Tuesday, 20 July 2010 02:07

Now That the MSM and Chinese Officials Admit There Is a Bubble In China...

About a week and a half ago I released a refresh of the HSBC Foensnic Analysis along with a macro rant on why China will not pull the world out of an economic slump in "Will the Emerging Markets Lead the World to New Growth?". HSBC is an interesting bank to cover since it has its hands in so many emerging markets as well as developed nations. In a nutshell, I truly don't believe a net export nation can lead a highly indebted developed world to economic nirvana when that indebted world is in the process of buying less (in terms of imports, and practically everything else) as well as paring down reliance on leverage as they wrestle with depreciating assets.

Well, this week, reality hit and the MSM news headlines say: China Says Exports Outlook 'Grim' on Europe Demand

China sounded a gloomy note on Tuesday about its export prospects, warning in particular that belt-tightening by deeply indebted European Union governments would dampen demand for the country's goods.

Calling the trade picture "still complicated and grim", the Ministry of Commerce said high growth in exports in the first half would give way to slow growth in the second half.

"The sovereign debt crisis has made many EU countries shift to fiscal austerity from fiscal expansion, which will greatly restrict consumption and investment growth in the EU," the ministry's spokesman, Yao Jian, told a news conference.

There is a great, big, 50+ article, "I told ya so!" to be had here. Reference "the Coming Pan-European Sovereign Debt Crisis" - and be aware that this malaise is guaranteed to spread. See the Sovereign Contagion model below for more on this...

Cheap, labour-intensive products would be less vulnerable to drooping European demand than more expensive, discretionary goods, he added.

For those of you who believe the Euro member states that are already in depression will be able to continue their climb back up by riding the export train, think again... The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

Click to Enlarge…


These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly “OVERBANKED” (a term that I have coined).

Now back to the article...

Spain, Italy, Germany and non-euro member Britain are among EU countries that are tightening their budgets after Greece had to be bailed out in April, raising a red flag about the sustainability of public finances across Europe.

Furthermore, Brazil, India and other emerging economies have started to tighten monetary policy, the Commerce Ministry said.

"The room for the further growth of Chinese exports is limited," Yao said.

As a result, the ministry would keep in place policies aimed at supporting external demand for Chinese goods, including retaining export tax rebates.


Despite the expected slowdown, full-year factory output growth may be higher than the 11 percent targeted at the start of 2010, the Ministry of Industry said.

The Ministry of Commerce was also optimistic about consumer spending. Retail sales would keep growing rapidly over the rest of 2010 thanks to rising incomes and government policies to encourage consumption, the ministry said.

Overall, economists expect a further slowdown in economic growth, which moderated to an annual rate of 10.3 percent last quarter from 11.9 percent in the first three months of 2010.

"With growing signs of economic slowdown, we believe that the government will now start to discuss possible policy adjustments," Ha Jiming and Xing Ziqiang, economists at China International Capital Corp, said in a report.

The government could accelerate the approval of investment projects, relax curbs on property speculation and loosen its liquidity controls in addition to keeping interest rates and banks' required reserves unchanged, they said.

This also brings to mind the fact that China is leading in global exports and increasing their global marketshare/footprint in exports because they are priming the Keynesian pump with gasoline, and it is ready to explode. Blowing a bubble is not the same as sustainable organic growth, and you can argue the contra-points until you are blue in the face but when asset prices rise faster than incomes, cash flows and the macro-fundamental forces that support them, you are in a bubble - plain and simple. All bubbles pop. If they didn't, then they wouldn't call them bubbles, now would they?  See from March of this year and notice the share prices of those companies mentioned who are so heavily levered into the Chinese production bubble! Don't tell me ample money is not to be made shorting the Chinese export bubble!

Additional and relevant commentary on the bubble in China:

  1. It Doesn’t Take a Genius to Figure Out How This Will End
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts
  3. HSBC is Performing as Expected
  4. Part 2 of the Mechel Overview is Available
  5. Some Light Shown on My Developing China Thesis
  6. Follow Up to the China Short Thesis Debate
  7. China’s Most Expensive Export: Price Inflation
  8. Believe Those China Growth Stories at Your Own Risk – Just Ask Google!
  9. He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
  10. Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
  11. All of my warnings about China are starting to look rather prescient
  12. Now that the world is forced to agree with Reggie on China’s growth propsects…

Relevant Macroeconomic and Fundamental Research Links:

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

We have performed a decent amount of analysis on HSBC in the past as well, and it has served as a very profitable short position in 2008. I have decided to release the dated analysis to the public for free,  it is available by clicking here: icon HSBC_Holdings_Report_04August2008 – pro (138.89 kB 2008-11-06 10:11:09)

For anyone interested in the myriad risks and opportunities abound in the HSBC market’s macro environment, I strongly suggest you review our sovereign contagion models (subscribers only):

icon Sovereign Contagion Model – Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
Last modified on Tuesday, 20 July 2010 02:07
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