Just a few considerations and a few questions regarding the Chinese economy after they reported 1h09 GDP & items yesterday...
According to a Citi Investment Research Nov 1 2008 report (take sell-side analysis for what it's worth): 25% of Chinese use toilets.
The Chinese government has piled up an all-accounts surplus for a rainy day. China will never be a threatening, emergED market until per capita income crosses a respectable threshold. If you're the Chinese government atop a hybrid capitalist/centrally planned economy, you're looking for a bridge to carry demand until the rest of the global economy climbs out of its ditches.
China can invest a part of its surplus in its un[der]developed rural geographies. Bring industry, business & infrastructure neigh, then income will follow--specifically in the Chinese case, in which there's an overwhelming, impoversed populace presenting potential demand. For the sake of both return-on-capital and economic stimulus, domestic modernization is a far sturdier bridge than the one they're buliding. Their surplus is currently tied in dollar denominated assets & US Treasuries.
Yes, now there's a portion of that surplus stimulating domestic demand, but they've approached stimulus through vehicles like increased bank lending, the standards of which have been so relaxed as to encourage consumer loans both collateralized by commodities AND for the purchase of commodities.
Commodities prices are volatile, i.e. not great backing/purpose for a loan. Has China learned nothing from our credit crisis? What's worse: consumers have flipped much of this credit into assets & markets, which makes me question the Shanghai's ytd performance (+75%). Is there a minefield of bubbling asset bombs in China?
China entered the global crisis in a much different circumstance than did the US. The saturated, mature American economy is scrambling to find a sustainable source of growth. China is scrambling to keep up with its growth, as a GDP growth rate shy of the target 8% would effectively be a hard-landing for a country needing to create jobs for 6.11mm university graduates this year (up from 5.59mm in 2008).
At the same time, China is also a far cry from a normal emerging market. Most EMs are dependent on the performance (and credit) of developed markets. The scale of China's operation plus the sway of their soverign funds casts them in a different light. Did anyone notice the trade agreement with HK last week? Trade henceforth settled in RMB? May be old news for some, but it's a huge development in Asian independence from the USD.
China is a creditor keen on exports. If the big-bad-west has swayed toward protectionism, that gives China a convenient excuse to turn toward its own domestic solutions for replacing that foreign demand void.
In the end, RURAL China doesn't have the financial resources to drive Chinese demand... but given the national economic model, the Chinese government would be well advised to provide those resources. Diversifying away from dollar denominated assets, they've accumulated all these raw materials--a practical strategy given the fungibility of hard assets. They've encouraged investors to do the same. I can't reconcile this all as a shortsighted strategy by the Chinese braintrust. Their commodity stockpiling couldn't be the end-goal. Would they really build a speculative bubble with no divestiture plan? I deduct that they'll refine the raw materials that can't be sold into a bull market, then they'll plug them into a massive infrastructure initiative.
Today, the Shanghai & FTSE/Xinhua China 25 are flashing bold technical sell signals. Such a steep 75% Shanghai rally has indexes hovering far above their means.
FXP is a great leveraged short play. It has straddled its lower-bound (20,2) Bollinger Band (i.e. 2x std dev from its 20-day MA) since Wednesday. I'm waiting for the slow stochastic oscillator K(5) to cross D(3) on its way up from the 20% perch it closed at tonight. That's my buy signal, especially considering that the heavier volume has been pushing the price upward. If I go long FXP in the next two trading days, I'll be watching for a sell signal. LT, I'm interested to review China's numbers, but from here, I can't see this stimulus package sustaining target growth rates.
