Wednesday, July 08, 2009
China And Commodities
China failed to complete a 28 billion yuan ($4.1 billion) government bond sale for the first time, as the central bank withdrew cash from the financial system to reduce inflation pressures.The bottom line is that Chinese bank lending is still soaring, and it appears that a decent amount of the credit has gone into corresponding housing/stock bubbles. See this Forbes article on housing market measures, changes to mortgage lending, etc. The regulators are worried with reason. Requiring the higher downpayments on second homes is a thoughtful response. However, the nastiest thing about China's situation is that housing sales are highly correlated with stock gains. China has a high savings rate, but a poor banking system, so a great deal of savings goes directly into the stock market.
The Ministry of Finance sold 27.5 billion yuan of one-year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May, according to Chinabond, the nation’s biggest debt-clearing house. Later, the People’s Bank of China it said will resume the sale of one-year bills tomorrow after an eight-month suspension.
It's unlikely that exports will rebound halfway over the next year, so that leaves China with some technical problems. So far China has followed the course I expected - stocking up on commodities and stoking their internal fires. I am expecting them to start slowly pushing the yuan down in an attempt to support exports - they have already done most of what they can do in the way of cutting taxes on exports and so forth. I also expect their metals buying to be mostly lower.
Both China and India raises energy prices over the last few weeks. Chinese electricity production may be rebounding a bit, but there is still no pattern of YoY growth. Therefore I have trouble believing that the economy is growing substantially. After Zhao Bingren's comments, the issue appears now to be sensitive and perhaps somewhat censored. May US YoY electricity consumption was down 3.4%. May Chinese YoY electricity consumption was down 3.5%. Go figure.
We now enter an interesting period in which everyone has to try to keep in the middle of the monetary policy road while stimulating growth. It is going to be an exercise in inspired discretion at central banks, or perhaps aspirational recklessness at some. Only history will sort the efforts of the various central banks correctly.
Germany reported a hefty May increase in industrial production. This is unequivocally good news, but it must be tempered against the reality of very substantial overcapacity in the face of massive YoY drops. (Compare to US industrial production.) Japan, in contrast, is showing continued and in some aspects growing weakness, as in machinery orders and lower exports. The problem for Japan is that global and industrial overcapacity in industrial production is cutting industrial investment. It is not very likely that this trend will reverse itself any time soon. What happens if world industrial production resets itself about 8-10% lower over the next 12 months than in 2007?
It appears to me that we are close to the limits of monetary policy on a global scale. This discussion of dynamics in the Australian economy illustrates the world conundrum. Economies have a certain capacity to absorb debt. If one continues to crank up the money supply after that level has been reached, the result will be bubbles or inflation, both of which result in eventual contractions rather than sustainable growth. Our current global situation fails the dynamics of widespread inflation, because the incomes and/or the spending desire in the consumer segment is flagging. Thus, cranking up the money spigot too widely will tend to produce bubbles.
This afternoon the US consumer credit report comes out. The June Redbook retail report showed very constrained spending, and I don't see anything about US dynamics changing in the near future.
Against this, we now see renewed interest in commodity trading regulations, because there is no doubt that energy trading has been highly speculative over the last few years. I suspect that the focus on regulatory changes will have more of an effect on trading patterns than the hard statistics, but neither are favorable.
Heating oil contracts I've checked in the MidAltantic region seem to be ranging under $2.30, and spot prices for sizeable orders are as much as 20 cents lower. There's a considerable discrepancy between futures trading and end user sales prices.
I also noted with great interest that India is slapping a hefty import tax increase on gold and silver imports. Rural Indian consumer inflation is still running very high, which is also suggestive of a peak in credit formation.,
I doubt that the central authorities have a good handle on things and know themselves what's what. I also doubt that the books are honest.
Western investors have too often neglected to consider the lack of a solid accounting and regulatory system in many of these markets.
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