Yesterdays equity rally in China was partly attributable to buying by a number of State owned organisations, comments that regulators will reduce the number of IPO’s and that there will be further development in Western China, in addition to hopes for monetary easing (source Jefferies). Furthermore, reports circulating today suggest that the Chinese Securities Regulatory Commission will allow foreign investors to participate further in its capital markets and seek a greater role for long term foreign institutional investors. Basically the same “cunning plan” as proposed y he Indian authorities recently. The moral of the story is that when in trouble, ask for support from foreign investors. To me, a sure sign of concern.

A friend of mine, who is very plugged into China (he met with senior Chinese officials yesterday), advises me that China will reduce RRR’s materially – an RRR cut is expected before Chinese New Year holiday (23rd – 27th Jan), possibly after tomorrow’s CPI data. Furthermore, the officials believe that residential property prices will decline a further 10% – 20% and that the Central authorities will support the provinces and Chinese banks. They suggest that GDP will rise significantly in the 2nd half of the year, though they acknowledged that the 1st half will be weak. My problem is that I have never seen a “controlled” decline in residential home prices, particularly in an environment of significant excess supply (supply exceeds demand by over 1.5 times according to UBS), no real secondary market and numerous owners of multiple properties.

Chinese newspapers, quoting an executive from the Agricultural Bank of China, report that the Chinese authorities intend to extend the maturities of loans (to the provinces) which are due to mature this year (not clear whether its the whole lot or a part). Some 25%
(US$396bn) of outstanding loans are due to mature this year. Well great, but the problem is that the provinces cannot repay these loans, which should be written off, in reality. Cunning plan, but me thinks that these kind of smoke and mirrors schemes are way past their sell by date. The bottom line is that the level of bad debts within the Chinese banking system is enormous and that Chinese banks are BUST, but hey, so are European banks;

Fitch repeated that they did not expect France to be downgraded this year. However S&P, in particular, may well have a different view;

Credit Suisse reports that Greece may consider passing legislative changes (essentially to include Collective Action Clauses in respect of existing Sovereign debt) to avoid a “credit event” which will trigger CDS’s. Greece is trying to become Chinese with the numerous dodgy schemes they are considering. However, Hedge Funds are said to be betting that Greece will be forced to default (source Reuters) – remains a serious possibility in my view. Without an agreement, the Troika will not pay out on the 2nd bail out package. A E14.5bn Greek Sovereign bond matures on 20th March, though the PSI negotiations will need to be settled weeks ahead of that. A high stakes game of chicken is being played out;

Spanish industrial production declined by the most in 2 years in November. Output was down -7.0% YoY, the most since October 2009.
The Spanish have given up on establishing a bad bank – lack of financial resources do you think.
The Spanish autonomous regions posted a deficit of over double the -1.3% forecast – it came in at -2.7%. You will recall that the outgoing Spanish administration reported that the deficit remained in line with forecast a few weeks before they were ousted !!!!
OK, so the response is to increase austerity measures and raise taxes to raise a further E15bn, with a strong hint of more to come. I will just remind you that Spanish unemployment is approx 22%, with youth unemployment nearing 50% – no that’s not a typo it’s nearly 50%.
If anyone believes that this is sustainable without serious social problems in spring/summer, well……

German 4th Q GDP declined by roughly -0.25% Q on Q, though the statistics office stated that it revise upwards its preliminary 4th Q assessment. However, German 2011 GDP came in at +3.0% (as expected), though down from +3.7% recorded in 2010 – domestic demand was a significant contributor, though exports and investment spending held up well. The budget deficit was just 1.0% of GDP. All great, but the situation changes dramatically in 2012, in my humble view. GDP will be barely positive (indeed, may well be negative). Siemens, a pretty good indicator of the German economy, was decidedly cautious just a few days ago. Industrial capacity has not been adjusted. Yes Germany have unemployment schemes in place to alleviate a significant rise in unemployment, but exports, in particular and domestic demand is likely to weaken significantly. German Government forecasts of +1.0% GDP growth are wildly optimistic – private sector forecasts suggests closer to +0.5%, with the Bundesbank at +0.6%;

Mitt Romney won the New Hampshire primary yesterday – cant see him being displaced as the Republican candidate. The next primary in S Carolina on 21st Jan should be the decider, if he wins – likely;

The FED has sent a paper to senior members of Congress suggesting bulk sales of foreclosed US residential properties (not just Freddie and Fannie, but private banks as as well – the FED will need to relax
rules) and loosening restrictions on the refinancing of loans with negative equity. Analysts suggest that the FED will buy some US$200bn of mortgage bonds this year, with BarCap suggesting tha the FED could well increase that amount to between US$500bn – to US$750bn.
(Bloomberg reports that almost 50% of 30 year loans carry rates of 5.5%+, as opposed to current rates of below 4.0%). All sensible stuff
- a US housing recovery remains the key for the US – but the impending Presidential elections are a major impediment;

Oil has been drifting higher on continuing tensions re Iran. However, the weaker than expected 4th Q German GDP has stemmed the rise – the Euro was also adversely impacted by the news – it traded below US$1.27 briefly.

Cant cope with the internet any more.

Category: Economy, Think Tank

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