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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: UncleBigs who wrote (66219)	7/16/2006 10:50:35 PM
From: russwinter	Respond to of 110194

liquidity is going into productive capacity to sell into the u.s.> Disagree, this is faux economica, from Andy Xie: Another popular consensus view is that China’s tightening is not for real and, if it were, the Chinese government would back down at the first sign of economic weakness for employment consideration. The main justification for this view is from what happened in 2004: when the spring tightening caused economic weakness in the summer, the government backed off in the autumn. First, the purpose of tightening is to limit and decrease inefficient investments that would cause another wave of bad debts. A high GDP growth rate does not necessarily require tightening. The problem stems from the fact that growth comes from a disproportionate increase of inefficient investment. Such growth can only last as long as liquidity is plentiful and interest rates are low. Today’s growth could be tomorrow’s bad debts. The primary purpose of tightening is to prevent bad debts. Second, shifting to consumption-led from investment-led growth could create more jobs. In addition to cyclical tightening, China is undertaking structural reforms to shift demand from investment to consumption. They include reforming healthcare, education and pensions. Consumption is likely more labor-intensive than fixed investment. Macro tightening does not necessarily mean that employment would deteriorate. Lastly, 2006 is not 2004. In 2004, tightening was justified on preventing wasteful investment. Now, overcapacity, white elephant projects and rampant land speculation are visible everywhere, not just in theory. If the government does not deal with the excesses, bad debts could become too big for the government to deal with. Most investors want evidence, not just rhetoric from the government, to believe that tightening is real. In 2004, declining steel prices were the leading indicator for demand. Steel prices are on the decline again. However, investors do not believe that it is a good leading indicator now. Loan growth is another leading indicator. It has not slowed yet. As investors have such a high level of skepticism, the market will recognize that China is serious about tightening when coincidence indicators turn down. Energy consumption is probably the best coincidence indicator. Monthly electricity consumption could be the best guideline. morganstanley.com