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China Data, Exports and Investment

January 22, 2015

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Regarding energy prices, the Chinese trade data suggest that lower prices are already having a profound effect on demand. Though imports fell 2.4 percent (better than an expected -6 percent), the decline was entirely due to lower import prices. By volume, imports of iron ore were up 18 percent from a year ago, while imports of both oil and copper were up 13 percent. No one should be surprised that the Chinese would ramp up inventories as prices fall. Many have asked me if they have enough storage. At this price they will fill little plastic containers to stockpile cheap crude. More importantly, China imports roughly 10 million barrels of oil a day. At a 13 percent growth rate, their demand would rise 1.3 million barrels a day, which is more than the OPEC gap that everyone is wondering who will close by reducing supply. Hmm….

China’s exports rose 9.7 percent year on year in December, primarily as processing trade rebounded. Imports for further processing also increased 9 percent confirming that demand for cheaper goods is solid. Meanwhile, soft imports of other goods are being interpreted as a soft domestic economy. That is true, but it is primarily a result of weak imports of foreign capital goods to expand capacity. Foreign investment in China has gone flat in recent quarters. However, retail demand—which accounts for just one third of Chinese GDP—continues to grow at a double digit pace. We expect this to continue as the Party is trying to redistribute income to the lower rungs of the income ladder. We argue that the Chinese have ended their Robber Barons period, and are now into trust busting (breaking up big SOEs), regulation (wholesome food laws and pollution control) and effectively unionization (by shifting profits to compensation). How can they do this and preserve profit? They can’t, but when your wealth and income are as highly concentrated as they are in China, the top of the income ladder can be squeezed pretty hard and for a long time—and especially if it is ordered by the Party.

Bottom line, we see inefficient investment in China declining. We see now unprofitable expansion of oil production ending. We see excess savings in Japan, Russia and northern Europe being devalued away. Meanwhile, small and medium sized businesses in America—the backbone of job growth in the world’s largest consumer economy—are seeing better cash flow, if not better access to credit. Even without more income, America’s consumers have more buying power. This is the traditional recipe for growth—and we expect it to generate a solid global recovery in 2015. However, the rest of the world is still burdened with the over-indebtedness that has hampered the US until recently, so we do not expect a sharp upturn like in past post-war cycles. Slow, but steady, just as the US expansion was from 2009 through 2013.

 

The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

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