China: Hard vs. Soft Landing

There is an increasingly divergent debate as to whether China will face a hard, as opposed to a soft landing. The IMF is the most recent to opine on the subject. They report that China will avoid a hard landing (generally defined as GDP growth of less than 6.0%). Property prices continue to decline – apartment prices declined in 45 out of 70 of the largest cities in Feb, as compared with Jan. Premier Wen reiterated this month that property prices remained “far from reasonable”, which does not suggest that the Chinese authorities are ready to change their policy of lowering prices. JPM’s Adrian Mowat writes that China is already facing a hard landing, with weakness in steel, cement and car sales. Personally, I believe that downside risks prevail, which I believe is borne out by recent data and which suggests that a slowdown is gathering pace.

The PBoC continues to try and weaken the Yuan – the mid point rate was set at 6.3082, down from the market close of 6.3225. Premier Wen states that a steady economy, accompanied by a stable financial system and strong regulation are a prerequisite for full Yuan convertibility – Hmmmm, that can mean only one thing in my humble view – full convertibility is a long way off;

India’s budget deficit is forecast to be 5.9% of GDP for the fiscal year ending 31st March 2012, some 1.3 percentage points more than target and the biggest miss since 2009. The 2012/13 budget deficit is forecast to decline to 5.1%, which seems optimistic to say the least. With debt to GDP and inflation rising, as is the current account deficit, India’s economic prospects look like getting worse. Political pressures (the general election has to take place by 2014 at the latest), will limit politicians desire/ability to reduce subsidies and raise prices – the Indian Railways Minister had to resign following his failed attempt to raise prices – they have not increased for 8 years. The Congress party has to rely on support from regional parties to remain in power, which further limits its ability to enact much needed reforms. Bloomberg reports that the Indian governments had 9 failed bond auctions to date this fiscal year – a definite Oops. I believe the SENSEX will under perform and, in addition, expect the Rupee to weaken, quite possibly materially against the US$. The higher oil price is a major headwind. I remain short India and am becoming increasingly bearish;

Israeli newspapers report that the Israeli cabinet has approved, if necessary, a military strike on Iran. It seems strange to me that such a report would be released by Israeli newspapers, unless the government wished it. However, the threat of military intervention remains a serious threat, with the result that oil (Brent) continuing to trade around US$125 – a major negative for the global economy/growth;

The initial auction of Greek bonds established a value of 78.5 cents on the Euro to settle CDS’s. The final rate will be established at 3.30pm GMT today – results just released, which confirm the 78.5 cent on the Euro payout. Well, at least they paid out, but I believe that investors will remain wary of this product, until the basis of a payout on these insurance policies is more properly defined;

President Sarkozy seems to be closer (in terms of the polls) to Mr Hollande, especially in the 1st round – indeed, i pool puts him ahead. However, the gap, whilst contracting, is around 8 points in the (deciding) 2nd round. My clued up (French) friends believe that Sarkozy will regain his Presidency, even though they are not totally enamoured by him;

European banks deposited just above E750bn at the ECB, down from the over E800bn recently. Risk assets should benefit, as more funds are withdrawn from the ECB and vice versa;

Better US economic data has resulted in a number of analysts predicting that the FED will increase interest rates ahead of their previous indication of late 2014 and, in addition, that QE3 is off the table. Whilst US data has improved, I continue to believe that such views are premature. The US economy is indeed improving, but below a rate which will reduce unemployment meaningfully. The FED will be mindful of the November Presidential elections and, if it is to introduce QE3 (which I continue to believe they will – most likely, on a sterilised basis), an announcement will need to be announced in the next couple of months, so as not to be accused of influencing the elections. US bond yields rose by 30bps last week – I believe that the FED will not welcome the rise in rates, particularly if it continues – indeed, a further sharp rise in yields could well force the FED to act to stem the rise. However, if the FED does not act and yields rise further, markets could well react negatively, though the US$ will benefit;


Asian markets (ex Hong Kong, India and Singapore) closed flat to higher. Personally, I continue to believe that Asian markets and emerging markets, in general, will under perform developed markets and the US, in particular.

European markets are (ex France) flat, with US markets higher. The Apple news seems good to me, which is clearly positive for markets and the NASDAQ in particular (up 0.7% at present).

A great deal of US housing related data will be released this week. Whilst the March NAHB housing index came in at 28 today, lower than the 30 expected, though at a 5 year high (Feb was also reduced lower to 28, from 29 previously), there is evidence that the US housing market is improving. Further data releases this week data should provide greater guidance. I remain positive of the building materials sector, which I believe will benefit from an upturn, but is less risky than the home builders. An improving US housing market will be a major positive benefit for the US economy and employment.

The Euro is rising today – currently US$1.3240, though was above US$1.3250 earlier. If, as I expect, the EFSF/ESM will be increased in size, the Euro should rise further. However, some time thereafter…..



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