Posts Tagged ‘BRIC’

Negative signals for Chinese economy, will they take heed

CHINA STOCKS FALLWhile the Chinese economy expanded 8.9% in Q3, propped up by easy credit & continued government spending programmes, Europe, US & Japan continue to flounder. The world’s 3rd largest economy has recorded 7.7% overall growth in the first 9 months of 2009, with officials saying they are confident that the much talked about annual growth target of 8% will be acheived.

Last November, as it became clear that the global economy was heading into a recessionary period, central government implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels. Via this stimulus package, China has implemented a number of schemes that impact practically all sectors in the economy;  real estate/construction, transportation infrastructure, agriculture, social services, industry, earthquake reconstruction, technology advancement & rural development being amongst those receiving special focus.

The strategy has paid off, with growth rising to 7.9% in Q2 from 6.1% in Q1 2009. Figures show that industrial output has risen 8.7% in the first three quarters of the year, and 12.4% in July-September, which would seem to signal accelerated demand from domestic purchasers, keen to take advantage of low cost loans to invest in the expected turranround for China in 2010.

However, while surging purchases of coal, iron ore & other raw materials have helped mining majors such as Vale & BHP Billiton the impact of China’s comeback has mainly been one of improving global sentiment than of actually driving growth, according to Stephen Green, economist for Standard Chartered Bank in Shanghai.

“Exports remain the key weakness for the Chinese economy,” Moody’s economist Alaistair Chan said in a report yesterday.

Our view is that it is time for those investing in China to pay attention to people like Chan, as investment via the stimulus package has accounted for nearly 88% of GDP growth this year. Central government  investment in factories, construction & national infrastructure has risen by one third in the first three quarters of this year to a record 15.5 trillion yuan (US$2.27 trillion).

As the economy “flourishes”, this heavy reliance on public works & other investments could be masking long term issues for the Chinese economy. Impressive as China’s ability to ride out the storm has been, companies desperately need to restart exports to offset the economies depenfdance on fiscal hand outs.

This week China’s leaders have also  signalled concern over these obvious imbalances in the economy, with the State Council saying policy must shift to dealing with waste and other associated problems of high growth.

“In the first three quarters, the pace of economic growth quickened,” the State Council said “At the same time, we also are clearly aware that there are still difficulties and problems in the economic and social development of our country.”

So it looks as though there are a number of challenges ahead for China in the near future. The stimulus package has obviously been deployed in a much more effective manner than in Europe & the US, however China has not had the crippling effects of masssive credit & huge write downs in it’s nascent financial sector. Although the Chinese have made a number of efforts to open new markets through bilateral trade agreements & an accelerated FTA programme with neighbouring countries in Asia & it’s BRIC partners, it cannot fully offset the real factor of dependancy on Western markets indefinitely.

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Hedged In on SDS, FXI & FXP as bears wake up early

kodiak-bear1Normally at this time of year, bears are getting their stores in & looking at hibernation, but the recent market has turned that around, with bears dozing most of the summer & now waking up & looking hungry.

Followers of our Twitter account, will know that we have been taking a good look at China over the past 10 trading days & have a very bearish outlook on China going into the 3rd Quarter & by default on the S&P 500. Signals have been coming for a while with the BDI declining at an alarming rate from it’s June highs, flagging up the possibility that China’s economy & associated infrastructure drive are starting to run out of steam.

The Shanghai Composite has been steadily declining. losing in the region of 21% of its value in the last month, today the benchmark index slumped an eye boggling 6.75% at its close. This has prompted me to look at a trade that I have been thinking about for a few weeks, that is neatly hedged & could also be a home run as bearish sentiment hits the markets again.


Having looked at three well traded ETFs , we are placing a trade that is mixing it up a little with SDS :Ultra Short S&P 500, FXI :iShares FTSE/Xinhua China 25 Index & FXP ProShares UltraSh FTSE/Xinhua China 25. The following chart shows the last 5 trading days of SPY, FXI & FXP. As can be seen, there was a clear signal on Tuesday last, that there was a divergence in FXI / FXP, with the S&P 500 mainly trading sideways.


Now using the Morgan Stanley A Fund CAF as a sentiment monitor for the Shanghai market over the same period against SPY (NYSE: SPY), it would seem that there has been some pretty good correlation over the last 6 months of trading. For me CAF is one of the best tickers to use for real sentiment, as it trades in China A Shares, whilst FXI (NYSE: FXI) is predicated on 25 stocks traded on the Hong Kong market (mostly ADRs). From looking at the charts, it would appear that CAF (NYSE: CAF) actually front runs FXI by a two to three day period & this has helped me immensely in trading Chinese ADRs this summer. At the same time, SPY has followed the FXI trend reasonably faithfully for the last 3 months, until August 17th, when FXI began to dip.


So our feeling is that with China declining at such a rapid rate, Long FXP  (NYSE: FXP) short FXI is a no brainer & we are looking to make some good returns over the next few weeks, we are also adding in a soupcon of SDS for interest & to confirm our bearish sentiment on the S&P 500. With a ratio of 2:1:1 we feel that this is a well hedged play, with a good upside potential.

We are looking to hold this trade for a minimum 10 day period & I have set this trade up on in our test account in order to track it. The idea being that we can give a visual on the performance of the trade & also  a good term of reference when we close out the positions & reblog.

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China : first to bottom – first to bounce

renminbiThe global financial crisis has forced Canada to rethink the received wisdom about fiscal management. It should also force a rethink of the international economic order and how we must position ourselves for a post-crisis world. Can we count on our traditional ties with the U.S. to sustain long-term development? If the crisis marks a shift in economic power toward emerging countries, especially China, what are the implications for international policy?

The current crisis has blunted the more extravagant claims of emerging market ascendancy: China, India and Brazil are facing the same challenges as the rest of the world. The notion of “decoupling” – that emerging markets are no longer subject to Western business cycles – has been debunked. In the case of China, a precipitous fall in exports has led to the closure of thousands of factories and added millions to the ranks of the unemployed.

To put it crudely, the U.S. is suffering from excessive debt and China is suffering from excessive savings. But there is a world of difference between a downturn precipitated by bad debt and one due to domestic under-consumption. When the toxic assets have been finally excised from U.S. balance sheets, Americans will be saddled with a massive debt. This will mean higher interest rates and below-potential growth for the foreseeable future.

China is also feeling the pain of a downturn, but the similarity ends there. Unlike the U.S., Beijing can afford a massive stimulus package. Relative to national income, the $600-billion (U.S.) spending boost announced by the Chinese last year is the largest of any major country. In terms of contributing to global reflation, China has done its share and more.

The critical question is whether the Chinese response represents a change in the country’s economic model. Skeptics say China is merely buying time for its exporters and will continue to pursue mercantilist policies (such as a weak currency) in a bid to gain global market share.

But the early signs point in the opposite direction: Beijing has recently expanded social programs and transfer payments for the needy, and introduced reforms to health insurance that increase coverage for an additional 400 million citizens. The expansion of social safety nets will reduce the need for precautionary savings at the household level, and result in increased discretionary spending. Given the low levels of debt in China and the huge pent-up demand for consumer goods, private consumption is destined to play a much larger role in Chinese growth. This will be good for China, and good for the world.

For these and other reasons, there is a growing consensus among experts that China will be the first to find the bottom of the economic crisis, and the first to come out of it.

It is surprising, therefore, that there is so little awareness in Canada about the impact of the global recession on China’s economic rise. The federal stimulus package did not give any hint that Canada has to build stronger economic ties with China. Bay Street, for its part, is looking to Washington for salvation, in the form of trickle-down from the U.S. rescue packages.

Paradoxically, the global crisis has emboldened China skeptics, who point to the fallacy of decoupling as proof of fatal flaws in China’s economy. This argument is sometimes conflated with the view that Beijing should be blamed for the crisis and that protection against Chinese imports must be part of a recovery strategy.

A more insidious argument is that the crisis exposes the fundamental weaknesses of Chinese authoritarianism, and will lead to the collapse of the Chinese Communist Party. Setting aside the obvious objections to this notion of “performance legitimacy,” the proposition that China is facing a crucial test of leadership may be instructive in thinking about China’s role in a changing world order.

If Beijing is able to keep domestic peace and China emerges from the crisis as a stronger player in the world economy, will we have any excuses left to not take seriously the rise of this new global power?

Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada

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Brazil’s Itaú-Unibanco rides wave of banking consolidation

itau-unibanco1Following last years merger between the number four & number two banks in Brazil last November, the newly forged conglomerate, Itaú-Unibanco (NYSE : ITU) is the frontrunner in a race for consolidation in the Brazilian banking market. The result being that Itaú-Unibanco is now 13% larger than Banco do Brasil and 58% than the other two main rivals, Bradesco (NYSE : BBD) & Spain’s Santander (NYSE : STD). At current prices, Itaú-Unibanco’s combined assets total $201 billion, while Banco do Brasil holds $178 billion and Bradesco $128 billion, only one billion ahead of Santander.

In the credit card segment, Itaú-Unibanco serves an estimated 30% of all credit cards issued in Brazil, which brings circa 36% of all cc revenues, making them far & away the market leader overnight. Unibanco brought a number of strategic assets with it in the November deal, notably Wealth Management with more than R$32.7 billion in assets under management, 14,356 points of service and 17.5 million customers.

Although there are obvious challenges in merging two large companies such as these, Itaú-Unibanco’s Chairman Pedro Moreira Salles remains bullish on expansion. Company executives are rumoured to be looking for international acquistion targets, Mexico being one of the favoured target countries.

“We want to be a bank that has the skill to operate around the world. We aspire to have a global scale” said Salles.

Sector watchers claim that Brazil’s banking consolidation will continue apace in 2009, the expectation being, in three to five years, five banking giants will control 85 percent of the market, with a balance between one public bank (Banco do Brasil), two private Brazilian banks (Itaú-Unibanco & Bradesco), with two foreign banks (Santander & HSBC).