Chinese Economy Slows

Only headlines here folks taken off the wires tonight, but this data set reveals that China’s economy is continuing to soften.

(CH) CHINA JULY NEW YUAN LOANS (CNY): 533B V 600.0BE (4 month low)

(CH) CHINA JULY FIXED ASSETS INV URBAN YTD Y/Y: 24.9% V 25.3%E

(CH) CHINA JULY INDUSTRIAL PRODUCTION Y/Y: 13.4% V 13.4%E (lowest level since Aug 2009)

(CH) CHINA JULY RETAIL SALES Y/Y: 17.9% V 18.5%E (7-month low)



China Manufacturing Index for July Reveals Slowing Demand for Goods

With practically everything coming from China that consumers in the United States and elsewhere buy everyday the Chinese PMI Manufacturing Index is closely watched for signs of where the real economy is.

CHINA -  JULY PMI MANUFACTURING INDEX:   51.2  (17-month low)

  • Output: 52.7 v 55.8 prior (multi-month low)
  • New Orders: 50.9 v 52.1 prior (multi-month low)
  • Input Prices: 50.4 v 51.3 prior (multi-month low)
  • New Export Orders: 51.2 v 51.7 prior (5-month low)
  • Backlogs of work: 46.8 v 47.4 prior (multi-month low)
  • Finished goods stocks: 49.9 v 51.3 prior
  • Imports: 49.3 v 50.4 prior (5-month low)
  • Inventories: 47.9 v 49.4 prior (multi-month low)
  • Employment: 52.2 v 50.6 prior (3-month high)

New orders have dropped once again. This is an important metric because it defines the future manufacturing activity. If new orders are stagnate then so to is the output of goods. The world is entering into the time when orders for everything from toys to clothing begins hitting the Chinese manufacturers for the Christmas holiday season. If over the next three months the new orders metric does not show a substantial improvement then we will know how the major retailers feel about the overall economy and the prospects for consumer spending.

The employment figure shows that Chinese manufacturers are keeping employee levels elevated in anticipation of a rise in new orders. But will a rapid rise in new orders come?




More on this topic (What's this?)
Andy Xie on China’s Empty Apartments
Just how risky are China’s housing markets?
MARC FABER: CHINA COULD CRASH
Read more on Investing in China, Manufacturing at Wikinvest

Stock Market Drops – What is the Cause

Stock market action today is being driven by several events. The first event occurred last night (22:00 US ET) when China reported their Q2 economic statistics.

CHINA JUNE CPI Y/Y: 2.9% v 3.3%e

CHINA JUN PPI Y/Y: 6.4% V 6.8%E (3-month low); PURCHASING PRICE INDEX Y/Y: 10.8% V 11.6%E (4-month low)

CHINA JUN INDUSTRIAL PRODUCTION Y/Y: 13.7% V 15.1%E  (lowest since Feb 2010)

CHINA JUN RETAIL SALES Y/Y: 18.3% V 18.8%E  (3-month low)

CHINA Q2 REAL GDP Y/Y: 10.3% V 10.5%E  (lowest level since Q3 2009)

At the time when these figures were released the market (S&P 500 futures) viewed the data as “not as bad as expected” and the S&P 500 futures moved up 10 points in the matter of only several minutes.

The data from China last night does show a slowing in the Chinese economy but the market was relived that it was not worse than it was. However, the initial excitement over the Chinese economic data quickly wore off and the S&P 500 futures lost all of the gains by the pre dawn hours this morning.

Then came the markets next anticipated event which was the earnings data from JP Morgan (JPM). The company reported -

JPMorgan Chase reports Q2 EPS $0.87 (ex items) v $0.67e, Revenue $25.6B v $26B expected

  • Q2 ROE 12% v 8.00% q/q
  • Q2 ROA 0.94% v 0.66% q/q
  • Q2 Investment banking net Rev $6.3B v $8.3B q/q
  • Q2 Tier-1 capital ratio 12.1% v 9.1% q/q
  • Q2 Retail Card Services provision for credit losses $1.7B v $3.5B q/q
  • Q2 Provision for credit losses $3.36B v $7.01B q/q

There are two glaring problems with JP Morgans earnings. The first problem is the reported revenue is down 9% from the Q1 earnings reported three months ago. The second problem is the drop in loan loss revenue reserves which is a decrease of 52%. The market feels as I do that JP Morgan is taking a risk in lowering the amount of funds they have set aside for future losses. This could put the company in a bad spot should the economy continue to deteriorate.

The next issue facing the markets today is the producer price index (PPI) data for June released this morning. The PPI dropped 0.5% month over month, much lower than expected and on an absolute basis reveals deflationary pressures continue to exist.

Remaining factors today are the Empire Manufacturing Index for July and the Philadelphia Fed Index, both of which came in much lower than expected -

JULY EMPIRE MANUFACTURING: 5.1 V 18E

  • Prices Paid: 25.4 v 27.2 prior
  • New Orders: 10.1 v 17.5 prior
  • Employment: 7.9 v 12.4 prior

JULY PHILADELPHIA FED INDEX: 5.1 V 10.0E (lowest level since Aug 2009)

  • Prices Paid: 13.1 v 10.0 prior
  • New Orders: -4.3 v 9.0 prior
  • Employment: 4.0 v -1.5 prior
  • Inventories: 4.5 v 5.1 prior

New orders, an important gauge of future work loads dropped in both of these regional reports suggesting that the real economy has reached a stalling point.

The final factor is the charts. As I have reported in my market videos the S&P 500 was reaching channel resistance and volume levels were deteriorating over the past several sessions indicating that market weakness could be expected.

The wild card for today is the financial reform bill that is making its way to a final vote today.

I will have more on the markets action today and the latest chart analysis in tonight’s market video.

More on this topic (What's this?)
Andy Xie on China’s Empty Apartments
Just how risky are China’s housing markets?
MARC FABER: CHINA COULD CRASH
Read more on Investing in China at Wikinvest

China PMI Manufacturing Data Shows Slowing Economy

Additional data shows China’s economy is slowing down. The PMI manufacturing data for June contracts in almost all categories

China June PMI Manufacturing: 52.1  (4-month low)

  • Output: 55.8 v 58.2 prior (4-month low)
  • New Orders: 52.1 v 54.8 prior (multi-month low)
  • Input Prices: 51.3 v 58.9 prior (multi-month low)
  • New Export Orders: 51.7 v 53.8 prior (4-month low)
  • Backlog of work: 47.4 v 49.7 prior (4-month low)
  • Finished goods stock: 51.3 v 49.8 prior (multi-month high)
  • Imports: 50.4 v 50.9 prior (4-month low)
  • Inventories: 49.4 v 51.0 prior (4-month low)
  • Employment: 50.6 v 52.1 prior (4-month low)

What the data shows us is that new orders have declined and so to has the backlog of work. Inventory levels are up which is generally not good and employment has contracted.

A statement by the Statistics Bureau of China: “Country’s export outlook is grim, drop in PMI reflects tightening in government policies and a slow global recovery”

So much for the notion that China’s economy was going to rescue the world.

Will China Step Back from Foreign Debt Purchases?

It is not news that China holds the most foreign bonds of any other nation. China essentially owns the United States and a super sized chunk of Europe. We already know that the United States is heavily dependent on China to keep buying our debt in order to keep the U.S. liquid in cash.

Late this afternoon the Financial Times reported that China is reviewing their holdings of European bonds.

Representatives of China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss the issue.

Safe, which holds an estimated $630bn of eurozone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral eurozone markets of Greece, Ireland, Italy, Portugal and Spain. (FT)

This news sent the Euro back down in late trading today as this news was spreading. Is it significant?

[Read more...]

Housing Bubble in China Brings New Lending Reforms

China, having witnessed the housing bubble in the United States, and its fallout, is starting toHousing Bubble get concerned of their own bubbles.

The Chinese housing market is already a bubble from my vantage point. Now it appears that some Chinese officials are afraid of the same thing happening to them as has already happened in the United States.

From Xinhua

Commercial banks can refuse to issue loans to buyers of their third home in areas suffering from excess property price rise, said the State Council, or the Cabinet, on Saturday.

To curb speculation, banks can also halt loans to those who can’t provide materials to prove they had lived and paid taxes and social insurances for at least one year in cities where they intended to buy houses, according to a statement on the central government’s website.

The statement also urged local governments to take any necessary measures to put restrictions on the number of homes to be bought in a certain period of time.

Tax policies should be employed to adjust consumption for housing and earnings on property development, according to the statement.

And this from Bloomberg

Chinese developers’ shares tumbled after China told banks to stop loans for third-home purchases in some of the government’s “most draconian” orders to cool property prices.

[Read more...]

Microsoft and Chinese Sweatshops

Pictures smuggled out of a Chinese sweatshop producing computer accessories for Microsoft, and other corporations, reveals what the true cost is for growing profits.

I have in the past opined about companies that are using more and more foreign labor to make products sold in the United States. The reason they do this is very simple, the need to keep profits growing. Here is a situation where a human rights organization smuggled out photos and worker conditions at a company that makes computer products, Microsoft being one of those companies that has products manufactured there.

Employed for grueling 15-hour shifts, in appalling conditions and 86f heat, many fall asleep on their stations during their meager ten-minute breaks.

For as little as 34p an hour, the men and women work six or seven days a week, making computer mice and web cams for the American multinational computer company [Microsoft].

Chinese sweatshop makes products for Microsoft This photo and others like it were smuggled out of the KYE Systems factory at Dongguan, China, as part of a three-year investigation by the National Labour Committee, a human rights organisation which campaigns for workers across the globe.

The mostly female workers, aged 18 to 25, work from 7.45am to 10.55pm, sometimes with 1,000 workers crammed into one 105ft by 105ft room.

They are not allowed to talk or listen to music, are forced to eat substandard meals from the factory cafeterias, have no bathroom breaks during their shifts and must clean the toilets as discipline, according to the NLC.

The workers also sleep on site, in factory dormitories, with 14 workers to a room. They must buy their own mattresses and bedding, or else sleep on 28in-wide plywood boards. They ‘shower’ with a sponge and a bucket.

And many of the workers, because they are young women, are regularly sexually harassed, the NLC claimed. […]

[…] Microsoft said it was committed to the ‘fair treatment and safety of workers’. A spokesman added: ‘We are aware of the NLC report and we have commenced an investigation.

‘We take these claims seriously and we will take appropriate remedial measures in regard to any findings of misconduct.’

Full article at the Daily Mail

I have an idea, but Microsoft and their investors won’t like it. How about not using sweatshops in other countries at all. Why not set up some production facilities right here in the United States? Oh, how stupid of me, of course you can’t do that because it would mean that your profit margins would decline because you had to actually pay someone a real wage here in America.

Microsoft says they have commenced an investigation. Come on Microsoft, who are you trying to kid here. You must know what goes on in your contract production facilities, it is just you don’t want anyone to know about it. And when facts leak out you have to take the “we are shocked” attitude.

Want to do something that will shock the world? Announce that you will no longer use any foreign labor and use labor here, in the country that you call your home base. You say you can’t because you would have to pass along the cost increase to the customers, and that customers won’t like it. Easy solution, keep the cost of the products about the same and instead tell your investors that the profit margin will decline so that you can employ American workers instead.

How much profit is enough Microsoft? As a publically traded company I understand the need to keep showing increased profit every year, but at what cost will you be willing to go to keep that profit growing? What will you do if the labor costs in China begin to grow? What third world nation would you then move production to?

China Decreases Holdings of U.S. Treasuries

The U.S. government needs foreign entities to keep purchasing U.S. treasuries in order to fund the government. Many months ago I discussed what would happen if foreign interest in purchasing our treasury notes began to dwindle, or worse yet, began selling them. If this is the start of a new direction for foreign governments, then funding the U.S. government will become increasingly difficult.

China Total holding of US Treasuries: $755.4B v $789.6B prior

Japan Total Holdings of US Treasuries: $768.8B v $757.3B prior 
Oil Exporters total Holdings of US Treasuries: $186.8B v $187.7B prior 
Brazil holdings of US Treasuries $160.6B v $157.1B prior 
Russia holdings of US Treasuries $118.5B v $128.1B prior 
Hong Kong holdings of US Treasuries $152.9B v $146.2B prior 
India holdings of US Treasuries: $29.6B v $31.6B prior

[…] WASHINGTON (AP) — The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.[…]

[…] The Obama administration on Feb. 1 released a new budget plan which projects that the deficit for this year will total a record $1.56 trillion, surpassing last year’s record of $1.4 trillion deficit. The trillion-dollar-plus deficit have been caused by a deep recession, which has reduced government tax receipts, and the massive spending that has been undertaken to jump-start the economy and stabilize the financial system.

The administration has pledged to begin addressing the huge government deficits with Obama saying he will soon appoint a commission to recommend ways to trim future deficits.

Overall, the Treasury Department said that foreign net purchases of long-term securities totaled $63.3 billion in December, down from $126.4 billion in November. This category covers Treasury securities and private company bonds.[…]

There is only one way out of this record deficit the United States finds itself in, taxes will have to go up and more services will have to be cut. There is simply no way around it. We the taxpayers will be paying for the mistakes of Wall Street and government spending for a very long time.