China is receiving much attention these days. Having been one of the first markets to recover, in no small part due to its massive stimulus program, it underwent a significant correction in the month of August, falling enough to be classified as a bear market, causing everyone to start reading the tea leaves.
The market appears worried about many things; leakage from the stimulus into the stock market, asset bubbles in the property market, the removal of the stimulus itself, and even the authorities taking a tightening stance.
I am visiting Asia in a couple of weeks, and I intend to pursue these, and other, lines of questioning with both companies and officials, but in the meantime I have given some thought to what I think is happening.
Firstly, markets do not go up in a straight line, and all too often we forget that. China “A” is a VOLATILE market, so a 20% move in either direction is less significant that a similar move in the S&P. I know that is trite, but if we are going to use the Emerging Markets as indicators, we need to separate the signal from the noise; to quote Douglas Adams – Don’t Panic.
In the last year we have gone from “HOLY F@^K!” through “We’re Doomed, Cap’n Mainwaring” to “Thank God, that’s over!” Six month’s ago my Autistic 16 year old , my touch point for the real world, came home from school to tell me that we were entering the worst recession since the Great Depression. Who could be left to sell?
As Bernard Lapointe shows above, many Emerging Markets are now up a massive amount this year, including China after the correction. In no small part, the rally was driven by the realization that the world was not coming to an end. Once the markets realized that tomorrow would indeed come, then it followed that there was value in the markets. In those countries where the Governments could reflate aggressively, it was inevitable that the markets would move in tandem.
I won’t deny that there has been leakage into the stock market, and in many tier 1 cities property prices now exceed 2007 peak levels. What would China be with out some good old fashioned speculation, but there is little too suggest that it is getting excessive by their standards.
In China, you know that the authorities will adjust policy, so a significant part of market activity is anticipating those policy changes. When things are falling apart, you know the authorities will step in to try and pick things up; conversely, they will try and calm things down if they see things getting carried away.
I think the Chinese authorities are more than happy to fine tune policy far more frequently than we are used to from our politicians. Whereas our opposition politicians would try to portray such policy moves as indecision, the Chinese authorities are able to convey a sense of being in control. As a result, I believe we misread and thus over react to what they are trying to achieve.
I also think fears of tightening are very misplaced. Easing-off on the accelerator is not the same as slamming your foot down on the brake. Aggressively stamping on the gas, then slamming on the brakes does little more that burn gas, heat the brakes up, and cause passengers to puke.
Judicious withdrawal of some stimulus measures now, such as the reduction in the discounting of Bills that we are seeing, leaves room for that policy to be reinstated IF growth slows too rapidly, whilst the 9% plus growth outlook for 2010 suggests that there is plenty of momentum currently in the system. Let it coast for a bit, and then see if we need to give it some more gas.
“Crossing the Stream by feeling the stones” is a more far reaching metaphor than many realize.
None of which is to say we are out of the woods; Luc’s piece on the state of State budgets is terrifying. In the last year, the world has changed, but we will not know definitively how for a very long time. Citi published a report this morning pointing out how much more the BRIC’s (I HATE that acronym) will contribute to global growth than the G8 for 2010, 1.2% Vs .88%. Recently Luc published a piece highlighting the likely low growth in the US for the next several years. Under such a scenario, Citi’s 1.2% would rise rapidly to 1.5%, and then 2%. As we enter this new environment, things will get very confused. There will be no easy answers.