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Roubini, Edwards Predict Slump in S&P 500 on China



January 23, 2009 – Comments (4)

Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.

Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.

Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.

“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”

Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.

Emperor’s Clothes

“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”

The consensus among eight strategists surveyed by Bloomberg this week is for the S&P 500 to end the year at 1,066. The index fell 1.5 percent to 815.41 at 10:59 a.m. New York time.

Data at China’s National Bureau of Statistics is gathered in a “scientific and realistic method,” Ma Jiantang, the agency’s director, said at a briefing in Beijing yesterday in response to a question about the accuracy of government figures. Zhang Yingxiang, a spokeswoman for the statistics bureau, declined further comment when contacted by phone today.

China Stocks Fall

China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in the previous year, the fastest in the world. China’s CSI 300 Index fell 0.6 percent at the close in Shanghai, the biggest drop in eight days. Commodity producers led declines after Aluminum Corp. of China Ltd. and Yunnan Copper Industry Co. reported lower profit.

Economists at JPMorgan Chase & Co., Citigroup Inc., the World Bank and the International Monetary Fund all predict China will grow at least 7 percent this year, while investors Jim Rogers and Mark Mobius are buying Chinese shares on expectations the government will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 percent in 2007 from 17.2 percent in the previous year.

China, which has $1.9 trillion set aside in the world’s largest reserves, plans to spend at least 4 trillion yuan on bridges, housing and tax breaks to boost the economy. Chinese President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties.”

China Recession?

Rogers, who predicted the start of the commodities rally in 1999, recommends investors buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy.

“China could be in recession, I have no idea and it’s not relevant to me because I’m using my judgment as to what will happen six months from now,” said Rogers, who authored books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.” “There is a lot happening in China and there will be those that will hold up well.”

China’s economy will grow 6.3 percent this quarter from a year earlier, according to the median estimate of nine economists surveyed by Bloomberg after yesterday’s GDP report.

China’s electricity output declined 7.8 percent in November from a year earlier and fell 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. Manufacturing shrank for a third month as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

‘Manipulating’ the Yuan

Edwards said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

The yuan appreciated about 19 percent against the dollar between 2005 and July 2008 as China redressed what U.S. officials saw as an unfair price advantage for exports. The yuan has since stabilized. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday that China is “manipulating” its currency.

The yuan was little changed at 6.8380 per dollar at the close in Shanghai, after sliding the most in a month earlier in the day, as China’s banks refuted the new U.S. administration’s accusation. The yuan fell as much as 0.28 percent to 6.8560, the lowest since Dec. 30.

“If you amble your way through the analysis, you realize if push comes to shove they will devalue” the yuan, Edwards said. That may spur lawmakers in the U.S. and China to increase trade barriers, he said.

4 Comments – Post Your Own

#1) On January 23, 2009 at 4:55 PM, jgseattle (26.31) wrote:

I hope the RMB s stable.  I just returned from some time in china snd have 400,000RMB in Bank of China.

I was afraid to bring it back and put it in dollars because I think the dollar is going down. 

What to do?

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#2) On January 23, 2009 at 5:06 PM, DemonDoug (30.95) wrote:

jg, you have to diversify.  put at least some of that into silver/gold and some into dollars or euros or yen.  i think the RMB would be okay but china has a history of devaluing their money.

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#3) On January 23, 2009 at 5:07 PM, DemonDoug (30.95) wrote:

btw i'm with mish. no way china will do well with the rest of the world falling to pieces.

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#4) On January 23, 2009 at 5:50 PM, tumachar (< 20) wrote:

Right on. Did you know that Yaun exchange used to be 2 to 1 dollars? They devalued it from two down to 8 in 80/90s.  Only then they became the export superpower.

Here is the information on exhange rates:

Why will anyone give away his own advantage? They would devalue. The problem is that now US govt wants to devalue too, to save jobs in US.

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