China is set for a hard landing it seems
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August 12, 2015China Slowdown
China’s economy is slowing dramatically it seems. Though the GDP numbers from the government indicate a 7% plus growth, the other indicators show that the growth is far less. Industrial growth is starting to show a decline, while the services growth which was growing rapidly will also reverse (given the stock market bust).
The biggest indicator of Chinese economy slowing down is the sharp decline in prices of commodities such as crude oil, copper, steel, aluminum etc. Note even as liquidity remains extremely loose globally with central bank zero interest rates, commodities can’t seem to find a buyer. The demand has plummeted from China, which had been the main incremental growth driver for most commodities in the last 10 years. The carnage in commodities has been dramatic and bankruptcies have just started. Distress sales are on with a coal mine in Australia selling for $1 after being bought for $630 million in 2011.
Some commodities are faring worse such as coal because they are also facing pressure from environmentalists. They are facing a double whammy now with major USA coal producers such as Peabody and Alpha Natural resources facing bankruptcy. Even gold miners have not been spared as gold price has fallen off a cliff.
I think the Chinese policy makers have gone off their rockers with more than $400 billion being used to support the falling Chinese stock market. Even a second grader will tell you that the Chinese stocks are highly overvalued with extremely high P/Es. Chinese companies have never been great stocks to own because of their low return ratios, as the companies in China are mostly looking to make more revenues than focus on profits.
The slowing down of China has already started to reverberate around the world. Brazil, Russia, South Africa and other major commodity dependent economies are facing recession like conditions with their currencies plastered against the dollar. Europe and USA will also start to follow the effects, as their companies face slowdown of the Chinese economy. Auto sales have fallen sharply and mining/commodity stocks in USA/Europe are on a major downtrend. I think that consumer companies will also face steep slowdown going into the next year.
Chinese leaders seem confident but their confidence seems misplaced. You cannot support an overvalued stock market infinitely and these leaders seem to be wasting billions in a stupid effort. You cannot run a stock market like a controlled economy.
Headwinds for the world’s second-biggest economy intensified at the start of the third quarter, with manufacturing conditions in China deteriorating to their worst in two years in July and triggering fresh slides in global commodity prices.
Similar business activity surveys for Taiwan, South Korea and Indonesia – all heavily reliant on Chinese demand – reflected varying degrees of weakness that is clouding hopes for a convincing global recovery in the second half of the year.