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Sunday, December 04, 2011

Well, It IS A Landing

Whether it is a soft one or not is highly questionable. I am, of course, referring to China. Here is HSBC Composite Output Index for November below 49. Go look at the graph.

It's the sudden fall in input costs that's most impressive:
The rate of input cost inflation in the Chinese service sector eased to a 13-month low during November, and was slower than the long-run series average. Largely due to a sharp fall in average costs faced by manufacturers, input prices at the composite level fell at the fastest rate since April 2009.

Service providers raised their output charges in response to higher average cost burdens, although the pace of inflation was marginal. Similar to the trend seen for input prices, manufacturers recorded a marked reduction in charges at the factory gate during November. As a result, composite data signalled a monthly reduction in average tariffs for the first time since July 2010.
This is going to be interesting. HSBC has been banging away on the theme that it's a soft landing. They seem a little less certain now, but still claim that the government can institute policies to create one.

I don't see any great big fluffy clouds underneath the fall zone. I think the Chinese government can toss down some gym mats, and maybe throw some trampolines in there, but you know, nowadays all the trampolines are made in China, and they're not the most durable items.

Japan's composite output index came in below 49 also. Hong Kong's still slumping. I think I forgot to mention it before, but JPM's global manufacturing PMI fell below 50 in November. The Thai floods definitely have something to do with that, but it's not the only explanation.

Do you think there's feedback from reduced European demand in this already, or will the Chinese manufacturing sector get a further shock from recession in the Eurozone?

Given the way the Chinese cook their books, I'd be really curious to look at raw data on coal and oil consumption in China right now ...
There must be some impact. Shipping rates.

But the decline started before the Euro thing hit the wall.

China has tightened money very hard over the year in their battle with inflation. That led to an explosive growth in private lending, with explosive interest rates. Then the commodity inflation worldwide placed additional pressure on producers.

As those chains of lending collapse, the slackness in external demand will be multiplied by businesses that were taking out tons of loans.

There is plenty of history to indicate that they are in real trouble. China has really been running on credit for years and years. The stock market crash seems to have diverted more private funds into it. How quickly they can unwind the bad loans will determine the depth of the problem.

The fact that businessmen in some areas who can't pay tend to flee in the middle of the night suggests that they've got their own private mafia that does the collection, so this should be very interesting indeed.

Bankruptcy courts tend to greatly mitigate economic damage from loose credit, but when it is Vinnie who shows up at your door suggesting that he wants your loan payment or a testicle, they bankruptcy courts do not matter.

Also, they have local government fiscal problems that are very impressive.
John - you may find this official releaseinteresting.

Read down through all the huge YoY increases until you get to rail and utilities. It raises huge questions about softness and giant fluffy clouds and so forth.
Given what I've heard of China's legal and banking systems, I wonder if they even have bankruptcy courts that are worth anything?

Vinnie might be the only guy out there actually shutting down businesses in some sort of orderly manner! After all, "busting out" a business doesn't much respect creditor priority, but it does get things liquidated while continuing the best operations.
Well, if the business owner flees in the middle of the night, the business is not going to be liquidated in an orderly manner.

And the real benefit of BK is that it keeps the economic flow going. If it lets a business keep operating and the employees working, it's an economic benefit when the loans collapse.
Even a BK will often start with the managers being dismissed. But Vinnie is certainly not as efficient as a well-run bankruptcy court. It's just that I have to wonder whether China's bankruptcy courts are as corrupt as the rest of their legal system--in which case Vinnie starts to look better.

In all fairness, though, most Chinese people I've talked to about their legal system don't view it as corrupt, per se. They believe that the law should NOT always apply to everyone equally, for the sake of "social harmony". I have no idea how this attitude applies to BK.
Off topic: drove past a major mall during afternoon rush; traffic was bizarrely light for this time of year. I think everyone must have done _all_ of their shopping on Black Friday.
Interesting article here (which I don't confess to understand yet): link
All we're asking is to play by the rules and assimilate. But no, I've seen positive questions about assimilation getting hate-filled answers and acusations of how our ancestors stole the land.

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