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Kiron Sarkar
January 11, 2012
Hi there,
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.
Best
Kiron
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