Calm before the storm, a sense of deja vu in China?

Posted on 27 August 2009 with no comments from readers

Markets are very quiet this week but China is particular is weakening. This reminds me almost exactly of the picture a year ago when markets also seemed far too high for what lay ahead.

I can not claim to be a fortune teller but have a look at this post from last September – one of several on the same theme:

http://arabianmoney.net/2008/09/11/waiting-for-the-next-shoe-to-drop/

Next down leg?

What will be the shoe to drop this autumn? Is it just a sense that the Chinese recovery is actually a sham and about to go into reverse?

Let us remember that for the past 11 months exports from a country that makes two-fifths of its GDP from exports have been down by a quarter. Imagine any business with revenues down 25 per cent, let alone a giant motor of the global economy.

China has been making good this deficit with massive lending equivalent to 50 per cent of GDP and state spending programs. But where does this money come from? Reserves are being spent, and the revenues needed to replace them are just not coming in.

The painful reality is surely that China needs a US economic recovery to revive its export sector, and that just does not look on the cards with the developed world saving money these days rather than buying Chinese products.

Chinese equities falling

Hence you would expect weakness to appear first in the Chinese stock market, and what do we see? From AP:

‘Wednesday’s announcement that Beijing plans to cut capacity in steel and other sectors comes after economists had warned that China’s 4 trillion yuan ($586 billion) stimulus package was creating a glut in a range of industries. In the long run, that may be positive for the Chinese economy, but in the short-term could mean less profit.

“They pumped trillions (of yuan) into the economy and the local economic leaders used the money to build steel mills that have no market,” said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. “This is bad for the stock market.”

“We’ll probably see a temporary lull,” he said. “In Hong Kong, people are ready to sell out because the market has risen so much this summer.”

Hong Kong’s Hang Seng index declined 213.57 points, or 1 percent, to 20,242.75, while Tokyo’s Nikkei 225 average slid 165.74 points, or 1.6 percent, to 10,473.97.

Shanghai’s Composite index, which has swung wildly over the last two weeks, dropped a relatively moderate 0.7 percent to 2,946.40. South Korea’s Kospi fell 0.9 percent and Australia’s benchmark ended down 0.1 percent.’