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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (9724)	7/23/2004 11:58:24 AM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 116555

ABN AMRO is very bullish on the USD as is BAnk America as they maintain that the recovery in the US is for real and when all is done interest rates may cross 3.5%. Furhter they believe the productivity is for real and so is employment - aside AG is a genius (on CNBC Europe)

To: yard_man who wrote (9724)	7/23/2004 11:58:52 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Global: Taming the Dragon Stephen Roach (New York) The China slowdown has barely begun. Yet the latest spin is that a soft landing may now be close at hand. Nothing could be further from the truth. Chinese economic activity is still expanding at a torrid and unsustainable pace. The nation’s authorities cannot afford to ease off on their campaign of policy restraint. If they do, an overheated Chinese economy runs the serious risk of a destabilizing hard landing. A slower-than-expected second quarter Chinese GDP growth rate is the source of this confusion. Not only did the 9.6% Y-o-Y increase represent a fractional (albeit statistically insignificant) moderation from the 9.8% pace of the first quarter, but it came in well below market expectations, which were centered in the 10.5% to 11.0% range. This prompted a sigh of relief from Zheng Jingping, official spokesperson of China’s State Statistical Bureau. In his words, “The uncertainties and unhealthy factors existing in economic performance have been put under initial control.” Putting it mildly, that’s wishful thinking. First of all, a 9.6% increase still represents an extremely rapid growth rate by any standards -- fully 0.5-percentage point above China’s 20-year trend and a moderate acceleration from last year’s officially stated gain of 9.1%. Second, the latest GDP estimate probably understates actual growth by a wide margin. This is hardly a shocker. Suffice it to say China’s growth problems have never been accurately reflected in its GDP statistics. Not only is this metric of dubious quality, but it obscures the impact of industrial activity -- the sector where the overheating drama is playing out most vividly. Recent trends in the industrial sector do, in fact, tell a very different story than the GDP statistics. Industrial output growth held at 16.2% in June -- down only marginally from peak comparisons of 19.4% in the first two months of this year and well above the 10% trend-line increases of the past 10 years. At the same time, the growth in energy generation barely moderated from 16.6% in May to 14.3% in June -- although it may well be that this “slowing” was more an outgrowth of the widespread power shortages of an overheated economy. In my view, the industrial output comparison needs to move into the 8% to 10% zone -- and then stay there for at least six months -- before a legitimate soft landing can be declared. From that point of view, China’s slowdown is, at best, only about 25% complete. Other data points offer mixed signals in gauging progress on the China slowdown front. The most encouraging trend shows up in fixed investment -- a stunning deceleration from peak growth rates of 53% in January and February of this year to 18.5% in May. This has long been the most bubble-prone sector of the Chinese economy, and the administrative actions that the government has taken to bring investment under control are certainly working. Even so, bank lending growth -- the principal means by which the investment bubble has been funded -- has moderated ever so slightly; year-over-year credit comparisons went from 20% in March to 16.3% in June and are still well above the 10-12% trend line . Meanwhile, Chinese inflationary pressures seem to be easing off a bit. While the CPI moved up to the 5% threshold, most of the acceleration remained concentrated in agricultural products. Significantly, signs of pricing moderation are now evident at the wholesale level: The co-called corporate goods price index published by the People’s Bank of China declined for a second month in a row, pushing the Y-o-Y comparison fractionally lower from 9.4% in May to 9.3% in June. While the energy component rose for a second month in a row, pricing elsewhere at the wholesale level was decidedly lower. At the same time, there has been little let-up in China’s impact on economic activity elsewhere in the world -- yet another corroboration of the limited slowdown in the Chinese economy. In large part, that’s because Chinese import growth -- a good proxy for this nation’s impact on the rest of the world -- continues to power ahead. China’s purchases of foreign-made products accelerated sharply in June, surging at a 50.5% Y-o-Y rate -- well above the 40% gains recorded in 2003. This has had collateral impacts on other key gauges of global industrial activity. That’s true of industrial commodity prices, especially metals, where China accounted for between 25% and 30% of the total growth in global consumption in 2003. The Journal of Commerce metals index has flattened out since mid-July -- actually down 1% -- but is still holding at levels 50% above those prevailing in the first half of 2003. Similarly, shipping activity remains relatively firm - -yet another area where the China boom has also had a major impact. While the Baltic Dry Index plunged from February through June 2004, it has subsequently rebounded sharply in July; looking through these gyrations, the latest reading of this gauge still stands at more than twice the levels prevailing in early 2003. I have long argued that the vigor of China’s production has become the major driver on the supply side of the global economy in the past couple of years. At this point in time, the power of that dynamic remains very much intact. When Chinese industrial activity turns more decisively to the downside, as I continue to believe it will, the impacts on the global economy could be quite significant. The Chinese leadership knows full well what’s at stake in all this. I give them tremendous credit for speaking openly and frankly about the perils of overheating. In many respects, China’s senior officials have actually led this debate (see my March 24 dispatch from Beijing, “China -- Determined to Slow “). For that reason, alone, it is ludicrous to expect China’s macro managers to declare victory prematurely. In that regard, I take considerable comfort from the recent remarks of China’s Premier Wen Jiabao in front of the State Council when he warned of the “difficulty and complexity of macroeconomic control” and cautioned against a “blindly optimistic” assessment of the prospects for a soft landing. This is precisely the tough jawboning that China needs as it grapples with the inevitable pushback from internal pro-growth constituencies. If, on the other hand, China were to back off on its policy-induced slowdown campaign, the financial and investment bubble would most assuredly end in tears. This is a critical moment on the glide path of descent for a still overheated Chinese economy. I remain convinced that China will not waver. Just as it successfully managed three serious macro adjustments in the past decade -- the boom-bust of 1993-94, the Asian crisis of 1997-98, and the synchronous global recession of 2001 -- I am willing to give the Chinese leadership the benefit of the doubt this time as well. Yet there is still a significant risk that world financial markets will price China for a “hard landing.” A year-to-date 19% decline in the “H shares” of Chinese enterprises traded in Hong Kong from their highs in early January 2004 is but a hint of that possibility. But to the extent that the world once again expects the worst from China -- an all-too familiar bias -- I would be willing to take the other side of that bet. The conclusion that emerges from all this is that a white-hot Chinese economy has barely begun the transition to a more sustainable growth path. The corollary of this conclusion is that the world has yet to feel any serious impacts of a China slowdown. Those developments remain very much in the cards, in my view. But we shouldn’t blow this transition out of proportion. China’s extraordinary success over the past 25 years is testament to an unwavering commitment to reform and to an increasingly adept macro management team. China is now facing yet another fork in its long road to prosperity. There is too much at stake for the Dragon to take the wrong turn. morganstanley.com