Thursday, August 08, 2013

China Downturn Accelerates

You won't read a headline like "China Downturn Accelerates" from mainstream financial news sites just yet.  Some content programmers are still sold on the China bull story and are slow to learn.  The facts of China's incongruous economic drivers are in plain sight.

The Chinese stock market has its down days, but concern about inflation is not the whole explanation.  Inflation is staying in its cage for now despite China's interest rate liberalization policy, which I consider to be inflationary as it makes lending easier within that country's shadow banking system.  China's problems right now are deflationary.  Europe's recession is killing demand for China's manufacturing exports.  Saturated consumer markets for smart phones and automobiles will keep basic input prices down.

It is no surprise that China is threatening to curb overcapacity in its manufacturers and cut the production of some rare earth producers.  It is easy for Beijing to make such noises because lack of external demand is doing the dirty work of forcing productivity numbers down anyway.  It's also noteworthy that China is fining foreign firms for price fixing in violation of anti-monopoly laws.  I'll believe they're serious about fighting price fixing when they fine state-owned companies.  There's an abject lesson in the central problem non-Chinese firms face when they source production inside China.  Asian businesses and their regulators have a long tradition of presenting a different face to foreign businesses than they do to domestic businesses.  Western companies foolish enough to open production facilities inside China should expect to be ripped off at some point.

China can stave off its implosion about as long as the US Federal Reserve can keep the yield on our 10-year Treasuries under four percent.  I believe that will be the tipping point that crashes the value of the US Treasuries in China's national reserves and forces them into panic selling mode.  China's replica of Paris is a ghost town.  No one can afford to live there until property prices crash.  China's urban migrants won't have long to wait for bargains.