that iron ore is being stored where wheat normally is.
There are other reports of car parking lots filled with commodities like copper, instead of being used for people to park their cars, simply because they are running out of storage space.
One bonded warehouse manager noted that the turnaround for copper used to be one or two months. Now it is six months. Clearly, these are the effects of the economic contraction.
Confirmation that the Chinese economy is in trouble came in the form of BHP Billiton Ltd. (NYSE/BHP) and Rio Tinto plc (NYSE/RIO) putting their expansion plans with relation to the Chinese economy on hold.
As far as I’m concerned, there is no greater evidence of an economic contraction within the Chinese economy than when mining giants scale back in a market in which they have continually expanded. … Read More
Recently in these pages, I wrote about how the market could be signaling a deflationary spiral. This was based on the fact that industrial and agricultural commodities were testing their lows from a few years ago.
In addition, the U.S. 10-year Treasury note hit an all-time low; below 1.8%. It isn’t helping as well that markets worldwide are correcting. I noted that the defensive sectors of the market, like utilities and health care, were outperforming the rest of the market; not a good sign.
Besides deflation, the markets could be signaling that a global economic slowdown is upon us. The main catalyst is the Chinese economy.
After the financial crisis hit in 2007, commodities did well in general, because Asian economies remained strong and helped keep the rest of the world afloat. The Chinese economy was the main driver of this growth from Asia.
The middle class in China grew from nothing to roughly 250 million people in 2010. It is estimated that at least another 200 million are moving up the social ladder to be part of the middle class in the Chinese economy.
This has led to an absolute surge in demand for industrial and agricultural commodities from China. Just as an illustration, last year, the Chinese economy consumed 60% of the entire worldwide supply of soybeans.
Therefore, the fall in commodity prices currently could signal the market’s belief that the slowdown in the Chinese economy is going to accelerate to the point of becoming a severe problem.
An investor has to ask the question: if Asia kept the economy going after 2007, what nation is going to … Read More