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Wednesday, March 14, 2012

Filed Under "ItsAllGood"

How do you write "It's all good" in Chinese, anyway?

Chinese official stats for RE:

Building up, sales down, what could go wrong? Hmm, let's go through the details of the report which is for combined Jan-Feb. This removes the New Year's distortion.

Completions (floor space) : +45.2%; residential completions +47.9%
Sales (floor space): -14%; residential sales -16%.

Trigger automated assessment routine:
Q. Were sales by floor space below completions?
A. Yes, 7,004 compared to 10,094.

Q Were under constructions increasing still?
A Yes, up 35.5% at 394,901.

Q Were starts still increasing?
A. Marginally, 5.1% at 20,049.

Okay, so severe oversupply with slowdown impact just beginning to hit wider economy. This is obviously a hard landing with the crunch of impact registering, but the blast is just about to register 5-4-3-2.... Casey Serin launches his grand tour of the Chinese east.

At the end of the first aggregate table there is a financing section. As one might expect, funding from sales is drying up, so "self-raising" funding has heavily increased in proportion (43.3%).

Going to industrial production, we note with interest that cars produced dropped YoY, but that metals, cement, etc, continued to increase, which is not surprising with the "under construction" figures up so much. This is not stable, and I don't understand much of the stuff I'm reading about the Chinese economy. The sales/inventory ratio for industrial products is down somewhat YoY.

Land sales have just begun to drop, so the local government funding problem is just beginning to hit. Apparently the Chinese government authorized rolling the development loans for some areas (bundling in balloon payments and interest and refinancing). Not a good sign at all.

I don't think the Chinese government can intervene meaningfully; funding for real estate development is apparently sucking money away from the real economy already, and once you start rolling those project loans, the balances just grow and grow. It defers the day of reckoning, but it magnifies the eventual impact.

The Chinese government is lowering loan-to-deposit ratios, which increases the amounting of lending banks can do. But the quoted amounts look to me more like the Chinese government is increasing those ratios to make it possible to roll the development loans to protect municipal financing and major development projects.

Auto output has been negative since November. Maybe inventories are beginning to clear there, but RE inventories are clearly rising, so there isn't going to be much of a pop. As completions outpace starts, inventory there will eventually stabilize, but not before the impact on the real economy is felt. Looking at the pace of iron/cement increases over the last year makes it clear that funding constraints are already slowing the pace of construction:

I think everyone should strap in and enjoy the ride on the Jurassic Park China express. The government is not going to make this up by lending to build more solar panel factories, that's for sure.

There was another railway collapse (heavy rain). I don't think the line was open yet, but I suspect the government is going to respond by slowing construction and trying to raise standards - if the line had been operational there could have been a serious accident.

One of the big nasties for China is that local government development projects fund local government spending and revenues, so multiply the impact times two.


In honor of the Chinese New Year we have offered them a moment of silence. Go figure.
Ignore noise and look at reality with stocks - Jim Cramer

Cummins? Caterpillar? Their orders have been fabulous. The construction build-out in China is not being cut back. It's accelerating. They need our machinery, for heaven's sake.

In his defense, I don't think he has read your post yet. ;)
Mark - as I said, I don't understand a lot of things I've been reading.

The increases in minimum wages in China did produce food demand. Right now food inflation is negative (short-term), but there is more money going into food production.

It takes quite a while for the carrying wave of money to fade out, but China is over a year into the process. The Chinese government has alternately boosted and struggled trying to hold down inflation - it's run to the end of the easy steps right now.

China's remaining options are:
1) Cut taxes
2) Build pyramids,
3) Build aircraft carriers.

I don't think cutting taxes will be enough by a long shot, although it would help. The strategy of pushing for development to seize control of markets appears to have fizzled. It's not that it doesn't work any more, but rather that it doesn't cover the costs.

The solar venture has produced a mass of solar Potemkin companies in China.

If gasoline prices in the "prosperous" USA are hurting us to the point we will reduce our driving (which it is), then what must the Chinese factory worker be thinking?

That's the question that always seems to be on my mind. It's one reason I have been bearish on China's economy since starting my blog in 2007.

We are inflating the price of food and energy. As you are well aware, that hurts the poor the most. China's factory workers are no exception.

Now add in millions of factory robots to replace human Chinese factory workers and what do they have left?

As you say, let's hope it isn't aircraft carriers. Sigh.
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