This morning we were delivered another piece of Chinese economic data that supports our view that the Chinese Ox is in a Box for Q1 of 2010.
The concept of being in a box is not all that hard to grasp, particularly if you put yourself in one. That’s what the Chinese government has decided to do. We approve of it doing so. Real-time growth and inflation data supported the decision.
In the long run, active/objective monetary policy should be as active/explicit when tightening as it is when loosening. The only thing that interrupts this pattern of communication is politics. The Chinese have tightened lending rates multiple times and raised the reserve requirements on Chinese banks twice since the chart below started to roll-over.
The slowdown in both Chinese PMI (to 52 in February versus 55.8 in January) and Chinese stocks dropping (Shanghai Composite Index lost 10.5% of its value from January 1st to its February 2nd low), is a direct function of the Chinese Government putting themselves in a short term box.
This proactive decision by the Chinese government doesn’t come without risks. In fact, looking at the monthly moving-average in the chart that we have outlined below, a reading of 52 puts Chinese PMI on the cusp of a very bad breakdown.
That said, from a risk management perspective, it is critical to note that risk can work both ways. There is equally as probable an event that Chinese PMI recovers from this current reading of 52 as there is that it breaks down.
If it breaks down through this moving average (dotted white line), recent history (Q2 of 2008) doesn’t paint a pretty forward looking picture. If it holds this level of 52 and recovers, to some extent we shouldn’t be surprised – Chinese stocks have been recovering for the better part of the last week and may be the lead indicators there.
We were never calling for a Chinese stock market crash. Rather, we were calling for a correction. Today’s data supports the efficacy of distinguishing the difference between those two outcomes.
With Chinese stocks closing up +1.2% on this Chinese PMI “news”, Mr Macro Market is starting to smell recovery in China – remember, Mr. Macro Market looks forward…
In terms of positioning, we covered our short position in CAF during the week of the Lunar Year holiday. We have not yet moved to the long side of the equity market. We need more data.
Keith R. McCullough
Chief Executive Officer