Everybody seems to be worried about contagion in the Greek crisis. It sometimes seems that European Central Bank president Marie Draghi is spending half his time these days explaining how the reforms initiated after the first wave of the Euro debt crisis succeeded in “ring fencing” Greece. The crisis there—even the collapse of the Greek banking system—won’t spread to Portugal, Spain or Italy or other EuroZone members, the official line goes.
But on the evidence of the last few days, it’s contagion from China’s bear markets that financial markets and investors ought to be worried about. Yesterday, for example, the stock market plunge in Shanghai and Shenzhen seemed to be creating spreading ripples in other markets and economies.
For example, after days when Hong Kong seemed surprisingly resistant to the tumble in mainland markets that had seen both Shanghai (down 32%) and Shenzhen (down 41%) fall into deep bear markets, on Tuesday the island’s Hang Seng index edged into bear territory itself falling enough to post a 20% decline from the May 26 peak. (On early Wednesday morning action, Shanghai fell another 4.2% to 3571. Analysts at Rabobank Group said they see Shanghai falling to 2500.
U.S. traded ADRs of Chinese companies, which had also resisted the early stages of the mainland decline joined in the drop on Tuesday with, for example, JD.com (JD), an ecommerce company, falling 4% after being down as much as 12% during the day. Alibaba (BABA) dropped only 0.8% but volume was twice its three-month daily average.
And there’s the effect on commodity currencies (with the Canadian and Australian dollars taking severe punishment) and on commodities themselves. Yesterday, Monday July 6, the European benchmark Brent crude fell below $60 with a 6.3% drop and with an 18% decline since May moved close to a bear market. U.S. benchmark West Texas Intermediate, which didn’t settle contracts on Friday because of the Fourth of July holiday, fell 7.7% on Monday. (Add in fears that European economies will slow cutting into demand for oil and that a deal with Iran over its nuclear program is near, which would lead to increased Iranian oil exports.)
And finally, there’s the feedback effect on China’s own domestic economy. In a poll conducted from mid-May to early July of 5,000 Chinese households with investments in the stock market only 40% still showed gains. The week before the figure had been 74%. (The speed and extent of the damage is a testament to how many new investors had been sucked into the late stages of the huge rally in mainland stocks. They put their money in just in time to get clawed by the bear. China has 90 million brokerage accounts of which 80% are retail accounts for individual investors.) The 30% and 40% losses in Shanghai and Shenzhen represent a huge hit to household incomes across China and especially for China’s middle class. That’s bad news for an economy that was already slowing.
The Chinese government’s reaction to this may be storing up more problems. Very lax standards for when a company can ask to have trading halted in its shares have led to a huge surge in trading halts. Among the ChiNext 100, 50% of stocks were halted as of the close yesterday. The other 50% fell the maximum 10% for the day. Shares of 1,300 companies are now halted for trading in Shanghai and Shenzhen, locking up about 40% of market capitalization of the exchanges. That lockup, of course, increases pressure on the stocks that are still available for trading.
I wouldn’t be surprised to see a rebound tomorrow after the recent pounding and on promises of increased liquidity from the People’s Bank and government verbiage urging support for the markets.
But I don’t think the carnage is over. The government is scheduled to report second quarter GDP on July 15. Any number less than the 7% official target for economic growth will just pour more fuel on already burning market fears. And at the moment, I just don’t see a reason for Chinese investors to buy Chinese stocks until they seem like a roaring bargain.
The Shanghai market began its extraordinary rally from near 2000 back in May 2014. In this bear the Shanghai Composite sliced through the 50-day moving average at 4544 like a hot knife through butter. The 200-day moving average at 3414 isn’t far below the Tuesday close at 3727 and aside from minor support at 3250, there’s not much support below until 2500 or 2250.
Wall Street hasn’t been impressed by Apple’s new product event today. Shares closed down $11.53 or 2.28% today. Wall Street heard pretty much what it expected to hear and sold down the shares because Apple didn’t announce any big new feature that hadn’t been priced into the recent rally in the shares.
But I heard what I wanted to hear from Apple CEO Tim Cook.
First, the new iPhones, the 5S and the 5C, will launch in China on September 20, the same day as the phone goes on sale in the United States and most European countries. (This is the first time China gets a new iPhone at the same time as the United States.) Japan’s NTT/Docomo will sell the new 5C phone as well.
Second, the new 5C, the cheaper of the two new models, will be cheap enough for China Mobile (CHL) to sell. The prices for the phone with its colorful plastic cover, better camera, and improved audio was announced today as $99 for the 16 gigabyte model and $199 for 32 gigabytes (on a two-year contract.) I think that’s cheap enough to give Apple access to the 800 million customers of China Mobile and NTT/Docomo. That access, given Apple’s slipping market share in China, is critical to Apple.
Am I totally happy with what I heard today? Read more
The week has certainly started out very well for Japan. And indeed for Asian financial markets.
First, Tokyo was announced as the site of the 2020 Olympic summer games. Shares of property developers went bonkers overnight on the news. Sumitomo Realty and Development (8830.JP), which has the biggest land bank in Tokyo with the potential for 30,000 new apartments, was up 4.7% overnight on the Tokyo market. Mitsui Fudosan (8801.JP in Tokyo) and Mitsubishi Estate (8802.JP in Tokyo and MITEY in New York), with land capacity to build 15,000 apartments, were up 6.4% and 4.7%, respectively, overnight in Tokyo.
Second, a big increase in capital spending pushed GDP growth in the June quarter up to a revised annual 3.8%. That was an increase from the first estimate of 2.6%. Of course, faster GDP growth is good news for Prime Minister Shinzo Abe’s effort to put Japan back on the path to sustainable growth, but the upward revision in capital spending is particularly significant since Japanese companies have been reluctant to increase capital spending even as consumer spending picked up. This data suggests that may have changed.
Add the news from Japan to news from China and Asian markets began the week with a big dose of optimism. Chinese exports increased by 7.2% in August from August 2012. That was above the 5.5% projection by analysts surveyed by Bloomberg. Consumer inflation rose by just 2.6%, giving the government no need to tighten.
It’s clearly going to take more than a credit rating downgrade from Fitch Ratings to get the attention of China’s stock markets. Yesterday Fitch cut China’s long-term local currency credit rating from AA- to A+. Because of the uncontrolled growth of China’s shadow banking sector, Fitch said, total credit may have reached 198% of GDP by the end of 2012, up from 125% in 2008.
Despite the downgrade, the iShares FTSE China 25 ETF (FXI) were up 0.5% today.
“Ultimately, we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet,” Fitch told the Financial Times.
In other words China’s financial system is going to need a government bailout like those in Ireland, Greece, and Cyprus. Read more
Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.
Well, never mind.
Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.
Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.
Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.
China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%
Investors can expect a torrent of economic data from China over the next week. Read more