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Calls for a bottom in China are very premature

Recs

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February 11, 2009 – Comments (2) | RELATED TICKERS: FXI

While I do not personally own stock in any Chinese companies, I sold most of the onese that I owned early last year, I have believed that China would recover before many other countries and that its stock market would outperform the U.S. markets in 2009. 

After looking at some of the Chinese manufacturing and bank lending data a few weeks ago, many analysts were saying that the country's economy may have reached a bottom. As Lee Corso would say (man I miss college football), "Not so fast my friend."

Some pretty bad economic news come out of China this morning. Not surprisingly (to me at least) the country's exports fell in January. The shocking part is by how much, a whopping 17.5% versus the same period a year ago. This is the third consecutive monthly drop in Chinese exports and it is a much steeper drop than the 2.8% than was reported in December. It represents the country's largest monthly drop in exports since October 1998.

Here's a telling quote from a Citigroup economist "The numbers are terrible. The environment is awful...The pressures on employment will be huge."

This seems to indicate that the recent press reports that China may have reached a bottom were very premature.

Imports into China experienced an even steeper decline in January, down 43% versus Jan. '08. This is to be expected as more than half of the imports to the country are raw materials that are used to produced goods for exports. To me, this steep drop in imports indicates that Chinese factories are being idled at an alarming rate and that the country's exports will fall even further in the coming months.

China still has not developed enough domestic consumption to weather a major global economic recession like this without experiencing a significant amount of pain. If the Chinese government cannot increase the country's domestic consumption dramatically, doubtful, its recovery will be tied to a recovery in the U.S. and Europe.

Beijing has passed a stimulus package that it hopes will increase domestic consumption by pumping money into the economy through massive infrastructure projects. Many economists believe that this stimulus package, which was passed much more quickly than the one that the government is still working on in the United States, will begin to have some effect as early as April.

For now, things look pretty bad in China and to me, they don't look like they will get better any time soon.

Chinese exports, imports plunge, fanning worries

Deej

2 Comments – Post Your Own

#1) On February 11, 2009 at 7:26 AM, PrestonCheek (32.41) wrote:

Good article.

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#2) On February 11, 2009 at 10:03 PM, TheGarcipian (42.84) wrote:

Agreed. Nice post, Deej. I don't think we'll be able to call a bottom for China until at least June or July, and that's "best case". Interesting, though, how the Chinese government has learned so quickly from the West in their attempts to stay in power and control the masses. Their economy is like a spinning top, with about 10x the inertia we have when you consider the billions of Chinese under their control, all potential rioters, usurpers and coup starters. Those in power must be very very nervous right about now...

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