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Tuesday, 02 September 2014

On a false dawn in China and a nightmare for Dave

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Someone lights a match on a dark night and the analysts declare that dawn is breaking. So it felt today when the official October Manufacturing PMI for China was reported at 50.2. However, you don’t need to be a chartist to see that an up-tick within a downward trend channel is no more than the sighting of a single swallow in late April.

Anthony Peters, SwissInvest Strategist

The generally more reliable non-official HSBC PMI remains marginally in contraction at 49.5.

One journalist flew into hyperbole when writing:

“Shanghai’s benchmark stock index rose the most in three weeks as the reports added to evidence of a pickup in expansion this quarter after industrial production, exports and retail sales accelerated in September. The data may also reduce pressure on outgoing Premier Wen Jiabao to roll out more stimulus measures during a once-a-decade power handover that begins with a Communist Party congress next week.”

This is China. Is the rise in all the component parts of the index cause or effect ahead of the congress?

At the end of all of that we are supposed to get all excited because of a glimpse of a diffusion index for new factory orders in China climbing a tad above 50 just a few weeks before the decennial change in leadership? Please, do me a favour!

European unemployment figures do not bode well and given the importance of this market for China’s long term economic development, it would be fatuous to believe that it can entirely pull itself up by its own bootstraps. The country still depends heavily on central government infrastructure spending which should, in a Keynesian sense, act as the starter motor to growth, not as the engine itself. Those who believes that we would be going into the Party congress with anything other than encouraging economic news must be smoking something which would surely get their children expelled from school, if caught in the possession.

China is still sitting on a sizeable property bubble and on a construction industry which is larger than it can realistically support in the longer term. I would never be so bold as to point to Ireland or Spain and to specifically compare them to China but there remain a significant number of unanswered questions hanging over the real estate sector which have no influence on the PMI. China has persistently suffered from over-investment – a phenomenon we have been observing for a decade and a half and one which went into overdrive to counteract the collapse in Western demand during the two post-2007 recessions. To suddenly take today’s PMI release and to declare that the Chinese economy has “turned the corner”, whatever corner that is supposed to be, leaves me perplexed.

We have had nearly five years of endless stimulus in the US (QE), in the UK (QE), Japan (QE), the Eurozone (the entire known alphabet) and in China (many shapes); at the end of all of that we are supposed to get all excited because of a glimpse of a diffusion index for new factory orders in China climbing a tad above 50 just a few weeks before the decennial change in leadership? Please, do me a favour!

Dave drubbed on Europe

Meanwhile, here in the UK, the struggle with the country’s relationship with the EU continues as David “call me Dave” Cameron suffered a defeat in the Commons over his proposal to insist on a zero percent real increase in the EU budget. Rebel Tories backed by Labour in the latter’s most opportunistic move I have seen since the Blair years, pushed through an amendment calling for a cut in the budget instead.

Not entirely unreasonably, the rebels argue that if every public sector budget in the country has to be cut, what right does Brussels have to demand more cash from British (and subsequently of course all other European) tax-payers and why should it have the unique right to spend more while preaching austerity to its members?

Any increase in the budget will necessitate members, most of them already struggling because they are chronically over-borrowed, to borrow even more. This is not Europe-bashing; it is calling for simple budget management, a discipline which was abolished in Brussels by Jacques Delors and which nobody has yet had the courage to try to reintroduce.

Spending is so much easier than saving, isn’t it?

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