The Myth Of Decoupling

[Uncle Festivus]

Decoupling may be a myth, but according to this article the effects of the global economy are quite the reverse; basically the author argues that the US economy is unlikely to go down the gurgler (a) because it isn't in the interests of the Arabs or the Chinese for the US dollar to collapse (essentially because the Arab and Chinese economies are tied to the dollar), and (b) because they will actively pump dollars back into the US banks to ensure the banks don't collapse, ah la Citibank.

http://www.investorsinsight.com/otb_va.aspx?EditionID=628

Interesting contrarian pov.

That's the trillion dollar question then - will the petrodollars and dragondollars (all in deflating US dollars) decide to prop up the USS Titanic or cut their collective losses? For several years the return form investing in the US has been flat to negative so combined with the final straw scenario unfolding now it's crunch time for the 2 US dollar hoarders - give back all those US dollar foreign currency reserves to keep the jalopy afloat or break free into a new world order removed from the us dollar.

 

[dhukka]

For the decouplingistas

World trade decelerates almost to standstill

Global trade slowed almost to a standstill over the new year, threatening to shrink for the first time since the US economy went into recession in 2001.

An indicator produced by the Bureau for Economic Policy Analysis, a Dutch research institute, showed that in the three months to January world trade in goods rose at annualised rate of 0.2 per cent over the previous three months.

The equivalent growth rate in the three months to October was 6.9 per cent.

"This is a substantial deceleration," the institute said. "World trade volume growth is on a downward trend."

Trade figures tend to be volatile but even on a longer-term smoothed basis, comparing the three-month average with the same period a year earlier, the growth in goods trade is at its lowest since 2003.

The data appear to provide further evidence that global economic activity is slowing, as growth in emerging markets has failed to compensate for weaker demand in the US.

The last time annual growth in trade went negative was in 2001, when the shallow US recession that followed the bursting of the technology bubble and the shock of the September 11 attacks caused global commerce to contract.

Trade growth is consistently higher on average than overall economic growth but it also tends to be more variable, dropping sharply during recessions.

Julian Jessop, chief international economist at the consultancy Capital Economics, said there were one-off factors that might explain the weakness in world trade in recent months, including disruptions to shipping and damage to Chinese trade caused by the winter storms.

However, he added: "Global trade growth tends to do twice whatever global GDP [gross domestic product] is doing, so with the world economy slowing it doesn't surprise me at all that there is a slowdown in trade."

The indicator - which is monitored by economists at the International Monetary Fund and other official bodies - is compiled from official data that are published by both industrialised and emerging market countries.

It covers more than 97 per cent of trade in goods, which itself constitutes more than 80 per cent of total world trade.

The institute said that imports into both the US and European Union fell in the three months to January.

Year-on-year trade growth hit a record high of 9.7 per cent in November 2006, at a time when the US and Chinese economies were both growing briskly.

 

[dhukka]

And the re-coupling continues:

IMF Slashes Economic Growth Forecast for U.K., Telegraph Says

The International Monetary Fund's World Economic Outlook will slash its growth forecasts today for the U.K. and will predict the weakest two years of growth for Britain since the last recession in the early 1990s, the Daily Telegraph reported.

The IMF expects U.K. economic growth of 1.6 percent for this year and 2009, the Telegraph said. The U.K. treasury forecasts growth of 1.75 percent to 2.25 percent this year, the newspaper said.

The IMF has cut its forecast by 0.7 percent since the last report six months ago, the newspaper said. The IMF said risks to financial markets have dramatically increased over the past six months and radical action is needed by policy makers, the Telegraph reported.

 

[dhukka]

Does anyone still actually believe in decoupling? Anyway, it seems the post Olympics recovery in China is a little tepid:

China's post-Olympics recovery hopes fading fast

Hopes of a rapid recovery in the health of the Chinese economy after the Olympic Games are fading fast on weakening commodity as well as property prices, Citigroup said in a report released Wednesday.

"All signs are pointing towards an across-the-board slowdown in the Chinese economy. The particular worrying signs are rapid cuts in steel prices, surging steel exports, deceleration in electricity consumption growth and weakening coal prices," Citigroup Lan Xue wrote in the report.

Lan said an unexpected reduction in steel prices for November announced last week by Baoshan Iron & Steel Co., China's largest steelmaker, suggested steel companies weren't expecting any major rebound in economic activities.
Baoshan last week announced a reduction of 800 yuan ($117) a ton, or more than 10% over October, in the prices of hot-rolled and cold-rolled steel coils for November, according to reports.

"Another sign of weakening demand is the recent surge in steel exporters which has been very evident" since the second quarter, Lan added.

China's economic indicators were expected to show an improvement after the Olympics, after industrial production weakened in the run up to the Games last month, partly because the government shut down several polluting factories in and around Beijing.

Official data released earlier this month showed that the growth in China's industrial output slowed to 12.8% in August from the same month a year ago, the weakest pace in six years. In July, China's industrial production expanded 14.7%.

Lan said "a significant deterioration in the property sector" was believed to be one of the key reasons behind the weakness in domestic demand.

"We have seen quite widely spread month-on-month decline in sales volumes, which could hinder" growth in property development in future, said Lan. "Along with its multiplier impact on the economy, it is very difficult to replace the damage from a slowing property sector."

Other analysts echoed the views on the weakening outlook for the Chinese property market.

DBS Vickers analyst Jasmine Lai wrote that sharp price cuts by property developers and sluggish sales have "increased the risks for a hard-landing in the China property market."

"About one-third of corporate loans are pledged by real estate. Any plunge in property prices may create uncertainties for the banking system. Hence, the timing and aggressiveness of the introduction of government measures to revive the property market is very important," she added.

 

[dhukka]

And the great decoupling continues.....not. But not to worry, the China stimulus package is coming, that'll fix everything.

China's Oct. industrial growth falls to 2001-lows

China's industrial production growth decelerated more than expected in October, raising concerns the nation's export-driven boom could be running out of steam, and highlighting the need for Beijing to step up measures to bolster domestic consumption.

Industrial growth eased to 8.2% in October, its slowest pace of growth since 2001, down from an 11.4% expansion in September, according to data released by the National Bureau of Statistics Thursday.

The growth was below the 10.8% rise expected in an average of analysts' forecasts compiled by Dow Jones Newswires.

"Industrial production growth should continue to decline as China's export-oriented industries scale back their operations due to lower demand form the U.S. and Europe," wrote Jing Ulrich, J.P. Morgan Chase & Co. chairwoman of China equities in research note Thursday.

Analysts said weaker output data had been expected after the release of October's data indicated a sharp decline in factory activity.

China's purchasing manufactures index, as measured by broker CLSA Asia-Pacific Markets, fell to 45.2 in October from 47.7 in September, reflecting a sharp decline in overseas orders.

 

[Temjin]

And the great decoupling continues.....not. But not to worry, the China stimulus package is coming, that'll fix everything.

Their stimulus package is quite different from the one used in US in the sense that it used to build infrastructures and employment rather than being used to bailout insolvent firms. Since infrastructures take YEARS to build, the benefits from their package will take a pretty long while to occur. However, I don't believe it will help them to suffer a cyclic downturn before it continues its secular uptrend.

 

[dhukka]

More fodder for the decouplers. Note the export reading fell off a cliff in November and since exports account for more than 40% of China's GDP, it suggests a significant slowing in China's growth rate.

China’s Manufacturing Contracts by Record on Exports
China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction.

Export orders, output and new orders all shrank by the most since the surveys began as the global financial crisis sapped demand for the nation’s toys, textiles and computers. The CSI 300 Index of stocks has fallen 68 percent from a record in October last year and President Hu Jintao describes the economic situation as a test of the Communist Party’s ability to govern.

“Another grim month for China manufacturing,” said Eric Fishwick, the head of economic research at CLSA. “Export orders will weaken further and we expect further cuts in production and employment.”

The yuan fell the most since a fixed exchange rate ended in 2005, sliding 0.7 percent to close at 6.8848 a dollar, as the government sought to help exporters. The CSI 300 rose 1.9 percent on a government plan to boost consumer spending.

The government-backed PMI started in 2005, the CLSA study in 2004.

Deepening Slowdown

The government last month announced a $586 billion stimulus package and the biggest interest-rate cut in 11 years to revive the economy and counter the risk of spiraling unemployment and social unrest. The key one-year lending rate fell 108 basis points to 5.58 percent.

“Dismal PMI calls for more immediate policy help” was the heading on a Citigroup Inc. report today.

The figures suggest that export growth may decline sharply and industrial output may fall, said Ken Peng, a Shanghai-based economist for Citigroup. He expects a 54 basis-point rate cut before the end of the year, along with more speculation that the yuan is set for “large-scale depreciation.”

A weaker currency helps exporters by keeping down the prices of their goods in overseas markets.

China’s economy, the world’s fourth largest, expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003. The nation is very exposed to the global crisis, President Hu said Nov. 29.

Export Orders, Output

An export order index dropped to 29 in November from 41.4 in October, the government-backed survey showed. A reading above 50 reflects an expansion, below 50 a contraction.

The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7.

Fired workers seeking more compensation from a toy factory in Guangdong province clashed violently with police on Nov. 25.

“It’s a very challenging time for policy makers -- they definitely need to do more in terms of fiscal and monetary stimulus,” said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. “There will be more aggressive interest-rate cuts.”

A slump in property sales and building work is also undermining growth. Construction of homes, offices and factories contracted at least 16.6 percent in October after a 32.5 percent expansion a year earlier, according to Macquarie Securities Ltd.

Slowdown ‘Getting Worse’

Baosteel Group Corp., China’s biggest steelmaker, is facing its “most difficult” period since the company was founded 30 years ago as output, sales and profit plunge, an executive said last month.

“The slowdown of the Chinese economy is getting worse,” Zhang Liqun, a senior research fellow at the State Council’s Development Research Center, said in a statement today. Government efforts to revive growth “still need some time to show their full effect, which will be after spring 2009,” Zhang said.

The World Bank slashed last week its growth forecast for China to 7.5 percent in 2009 from a 9.2 percent estimate in June. That would be the weakest pace since 1990.

The government-backed Purchasing Managers’ Index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics.

The survey tracks changes in output, new orders, employment, inventories and prices.

 

[Bushman]

More fodder for the decouplers. Note the export reading fell off a cliff in November and since exports account for more than 40% of China's GDP, it suggests a significant slowing in China's growth rate.

Imagine what happens when the average Chinese market participant stops saving their hard earned and starts consuming. Asian personal savings rates are some of the highest in the world. There is good reason for this - lack of affordable public social infrastructure and welfare benefits. But as this is built up, the incentive for domestic consumption will increase.

So you have:
1. a stimulus package based on massive cash reserves;
2. no Western reluctance for a "Big Governemental Stick' to aide the recovery; and
2. an emerging domestic economy to alleviate the current reliance on the US and Europe.

There are, off course, short-term impediments to this but from here the upside for China is more apparent than for the 'mature' Western economies that need significant consumer leverage to maintain GDP growth. So, at some stage, the myth will become reality.

However those that were early in their 'China has decoupled' calls certainly have egg on their face today (myself included).

 

[dhukka]

Recoupling continues for the Chinese economy with GDP growing at it's slowest pace in 7 years. It is widely acknowledged that Australia went into this economic downturn in better shape that most countries but does that necessarily mean it will whether the storm better given it's leverage to the Chinese economy? From Bloomberg:

China's Economy grows 6.8%, Slowest Pace in 7 Years

China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.

Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.

Plummeting Chinese demand for parts and materials for exports is reverberating across Asia and the Pacific, driving Taiwan, South Korea and Australia closer to recessions and worsening Japan’s slump. Premier Wen Jiabao said this week that the government must work urgently this quarter to reverse the slowdown and maintain social stability amid a “very grim” outlook for jobs.

“It’s an astonishingly steep slowdown,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong. “We haven’t yet seen all of the pain.”