Conclusion: In this three-part note, we update our outlook for Chinese economic growth and monetary policy, hit on recent economic growth trends and outlooks across Asia and the associated implications for U.S./E.U. growth, as well as offer some sobering analysis on Asia’s role in funding the Eurocrat Bazooka.
With the bulk of U.S. investor attention oscillating between a sequentially worse domestic equity earnings season and Europe’s Sovereign Debt Dichotomy, we thought it be a helpful to quickly focus your attention on a few data points out of Asia over the last 72hrs that we think are instrumental to constructing a more clear intermediate-term outlook for both the U.S. and global economy:
While Chinese Growth Is a Real Problem, Broad Easing of Monetary Policy Is Unlikely to Occur Soon Enough
On the heels of Chinese Vice Premier Wang Qishan’s urging that the nation adopt more “forward looking and flexible” monetary policy (i.e. ease), the People’s Bank of China cut reserve requirement ratios in the province of Zhejiang, where Wenzhou is located (home to the sensationalist media reports of a dramatic credit crunch). While the single-province, -50bps reduction is hardly something to get excited about, it does support our view that China is unlikely to broadly ease monetary policy for 1-2 quarters, instead electing to “fine-tune” economic policy, per the PBOC. Chinese equities, as measured by the Shanghai Composite Index, are in support of our view (broken on our TRADE and TREND-duration quantitative factoring):
Also consistent with our contrarian view that rate cuts aren’t always bullish when initially implemented because of the effect fear-mongering has on private sector confidence, Vice Premier Qishan’s call for monetary easing was accompanied by the following statement:
“The global economic recession triggered by the international financial crisis will be long-term.”
We remain convinced that this type of negative sentiment coming from high-ranking officials is not conducive for small business owners investing in additional capacity or consumers opening up their purses for big(er)-ticket items. Moreover, they aren’t conducive for international confidence in the world’s third-largest economy; it’s not a coincidence that the first decline in yuan holdings at Chinese banks (a gauge of “hot money” in/out flows) since December ’07 occurred in October. As such, we’re now seeing 12mo non-deliverable forwards for the Chinese yuan trade at a slight discount to spot prices – the first break into negative territory since September ’08.
Asia’s Woeful Export Growth and Downward Growth Revisions
Japan joined Hong Kong, Singapore, and Thailand as another large, export-dependent Asian economy to post flat-to-down YoY export growth in the latest reporting period. This is consistent with the general trend of softening industrial production statistics and weaker manufacturing PMI surveys throughout the region. This has obvious negative implications for the intermediate-term inventory build and consumption trends in the U.S. and E.U., given that Asia generally rests atop the developed-world’s supply chains. We say this time and time again, but it’s worth repeating:
“If the velocity of Asia’s production and shipment of goods and services is slowing or in decline, then the velocity of U.S./E.U. orders and consumption is sure to follow. Suppliers can’t sell what isn’t on the shelves and consumers can’t consume what hasn’t been produced.”
Elsewhere in Asia, Singapore updated its 2012 GDP estimate to a baseline forecast of +1-3% and revised down its 2011 forecast for export growth to +2-3% from +6-7% prior. Per the Trade Ministry, neither forecast is inclusive of "downside risks to growth", such as a Eurozone recession. This follows up the Monetary Authority of Singapore’s stern warning issued on Friday:
"The world economy and financial system are at their most fragile state since the 2008-09 global financial crisis."
Just a thought, but if Singapore – a place home to the world’s 1st, 5th, and 6thstrongest banks and consistent a ~2% unemployment rate – is growing at only +1-3%, where does that put French and Italian growth in 2012?...
Additionally, Singapore joins Japan, Hong Kong, India, Indonesia, Thailand, and Australia as key Asian economies to either reduce official GDP estimates or talk them down publically in recent weeks.
Are China and Japan Setting Consensus Up for an Asymmetric Downmove?
With global equity prices still elevated relative to their early October lows, we think it’s fair to say that there is a decent-sized faction of buyside consensus that is betting on an orderly resolution to the Eurozone’s Sovereign Debt Dichotomy. That, of course, requires a leveraging of the existing Eurocrat Bazooka, per the latest official commentary out of Germany. Unfortunately for this viewpoint, we continue to come across glaring data points that are supportive of our belief that the EFSF will struggle to attract capital – especially on the order of our estimate of $2-3 trillion needed for the upcoming fiscal year:
In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout:
“When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”
Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well:
“China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.”
Clearly, the powers that be over at CIC share our view that China is no lemming. They won’t be foolishly convinced to step in and bail out Europe at these prices! Refer to our 9/14 research note titled, “China to the Rescue?” for more details on what conditions China needs to see before stepping in to bid for European assets with size. Moreover, we are perhaps even farther from meeting those conditions than we were just over two months ago.
Turning to Japan, in recent weeks we’ve had conversations internally and also with various members of the buyside centering on the possibility that Japan can “save the day” with major purchases of EFSF issuance and/or PIIGS+French sovereign debt via central bank money printing. Japan appears to have a vested interest in weakening the yen from near-record levels, having carried out three largely-unsuccessful interventions in the YTD with record size. Such a bold move could prove a great deal more successful than their previous interventions (the yen is trading +5.4% YTD vs. the USD vs. a median decline of -2.0% for all other Asian currencies), in addition to perhaps giving them a boost to their public image and international influence.
Unfortunately, today Finance Minister Jan Azumi rejected the possibility of the Bank of Japan establishing a ¥50 trillion yen (~$650 billion) fund to purchase foreign debt (a plan proposed to him last month by BOJ Deputy Governor Kazumasa Iwata) by saying:
“We think that would be similar to intervention… Such an idea isn’t in-line with our thinking.”
This is a major blow to this creative line of Keynesian thinking, as the BOJ takes orders for currency intervention from Japan’s Finance Ministry – whose sole purpose for intervention has been to stem “speculative trading and excessive movements”. An outright currency devaluation isn’t on their agenda and certain members of the BOJ remain publically concerned of the ill-effects of Keynesian money-printing:
“We should minimize the chance of distorting markets [when the BOJ buys assets] and I’m very cautious about that.’’
-Sayuri Shirai, Monetary Policy Board Member, November 2011
“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and the economy, as has happened in the past.”
-“Masaaki Shirakawa, BOJ Governor, May 2011
To his point, in the last round of outright JGB monetization which occurred during the Great Depression era, Japan’s CPI and PPI eventually peaked at YoY growth rates north of +40% and Real GDP growth slowed sequentially for nearly 15 years. While buying EFSF or PIIGS+French paper isn’t the same thing as buying domestic securities, it is created from the same source – an expansion of Japan’s monetary base. Should such expansion eventually seep into Japan’s domestic money supply in the coming years, Shirakawa’s worst fears are at risk of being realized.
All told, we think Japan is doing the prudent thing by standing pat here. Moreover, our analysis would suggest it’s also prudent to remain cautious about the EFSF – at least in the short-to-intermediate term.