Thursday, October 08, 2009

Chinese Credit Festivities

While we celebrate the re-birth of the US consumer, let's look at Chinese winds - what are they blowing? Well, US stock market appears more enthusiastic about materials and energy, less so consumer discretionary titles, at the very moment.

Finally, even the economists at Citigroup Global Markets have noticed the credit boom in China, and are wondering today - How Long Would It Last? First of all, reading the first two paragraphs of summary:

China’s credit growth could decelerate next year, but it’s unlikely to return to “normal” in the near term.

Recently, Chinese officials emphasized the need to maintain a “sustainable level” of credit growth. This could imply around 33% yoy, or Rmb10tn in new loan growth for this year. The unprecedented credit boom lifted the Chinese economy out of its downturn by mainly boosting investment in the state sector.

Interestingly, according to Citi economist, "maintain "sustainable level"" in Chinese means now "unlikely to return to "normal"'.

Further on, the final sentence of summary describes our inevitable destiny:
A continuing credit boom will surely encounter asset price bubbles or CPI inflation, or both in the coming months, in our view.
Obviously, Chinese pig farmers are no fools and know the rules of "asset reflation" even if economic momentum fades. They are hedging the debasement of renminbi by purchase of copper stockpiles? But why are Americans worried about the debasement of US dollar? Well, this is, of course used by smart people (Masters of Mechanical Monetarism) to print the "economic recovery story".

The chart below is supposed to show how stunning growth in credit and money supply in China is hopefully providing the so needed medicine to falling growth of nominal GDP. Click on chart to enlarge, courtesy of Citigroup Global Markets.

As we know, according to Citi' s analysts, the inflation and asset bubbles are our destiny. However, the leading indicator of Shanghai stock exchange is struggling to confirm? Click on chart to enlarge, courtesy of Citigroup Global Markets.

It may be curious, but equity strategists at Nomura were puzzled about the Hong Kong stock exchange yesterday:

In fact, we are puzzled why investors have not questioned more the underperformance of the equity market relative to the build-up in liquidity. Certainly, the underlying strength in the balance of payments has been real and this has forced an easing in domestic monetary conditions. With a rebound in re-exports, ongoing confidence in the Chinese economy and relaxed US monetary policy, in some respects the stock market should have done a lot better. Moreover, it is beginning to underperform the more cyclical economies, such as Korea’s.

Equity’s underwhelming performance relative to changes in the balance of payments is even more stark when compared to previous economic cycles and the recent decline in the greenback. There are a number of reasons. Firstly, real interest rates are still high as deflationary pressures are still passing through the economy. Secondly, the lending cycle remains modest in comparison to previous cycles and household gearing remains low. Thirdly, financial leverage in the equity market is muted in comparison to 2007 as warrant turnover attests. Hence, there has been neither a multiplier from domestic lending or through financial leverage.

Yes, watch that outperforming market of Korea ...
Who knows? Let's party till it lasts ...

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