China – “a year of complexity and challenges”

Mr Ma Jiantang, a spokesman for China’s National Bureau of Statistics, stated that 2012 will be “a year of complexity and challenges”. All very Confucian, but what he really means is that China is going to face a pretty tough year;

China grew by +8.9% YoY in the 4th Q, slightly higher than the forecast of +8.7%, but lower than the +9.1% YoY in the 3rd Q. The economy grew by the slowest pace in 10 Q’s. Industrial production increased by +12.8% YoY, once again somewhat higher than the +12.3% forecast. Fixed asset investment rose by +23.8%, as compared with a forecast of +24.1%. Retail sales rose by +18.1%. CPI averaged +5.4% last year, exceeding the Governments target of +4.0% every month. CPI was +4.1% in December YoY, down from a peak of +6.5% in July. The data will reinforce the view that China will ease of its tight monetary policy – which was introduced to curb inflation and property prices. A number of analysts are revising growth expectations lower for the current year – to around 7.5% -8.0%. As you know, I believe China is in for a tough year and sub 8.0% growth is likely, in my humble view. The 1st half of the year looks especially difficult;

The Mayor of Shanghai announced that plans to list international companies will be delayed – he did not provide a reason. However, the announcement is no great surprise, as Chinese investors will flock to these issues, rather than to the rather exotic local businesses with their unique accounting practices;

Chinese home sales rose at the slowest pace for 3 years in 2011, the National Bureau of Statistics reports. In 2011, home sales rose by 10% to US$770bn. The residential property sector slowed materially in the 4th Q, in particular, in response to tighter monetary policy measures. Property prices declined for a 4th month in December and no pick up expected for at least the next 6 months (Source Bloomberg);

Interestingly, China’s urban population has exceeded its rural population for the 1st time in 5000 years, according to Bloomberg. The rural population was 81% in 1979, just confirming the massive change in just over 30 years;

The Japanese are becoming increasingly concerned as to the decline of the Euro – very bad for their exports. There is increasing talk of buying the single currency and even EFSF/ESM bonds !!!;

Worrying developments in Pakistan – the military seems to be pressing the Government. Talks of a military coup abound;

S&P has downgraded the EFSF by 1 notch to AA+, the same rating as France. No great surprise, given the downgrades of France and Austria on Friday, which left just 4 Euro Zone countries AAA rated (Germany, Finland, Luxembourg and Holland), though with only Germany retaining a stable outlook. France and Austria account for approximately E180bn of the guarantees supporting the EFSF. Its now going to be interesting to see what the “good and the great” of the Euro Zone do, apart from the traditional huffing and puffing.

Mr Klaus Regling (head of the EFSF) claims that the fund will be able to maintain its E440bn lending capacity – S&P reported that the Euro Zone governments were considering credit enhancing options which, if satisfactory, could restore the EFSF’s rating to AAA. However, they also warned that if such measures were not introduced and/or were insufficient, they would change the EFSF’s outlook to negative (as is the case for France) – can’t see the Euro Zone countries increasing their guarantees (Germany has already rejected this option), so it will be interesting to see what credit enhancing policies they pursue.

The Euro Zone have brought forward the permanent bail out fund, the ESM – to be operational on 1st July this year. The ESM will, at least, have paid up capital of E80bn, as opposed to just guarantees, as is the case for the EFSF. The current plan is to raise the lending capacity of the ESM to E500bn. However, a number of technical issues remain unresolved – like where’s the money coming from !!!!.

The bottom line is that neither the EFSF, nor the ESM are large enough to meet potential demands for funds from Euro Zone countries, in particular Italy and Spain;

Mr Mario Monti, Italy’s PM (supported by the European Council’s President – Mr Van Rompuy) is asking Germany and other Euro Zone countries to help lower his countries borrowing costs. He warns of a “powerful backlash” from the population – too true. In addition, he adds that lower interest costs for a number of Euro Zone countries will be in Germany’s interests. Whilst not referring directly to the ECB, Mr Monti is clearly calling for the Central Bank to buy far more Italian and other peripheral bonds and for the EFSF/ESM to be enlarged. Well the EFSF/ESM is not going to be enlarged, which leaves the ECB as the only game in town. Germany clearly does not approve of the ECB buying bonds, preferring “hair shirt” fiscal policies, though has acknowledged that it is an independent organisation. However, without the introduction of growth measures, these austerity/hair shirt policies will fail, as I suspect everyone, including surely the Germans know. Mr Monti’s comments come ahead of the EU finance Ministers meeting next week and the EU heads of State meeting at the end of the month;

There is speculation as to the level of take up of funds at the ECB’s next 3 year LTRO at the end of February. Personally, I believe the take up by banks will materially exceed the E489bn taken up last time around. If you were a CFO of a bank and given the current uncertain market conditions, why would you not load up on as much cheap (1.0% and possibly lower) money as possible. The argument that there is a stigma attached to borrowing from the ECB is spurious in my view. The level of bank borrowing will be dependent on the the availability of eligible collateral by banks, though the relaxation of collateral rules once again suggests to me that the take up will be extremely large. A large take up will be positive for European financials in my humble view, particularly those that do not need to raise capital. For full disclosure purposes, I own Barclays, Lloyds, RBS, Aviva, Prudential and ING Bank and may add a few more financials in due course;

Portugal is firmly in the cross hairs as 10 year yields rose by over 200bps to a record 14.5% yesterday, following the S&P downgrade to junk. As you know a “haircut” on its Sovereign debt is inevitable in my view – at least 40%;

Brazil’s economy in November grew by +1.15% from October, the fastest pace for over 1 1/2 years and reverses a 3 month contraction – exceeding forecasts of a rise of +0.9%. Lower interest rates combined with tax cuts are boosting consumption. The Brazilian Central Bank is expected to cut interest rates by 0.5% (to 10.5%) this week, with further cuts very likely. The IMF forecasts that Brazil will grow by +3.6% this year, which is the lowest of the BRIC nations;


Asian markets rose today as speculation mounted that the Chinese authorities would ease monetary policy, following the announcement of the slowest GDP growth in 10 Q’s, though the GDP data was better than forecast. Most markets are over 1.0% higher, though Japanese markets are up by just 0.7%. The A$ is also benefiting from expectations of loser monetary policy in China.

Futures suggest that European markets will rise by some +0.5% at the open. The Euro is stronger – currently US$1.2725. Brent is up to US$111.60 – a ludicrous level, given the state of the global economy.

I think its time for the beach – yep, its a hard life here in Goa – cloudless blue sky’s, a gentle breeze and temperature, for those interested, is 82F. Sorry, could not resist.

Print Friendly, PDF & Email

Posted Under