17 reasons why China is heading for a hard landing

Jun 06, 2012, 10:33

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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Is China heading for a hard landing? We think so – which is why we think you should steer clear of everything from most industrial commodities to Asia-dependent luxury goods firms. However, a good many of the people who comment here disagree.

It is hard to tell much (except the general trend) from the official GDP numbers, so with this in mind, here’s a list of reasons to think that all is not well in the economy the bulls hope will be the financial saviour of the West. If you have any more, feel free to add them.
 
1. The FT reports that Chinese buyers have deserted the Hong Kong art market. Six months ago, they accounted for around 44% of Sotheby's sales. That is now down to more like 20-25%. Kevin Ching, chief executive of Sotheby's Asia, noted that “there used to be five to six mainland Chinese individuals who would bid like crazy here, but they did not make any offer in spring sales.” Sotheby's reported a net loss of $10.7m in the first quarter.

2. ICIS.com reports that demand for polyethylene, which has long been “a very reliable leading indicator for the economy”, is no longer rising but falling (down 6% overall).

3. The FT again – reporting that Chinese buyers have started to “defer raw material cargos” in a “hand to mouth” market. Traders are reporting requests that cargo deliveries be deferred, but also an increasing number of defaults.
 
4. The Purchasing Manager’s Index (PMI) is at a five-month low. Headline PMIs are also falling across the rest of Asia.

5. Electricity consumption is still up on last year, but it is now flat month on month this year.

6. The price of a bottle of Chateau Lafite is down 50% from its peak.

7. Rail cargo volumes are flatlining.

8. Cement demand fell in the first quarter.

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9. The price of benchmark iron ore is down 9% from the end of last month.

10. Car sales are entirely flat (and fell slightly in the first few months of the year) and there are regular reports of prices being slashed. “The best scenario is for annual car sales to remain flat, even if the automakers try harder in the latter half,” said Zhang Xin, an analyst with Guotai Junan Securities Co (GJSZ) in Beijing.

11. Household consumption remains stuck at under 35% of GDP (still a record anywhere) making it pretty clear that there is not yet any real rebalancing from investment (around 50% of GDP) to consumption.

12. Graff diamonds has just pulled its Hong Kong IPO. It is the third company in a week to do so. The others? China Nonferrrous Mining Corp and China Yongda Automobiles Services.

13. In the first quarter of this year China’s state steel companies saw profits fall nearly 70% on a year earlier.

14. Bank lending is sharply down – total new bank loans were down 7.8% as of May 11 (year on year) and medium and long term loan volumes are 50% down on last year. The government has even conceded that the banks might miss their lending targets for this year.

15. Capital flight is rising fast. In January revenues at the casinos of Macau (this is the best way to move money out ofChina) were up 35%.

16. House prices in China saw their eighth consecutive monthly fall in May. In some areas of the market price falls of up to 65% are being reported, and even late last year falls of 25% in Shanghai were causing riots.

17. Stimulus. Given the levels of debt and overcapacity China is already saddled with it seems unlikely that the government would want to spend more if it was certain it was seeing nothing but a mild slowdown in growth. But the authorities have already given the go ahead to yet more infrastructure plans this week. Government spending in China was 27% higher in the first quarter of 2012 than 2011.

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  • 1. Merryn

    (06 June 2012, 10:43AM)  Complain about this comment

    And another.. Cotton prices are now back to 2009 prices. "There are so many things that affect cotton prices that are built into the economy, its a great barometer of whats going to happen. When you see cotton get sick everything else tends to show up at the hospital weeks or months later," says a commodities broker in the FT.

  • 2. Romford Dave

    (06 June 2012, 12:48PM)  Complain about this comment

    Reminiscent of the Spanish Inquisition sketch Merryn - 17 reasons why we should fear, No 18 reasons why....... ;-)

  • 3. Smibby

    (06 June 2012, 01:17PM)  Complain about this comment


    Just out of interest I read in the BG Shim Nippon trust information that a slowdown in China would be bad news for the trust.

    That also is a fact I think.

  • 4. Bapodra Investments

    (06 June 2012, 01:32PM)  Complain about this comment

    If what you say is correct, I am not 100% sure it is but who knows, then you need to focus not on China as it is big enough to look after itself but the Eurozone, UK and rest of the world. If China has a hard landing then we are looking at a world recession so forget avoiding China, you avoid all those countries that are relient on China as part of their main trade. China has a lot of foreign reserves and owns a lot of US debt so if China has a hard landing then think what happens to the US? If it brings the US down with it and it sneezes then the rest of the world will not only have a cold but there will be a serious flu crisis.

  • 5. Merryn

    (06 June 2012, 01:54PM)  Complain about this comment

    @Smibby, a hard landing in China isn't helpful for anyone! But Japanese stocks as a whole, like some Europeans stocks, at last have the benefit of being cheap.

  • 6. Bchung

    (06 June 2012, 03:06PM)  Complain about this comment

    How is Japanese Stocks Cheap when the earnings are only going to suffer even more when China is in for a hard landing?

    Not to mention Japan is probably the most exposed to China for any major economy, any set backs in China is probably going to hurt Japan the most, making the Cheapness today for Japanese stocks actually expensive if taken China's hard landing scenario in to account.

    It might make sense to park some money in Blue Chips in Europe regardless of the EURO, but Bullish in Japan as a whole while being ultra bearish in China as a whole makes no sense at all.

  • 7. Boris MacDonut

    (06 June 2012, 03:53PM)  Complain about this comment

    Merryn. There are actually 20 reasons.
    18. 50% of their population live on $2 a day.
    19. They have a culture of distrust and deception(especially as regards debt).
    20. The US is moving the bulk of its fleet to the Pacific.........and denying it is anything to do with China, so it must have everything to do with them.

  • 8. Smibby

    (08 June 2012, 11:41AM)  Complain about this comment

    Merryn,

    I agree a hard landing is bad for everyone.

    I did hear Lars say Japan was shifting it's emphasis from China to the ASEAN countries,I think.Roll on 2015.

    I also read another report yesterday that Japan is heavily exposed to China.More so than a lot of countries.

    I have no idea.I have never been to Japan or China.I just read the information.

    I am pretty sure when I read stuff about the Shin Nippon trust the manager said a slowdown in China would be bad news for the trust.

    However,if anyone wants to confirm that,do due diligence and read the report yourself and find out.

    Japanese stocks are cheap,you are right and I too have put my money where my mouth is just like you did Merryn,according to director dealings.

  • 9. MarkF

    (09 June 2012, 12:10PM)  Complain about this comment

    Great article Merryn, and completely agree. The numbers speak for themselves. I guess now more than ever is the time to hold cash and perhaps beef up one's gold and silver holdings?

  • 10. Mark A

    (09 June 2012, 06:51PM)  Complain about this comment

    What about demographics? One grandchild per 4 retirees?
    That is going to hit them at some point in the future.

  • 11. Chris

    (10 June 2012, 11:53AM)  Complain about this comment

    In point 17) you say 'given the levels of debt' China has, but China is a net international creditors isn't it? i.e. it is owed more money than it owes. Doesn't that suggest there would be significant capacity for stimulus in the event of a siginificant slowdown- thats one of the fundamental reasons why I don't see how that could happen.

  • 12. Boris MacDonut

    (10 June 2012, 09:31PM)  Complain about this comment

    #11 Chris .Chinese Government debt is only about 20% of GDP.,but they have a lot of corporate and personal debt.
    China and India, much more thanWestern countries, rely heavily on lending between individuals and families outside the banking system. These are difficult to quantify but for lender and lendee they are as real a debt as bank borrowing.

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