Tuesday, 1 September 2015

September - warning signs

China electricity outputAs noted last week, and indeed every year, the old adage in the City is to "sell in May and come back on St Ledger's day."

Well that is 9th September this year so we still have a week or so to go. However, today is the end of the summer holidays - the August Bank Holiday is over, school kids are going back in a few days, the commuter trains are full and the City offices filling up again. Even serial holidayer Prime Minister Cameron is back to work.

And what do they come back to, a China manufacturing PMI reading of 49.7, this is now serious stuff. It is one thing to overdo the whole China is dead meme - easy to say, less easy to prove. However, the meme is that China is slowing - whereas the data is now starting to show that China is likely to be in outright recession soon, if it is not already (after all, much of the data is rigged, so we have to look at foreign sources).

Notable is the continuing decline in power output. How much power China is using is often cited as the key metric to watch. After all, all the new factories and cities being built should significantly up power drawn down, but in recent months this has been falling - 2% in August for example. Overall for the past year it is now just 0.4% up after months of recent falls.

A true recession in China will spook Western markets further for sure and this is increasingly looking like it will be the case for Q4 2015 and Q1 2016. September and October are looking set to be bumpy months unless somehow the falls so far are deemed to be deep enough....


Steven_L said...

Tata motors is looking cheap again, but as much as I fancy a Jag XE it's too pricey for me!

CityUnslicker said...

That awful Jag advert kills any thoughts I may have on that front anyway!

AndrewZ said...

The big picture is that China is reaching the limits of catch-up growth, so its annual growth rates will inevitably decline to the same level as the most advanced economies.

When a country starts off far behind the technological frontier it can grow very rapidly by importing technologies and processes that have already been proven to work elsewhere. The state can direct this process because it is copying known successes rather than trying to innovate. This also means that it can happen where the rule of law is unreliable or when contracts are awarded through bribery and cronyism. Party apparatchiks and corrupt crony capitalists can’t innovate but they can copy ideas that were pioneered elsewhere.

But the closer the economy gets to the technological frontier the more its continued growth depends on innovation. The less there is left to copy the more you have to invent yourself. But this requires a much more effective rule of law and functioning markets. Without the rule of law, entrepreneurs cannot protect their innovations. Their ideas are stolen by the powerful and exploited for maximum short-term gain rather than long-term development. If markets are rigged to protect vested interests, disruptive innovations are smothered at birth.

So the question is whether China can make this transition from a catch-up economy to a technological frontier economy or whether it will get stuck in the middle-income trap.

MyBackToSchoolName said...

Sometime I wonder just how fuckin dim people actually are....

China is not the problem, China is the symptom.

The problem is that the Western economies are as good as totally bust.
There are no consumers left to buy the tat that China produces.
The only wealth left in the West is with the pensioners/boomers and they dont spend.
Successive policies have been enacted to keep this constituency happy - rising house prices, propped up stock markets, slowed immigration etc..etc...etc...
The unfortunate effect of all this has been to squeeze the life out of the young, entrepreneurial, tax-paying economy in favour of the asset rich, largely untaxed home counties bed-wetters.

If we want to boost the economy we need to sharply reduce taxes on income (to increase consumption) and sharply increase taxes on assets - the 'dead money' sitting in housing and land. Its just that simple. It always was and always will be.

Incidentally, I read somewhere that the modal age of the UK population is 47.
Yes you read that right 40-fucking-7!!!!!!!!!!

If this doesnt tell you that we need RADICAL tax and social reform or massive (pretty much unregulated) immigration then youre asleep.

Facts are a bitch, huh?

We then need to create a

Anonymous said...

Create a what????

CityUnslicker said...


um..not quite right. China's catch-up growth hollowed out our economy and exported deflation to the West. The financial system of the west was happy with this as it meant creating new t-bills etc to help finance global trade. Now China has eaten up our capacity to spend and itself has run out of steam. It's real cause is the lack of it creating domestic demand becuse all the money is spent on crazy state infrastrcuture projects rather than paid to the workers.

After that bit, your comment is more amenable. Asset taxes are already high enough. You have to be careful with other peoples money you know.

MySecondDayBackName said...

@CU - your point about Chinas spending/structural problems are on the money - they have no domestic demand. However part of the reason for this is that they have no welfare infrastructure - if you get sick or retire in China youre on your own. The evidence for this is in the savings rate - amongst the highest in the world.
You could argue the Chinese are underpaid, alternatively you could argue they are living in a right-wing paradise where all services are private; Indeed I'd put it to you that China is a lot closer to the libertarian wet-dream that some on here espouse.

In fact, I might even agree with you that if the govt stopped molly-coddling boomers and allowed markets to find their own levels, and privatised many services demand would totally crater as people had to provide for their own retirements and not sponge off younger generations. After all, you have to be careful how you legislate with other peoples money.


What you are espousing is a gerontocratic socialism.
I'd wager if you stopped being such a young fogey you'd see the Establishment is legislating for itself and damn the consequences! If I'm not msitaken, youre on the wrong side of that modal age, arent you? Then you know how thats gonna end for you and your kids, dont you?

Get your head out of the Daily Express for a few minutes and stop parroting what your Daddy tells you. Honestly, youre like a sock puppet for the boomers sometimes.

We must either have radical change or mass immigration, thats the beginning, the middle and the end of it.

Take yer pick.