Speculation that financial authorities will use next week’s Golden Week holiday, when stock markets in China are closed, to announce a new stimulus plan for the country’s financial markets does, in the short term explain the rally today and for this week. Although the Shanghai Composite Index lost 6.3% for the third quarter, the index rose 1.5% today and finished up 2.9% for the week. The China Securities Regulatory Commission, according to the China Securities Journal, is considering lowering taxes on investing in securities. That would follow on other measures the commission has take this year to support stock prices: a 25% reduction in stock-trading fees and expedited approval for foreign investors.
In the longer run the market’s climb also reflects the gradual easing of some of the tensions surrounding the once-in-ten-years transfer of party and government leadership that is taking place this fall. Last week saw the re-emergence of Xi Jinping, tagged as likely new leader, back into public view after a two-week absence. Today the Politburo announced that Bo Xilai, the Communist Party chief in Chongqing and who had been expected to challenge for a seat on the Standing Committee of the Politburo, had been expelled from the party. Bo has been found guilty of accepting bribes, improper relations with women, and abuses of power in attempting to cover up the murder of British businessman Neil Heywood by Bo’s wife Bogu Kailai. She received a suspended death sentence on August 20.
The expulsion of Bo from the party apparently cleared the way for the official transfer of power to China’s new leaders. Today, at the same time that he announced Bo’s expulsion, outgoing President Hu Jintao finally gave a firm November 8 date for the party congress that will see the new leadership take power. The long delay in setting a firm date had raised worries in China that what was hoped to be a smooth transfer of power had dissolved into infighting at the highest levels of the party.
Given the growing consensus that China’s relatively slow response to the slowdown in the country’s economic growth was a result of paralysis at the top of the government, resolving Bo’s status and setting a date for the transfer of power are reassuring events for investors in China’s markets.
It’s a tentative sign of relief but a sign of relief nonetheless.
Xi Jinping, the man tipped to take over the top post in China in the country’s leadership transition in October, has returned to public view. Until China Central Television showed footage of Xi visiting an exhibit at the China Agricultural University on Friday, Xi hadn’t been seen in public for two weeks. That had lead to rumors that Xi, 59, had suffered a heart attack or stroke or that he might be suffering from cancer.
By this time of year, the government has usually released a date for once-in-a-decade hand over of power, but not this year. Read more
Building infrastructure at breath-taking speed. Creating the world’s factory. Stringing together quarter after quarter of 7%, 8%, 9%, and even 10% growth.
These are some of the strengths of China’s economic system. And sometimes, as we watch the global economy struggle with the fall out from a financial crisis that started in the United States or the economies of Europe sink again into recession, it can seem as if China’s system has only strengths.
But no economic system is good at everything. And right now China is delivering a very painful lesson in exactly what its economic system is bad at.
China, and this shouldn’t come as a surprise given the history of other centrally controlled economies, is really, really bad at diminishing supply when demand falls. (Or at what economist Joseph Schumpeter called “creative destruction,” the process in which an economy destroys the old to give the new room to grow.) The current supply-side disaster is so bad, in fact, that the Chinese government has been forced to obviously falsify economic data to hide the extent of the problem. (And the extent of the problem is one reason I think that the People’s Bank of China will move relatively soon to cut interest rates and step up its efforts to stimulate the Chinese economy.)
The current obvious fakery is degrees of magnitude different from the usual distortion in Chinese economic data. So, for example, the Public Safety Bureau has simply stopped publishing data on new car registrations because the numbers show such a big drop in new car sales that they can’t simply be fudged. Data on the steel industry has been revised and revised again because the government can’t come up with a methodology that disguises the drop in steel sales and yet isn’t completely unbelievable. And, of course, the government hasn’t published data on the number of vacant apartments in China—a reflection of the country’s real estate boom and bust—since 2008.
Take a look at the auto industry as an example of China’s supply-side problem. Read more
Now it’s China leading the bad news is good news parade.
The bad news from China today has been enough to lift Chinese stocks—Hong Kong’s Hang Seng index closed up 1.1% on the news—but it hasn’t been bad/good enough to do the same for Europe. The French CAC 40 was up 0.54% today but the German DAX Index nudged into negative territory with a 0.02% drop. The Spanish IBEX 35 fell 056% and the Italian FTSE Milan Index was down 0.08%.
The bad news from China is that the country’s economy continued to slow in July. Read more
Coach (COH) announced June quarter (the fiscal fourth quarter for the company) results today. Earnings of 86 cents a share were a penny above expectations and grew by 27% from the fiscal fourth quarter of 2011. Revenues climbed 12% year to year to $1.16 billion, short of the Wall Street consensus of $1.2 billion.
And the stock closed down 19%, falling to $49.33 from $60.58.
Unless this market has gone completely insane—a possibility that I always consider these days—there was something besides those headline numbers that investors really, really didn’t like.
And the stinking fish in Coach’s results? North American same store sales. Same store sales increased by just 1.7% from the fiscal fourth quarter of 2011. That was a huge miss—the company had guided Wall Street to expect 7% same store sales growth in the quarter. And Wall Street, skeptical for once, had estimated 6%. Last year in the fiscal fourth quarter North American same store sales grew by 10%.
Which, of course, has led to news stories and analyst snap reports asking if Coach has lost its cachet, or, even worse, if this portends the end of the company’s strategy of growing by selling more in the expanding luxury markets of Asia.
I don’t see any evidence that the problem this quarter was with that part of the company’s strategy. Read more