Tag Archives: china

It’s not been a good last few years for the Chinese stock market. That may be in the process of changing, however.

As the weekly chart of the Shanghai index below shows, the downside momentum has abated considerably in the last year or so. Granted, the market did make a new bear trend low south of 1900 in the middle part of 2013. That was short-lived, though. Essentially, we’ve been looking at a mainly range-bound market since late 2012.

This is actually a potentially significant development for the global markets. To the extent that the Chinese market is an indicator of the health of the global economy, the stabilization of the Shanghai index at least offers a suggestion of potential better times to come. If the market can hold up from falling back below 2000 once more it would be a good indication turnaround potential.

If we think of the stock market as being a forward-looking economic indicator, then we can read some things into these developments in the Chinese market. Stabilization suggests that the worst is likely in the past at this point in terms of economic growth. This is a good thing for China, and for those countries which export to that market.

There is a lot of work to be done before we can declare any kind of turnaround to have actually taken place, though. The double top put in a bit below 2300 is the first major resistance to any potential bullish trend developing. A break clear above there would be a first positive step, but even then we couldn’t get overly positive from a long-term perspective until 2500 gets breached. This is the sort of thing which could take many months, if not multiple years, to actually happen. In other words we probably shouldn’t expect to see a lot of outwardly positive economic indications right away.

Given how narrow the Bollinger Bands have gotten on the weekly chart, there is definitely considerable potential in the Shanghai index. If an upward trend does start to develop (probably indicated in the intermediate term by a break of 2300) there could be some real power to it.

Earlier this week, Sina Corp., the company who provides the Chinese social media service called Weibo, saw a 3.8 percent rise in stock prices. Bloomberg reported that Weibo, a micro blogging platform comparable to that of Twitter, is now offering a premium service for users who are willing to pay a fee of 10 yuan per month. The hope is that they will be able to offer services users will actually really want to use in order for them to oblige to paying a fee.

Recently, Weibo has been appearing in the news due to the role it played in the June 14 Chinese food scandal. It was on this day that Inner Mongolia Yili Industrial Group Co. announced a recall of infant formula that was found to contain mercury. A Wall Street Journal article reports that searches pertaining to the incident were blocked from the social media site. It’s believed that censorship of this sort is done in an effort to control the spread of news on food safety, something that could threaten the stability of that Chinese economic sector.

With the growth of China’s economy currently in question, it makes sense that the Chinese government would want to preserve their strongest industries. Right now, with last years sales reported at $28 billion, one of those industries is dairy. Directly preceding the release of this information, Yili’s shares dropped 10 percent, which is the maximum fall allowed in one session.

This issue gives new perspective to the Chinese internet censorship issue. It is often projected in a negative light, attaching to it a stigmatism of the Chinese government encroaching on the population’s freedom of speech and freedom of access to information. But in situations like this, where negative news spread via social media could potentially wreak serious havoc on an industry integral to economic stability, should regulation be enforced? Also, what about people who might not have otherwise heard about the recall and continued to consume tainted food?

With the sharp rise in popularity of social media services, there very well might be an increasing need for new forms of regulation.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Despite yesterday’s surge in investor confidence that provided Asian markets a boost, things appeared to have fallen a bit flat this morning. As reality set in that Spain’s bond yields have hit record-breaking highs and Greece’s electoral success might not be enough to negate prior monetary upset, investor’s optimism wasted no time in fizzling out.

Bloomberg reported early this morning a slip of 0.8 percent in Japan’s Nikkei 225 Stock Average, 0.1 in Hong Kong’s Hang Seng Index, and 0.7 in China’s Shanghai Composite Index. Tim Riordan of Australian hedge fund Parker Asset Management Ltd., elucidated how he sees European problems increasing, as opposed to reaching a resolution. With bond yields hitting 7.29 percent, Spain is becoming somewhat of the elephant in the room. Riordan states that this is could really be a red flag indicating a downward spiral should be reason for caution.

Borrowing costs of this caliber can be indicative of a country potentially in need of a bailout in the near future. Despite the notion of this possibility, European markets were able to rise Tuesday. Currently, the strongest fear amongst investors seems to be a contagion of Spain’s monetary battles over to Italy, who’s facing issues of its own.

A few weeks back I happened upon a very economically fitting Warren Buffett quote assuring American’s they needn’t fear a recession relapse lest things in Europe get out of control and leech into the US economy. If investors’ uneasiness over debt spilling across Europe is foreshadowing for imminent future fiscal events, will Buffett’s words prove true?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

It was hard to ignore the swells in yesterday’s U.S. stocks that took place in response to speculation of global policy makers’ possible plans for economic growth stimulation. However, the US wasn’t the only country to see its stock prices move up so aggressively. CNN reported China’s overseas investments surged to more than $21B, as state-owned companies obtained various global resource-related assets.

A report compiled by private equity firm A Capitol revealed that Europe’s delicate state continues to capture the attention of Chinese companies. Drawing them to the scene is undoubtedly the alluring possibility of obtaining equity at undervalued prices. In fact, China’s second largest destination for investment is Europe; which accounts for 16 percent of outbound mergers and acquisitions.

This number has actually fallen from last years reported 37 percent, due largely to a shift in capital interest towards the realm of resource-related assets. One of China’s largest European investments lies in Thames Waters Company, the UK’s largest water and wastewater treatment establishment. Though the exact amount of appropriated equity isn’t known for sure, the investment is valued at about $778B.

With all of the ongoing stresses about Europe’s faltering economic state, it would be easy for one to find solace in knowing that the world’s second biggest economy had its back in a big way. But, then we start remembering, wait a minute, isn’t China’s economy losing footing themselves?

Yes, but this morning the WSJ’s Market Watch brought good news of interest rate cuts in China, information that will undoubtedly ease fears of the country experiencing a slowdown in economic growth. In a statement the People’s Bank of China posted on its website, it was announced that starting June 8, they will lower benchmark one-year lending and deposit rates by 0.25 percentage point.

An economist from Credit Agricole, France’s largest retail banking group, projects the move to be indicative of policy makers “bringing out the big guns.” He explains further the real impact of the reduction will be most prevalent in sentiment amongst businesses, domestic consumers, as well as the markets.

Economist Mia Hong explains that since the focal point of China’s financial reform is interest-rate liberalization, tomorrow’s change will be a near bull’s eye move for shifting things in that direction. She also forecasts the lowering of interest rates could spark a possible reversal in China’s slow bank lending, which has developed due to lower borrower demands.

This sounds to me like all the right ingredients for economic growth stimulation. And it all comes at an integral time, especially with Europe’s wounded economy permeating others around it. The potential for economic failure within the euro-zone should also have US investors weary of an economic domino effect.

Hopefully Warren Buffett was right in his recent statement that the U.S. economy should be safe from a recession relapse “unless events in Europe develop in some way that spills over here big-time.” Right now though, things are heading in a positive direction for everyone. With China’s interest rate cuts strengthening its own economy, more capital will be available for potential allocation into European investments, thus contributing in some way to global monetary rebalance.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

In an optimistic article published by Bloomberg Businessweek, it is predicted that despite March’s minor employment setback, the US job market will continue to grow throughout April. Predictions by Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna illustrate that due to increased consumer confidence, the hiring world will expand at a rate of about 200,000 new positions per month during 2012.

As companies sales increase, investing in new workers becomes an attractive prospect for upping productivity. Thanks to strong consumer spending up climbs, the jobless rate appears to be doing the opposite. This is clearly demonstrated in March’s numbers, where it fell to 8.2 percent – the lowest it’s been in three years. In a recent Bloomberg survey of 70 economists, it was determined that the US economy is healing at an estimated median of 2.2 percent; a bit heftier than last years 1.7 percent.

With all the positive outlooks swirling around the US job market, inevitably a balance must be struck meaning someone’s gotta suffer. The stocks are assuming that role as they fell, bringing with them the S&P 500 Index to 1.2 percent. Asian stocks also declined for a fourth day, while China’s recent inflation increase killed hopes of the government easing monetary policy.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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Concerns that the Chinese economy might ‘crash land’ in 2012 ranked high on the list of potential negative tail events that troubled investors in risk assets as they returned to their desks for the New Year.  These fears were eased if not removed altogether, once the Middle Kingdom’s National Bureau of Statistics revealed that the economy expanded 8.9 per cent year-on-year during the fourth quarter, comfortably above expectations and far removed from levels of growth that could be considered consistent with a hard economic landing in the immediate future.

However, the positive sentiment generated by the headline numbers would appear to be decidedly naïve given that the annualised growth rate quarter-on-quarter dropped to 8.2 per cent from 9.5 per cent in the third quarter – a troubling rate of deceleration – while, the ongoing correction in the property market still has the potential to provoke further downside momentum.  The fact of the matter is that the debt-financed, investment-led growth of recent years has significantly increased the potential for greater economic turbulence in the months and years ahead than most analysts currently envisage.

It is important to note that China’s fundamental strategy since reforms were first introduced in the late-1970s has been large-scale investment in physical capital, facilitated by high gross domestic savings rates and through state control of banks.  China emulated the precedent set by its high-achieving Asian neighbours during their corresponding periods of development and, through most of the subsequent three decades its investment rate has not been out-of-line with the capital spending booms of previous great economic transformations.

Gross fixed capital formation (GFCF), a broad measure of investment, averaged 34.5 per cent of GDP during the latter half of the 1970s, 35.4 per cent during the 1980s and 38.5 per cent during the 1990s.  This compares to an average investment rate of 33 per cent of GDP for Japan between 1961 and 1973, almost 40 per cent for Singapore during the 1980s and, 31.5 per cent for South Korea from 1983 to 1991.

However, the close parallels between China’s economic renaissance and previous great transformation periods comes to an end during the most recent decade, as the Middle Kingdom’s capital spending boom continues to grow in magnitude and duration.  GFCF jumped from 32 per cent of GDP in 1997 to near 50 per cent in the most recent calendar year and, has been above 40 per cent for nine straight years.

In contrast, of its high-achieving neighbours, only Singapore managed to register a peak investment rate during its corresponding period of growth anything close to the level currently reported in China and, even then the GFCF to GDP ratio was sustained above 40 per cent for a brief period.  Indeed, the investment rate dropped sharply from an average of 46 per cent of GDP between 1981 and 1985 to 33 per cent in the subsequent five-year period.

Neither Japan nor South Korea registered investment rates above 40 per cent during their respective periods of high growth – the former peaked at 36 per cent of GDP in 1973 and the latter at 39 per cent in 1991 – while, rates above 30 per cent did not persist for long in either case.

It is abundantly clear therefore, that China’s capital spending boom is unprecedented in modern economic history but, a relatively high investment ratio of itself does not necessarily imply that it is excessive and predetermined to end in a bust.  That depends on how efficiently resources are allocated and, in this regard, the omens are not good.

The incremental capital/output ratio (ICOR), the quantity of new capital required to generate an additional unit of growth, is commonly used to measure investment efficiency, where a reading of three is considered normal and a ratio above four is considered inefficient.

The trend in China’s ICOR is far from reassuring given that it was above four during most of the past decade and jumped to a reading of six in 2011 following the most recent surge in capital spending.  Of note is the fact that the efficiency of capital investment is at the worst level since the Middle Kingdom’s last hard economic landing in 1989/90.

The marked deterioration in the marginal return on investment is troubling since it has been fuelled by a credit boom that has seen total domestic credit – private and government – jump from 121 per cent of GDP during the fourth quarter of 2008 to an estimated 180 per cent by the end of 2011 – a level that is notably high compared to countries at a comparable income level.

The almost sixty percentage point jump in credit relative to GDP – with much of the increase emanating from the large unregulated banking sector – would appear to be symptomatic of the increasingly speculative nature of the investment boom and a financial crisis could well ensue should the boom turn to bust.

Official data for economic activity during last year’s final quarter has convinced many investors that a hard landing is not in store for the Chinese economy.  Close examination of the facts however, suggest that such a call is far too early to make – the probability of significant economic turbulence is far from non-trivial.

 

Previously posted on www.charliefell.com

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The world’s financial markets have entered the New Year just as they left the last – weighed down by myriad negative influences that threaten to send asset prices into a tailspin.  Reasons to be bearish are not hard to find, yet the bulls remain undeterred and continue to argue, albeit unconvincingly, that risk assets will deliver healthy returns in 2012.

The list of potential catastrophes or ‘black swan’ events is unusually high and urges caution.  First, the seemingly never-ending crisis in the euro-zone refuses to ease and could well gather in intensity – if not come to a head – in the near future, as a deepening recession is set to test the capital markets’ ability to absorb the large, scheduled supply of new debt issues from the monetary union’s shaky sovereigns.

It is already quite clear that the euro-zone’s monetary union is not viable in its current form and, further market stress would almost certainly increase fears of an eventual euro break-up – a potentially devastating event – with a concomitant rise in the return premium required on all risk assets.

Second, China’s stellar growth rates are now an historical artefact and, the demise of the Middle Kingdom’s notorious property bubble, in concert with the damaging side-effects of ill-advised credit creation – not to mention the downward pressure on the export sector reflecting the euro-zone’s economic malaise – could well provoke a hard landing.  The potential adverse impact on worldwide economic activity should not be under-estimated given the large share of global growth captured by the Chinese in recent years.

Last but not least, tension in the Persian Gulf continues to mount, as Iran flexes its naval muscles in the Strait of Hormuz, the world’s most important oil transit chokepoint with flows through the strait amounting to more than one-third of all seaborne traded oil.  The Iranian actions have been taken in response to tougher trade sanctions imposed by the West, who have grown increasingly concerned over the Islamic Republic’s nuclear enrichment programme.

The stand-off looks set to continue given the strong rhetoric on both sides and, could well result in an unwelcome incident that precipitates a surge in oil prices and plunges the global economy into recession.

Indeed, Intrade, the world’s largest prediction market, has seen the odds of an overt air strike by the US and/or Israel against Iran before the end of the year, rise to more than one-in-four in recent weeks.  The probability of a strike can hardly be viewed as trivial at this juncture and, and the potential for a ‘black swan’ event originating in the Persian Gulf is a very real possibility.

The bulls dismiss the worst outcomes in all of the above as hyperbole and, believe that disaster will be averted in each case simply because policymakers cannot – and therefore, will not – allow the worst to happen given the economic carnage that would result.  Recent history however, suggests that confidence in officialdom’s ability to deliver favourable outcomes is misplaced.

One need look back no further than three to four years to observe how American policymakers failed to prevent a supposedly containable problem in an inconsequential segment of the said country’s residential mortgage market from morphing into a full-blown global financial crisis.

More recently, Europe’s leadership did not demonstrate any greater wherewithal to insulate the euro-zone’s core from the difficulties that beset the periphery.  As for the foreign policy arena, America’s historical record suggests the less said the better.

Given historical fact, it is clear that the potential worst-case scenarios cannot and should not be excluded from the decision-making process.  Unfortunately, advocates of high allocations to risk assets do not concur and, are quite obviously, gambling on the most probable rather than probability-weighted expected outcomes.

The year ahead could well prove kind to the employers of such faulty decision-making but, should that prove to be the case, the favourable outcome should be considered a function of good luck rather than a solid investment process.

The bulls will undoubtedly counter that valuations are already cheap and, have thus discounted most of the potential bad news.  However, the measures of value employed are clearly flawed given that reliable valuation indicators such as the cyclically-adjusted price/earnings ratio or Tobin’s Q, which have historically demonstrated a statistically meaningful ability to predict future returns, suggest that most of the world’s major stock markets are far from cheap.

The investment world’s perennial bulls continue to expect risk assets to generate solid returns in the year ahead and, appear oblivious to the vast array of potential negative scenarios that threatens to undermine their asset allocations.  As Warren Buffett once quipped, “Forecasts tell you little about the future but a lot about the forecaster.”

The astute investor will know to emphasise a disciplined investment process over the most probable outcomes.  Indeed, the sub-standard investment performance delivered by many investment professionals over the past ten years or more confirms that good luck cannot outdo sound decision-making indefinitely.

Previously posted on www.charliefell.com

 

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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There's starting to be an increasing amount of talking in financial markets circles about what's happening in China and the potential implications it has for the global markets and economy. One of the guys I work with (bond guy, but he trades stock index futures for his own account) has been all over the poor performance in the Shanghai index. His view is that it's a major negative indication for the global economy in 2012. Let's take a look.

Here's a monthly chart of the Shanghai Composite Index going back to 2004.

 

There has obviously been A LOT of volatility in this market over the last few years. Things have calmed down considerably in the last couple, though. That sets up an interesting situation where the Bollinger Bands have gotten pretty narrow. That's usually a sign of a market getting ready for the next big directional move. The width of the Bands doesn't tell us direction, but the fact that they are point lower is a negative.

More significantly is the break of the 2010 lows. We saw a dip below those lows back in October, but with a rebound. Now the market is starting to extend down below there. There isn't much in the way of support until the index gets down near the 1800 level. That's a drop of about 20% from current levels.

The thesis of my colleague and others is that as goes China, so goes the global economy, especially the global industrial commodities (copper, oil, etc.) which feeds that country's development. Therefore, if the Shanghai index is headed for 20% or more in losses over the next few quarters that forecast performance in the Chinese economy, there could be a major decline in those markets. This has implications in the forex markets. It means downward pressure on the so-called commodity currencies (AUD, CAD, etc.), as well as more emerging market currencies, and probably upward pressure on the USD.

 

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A lot of folks like to share vacation news via social media. Updates on their latest pets, travels or even the food they eat. The things that excite me are business successes and news having to do with currency markets.

Specifically, I get excited about new opportunities for investors and how the world as a whole is becoming more accessible because of social tools and global communication. I want to look at the big picture today. And the biggest thing in my lens is China and Forex trading in that country.

In three years - April 2007 to April 2010 - according to the Bank of International Settlements, average daily Forex trading in China had increased 112.9 percent to $19.8 billion. What this tells me is that the savvy investor in China knows his currency market and pays attention to the economy. But the culture in China is a bit different from other countries when it comes to investment attitudes.

For example, a recent Reuters article suggested that many investors in China pay more attention to trusted advisors and information gleaned from trusted contacts. Within the article, Ding Yuan, a professor of accounting at the China Europe International Business School, said there’s actually a lot of trading in China based on privileged information...which borders on insider trading.

I see this as a great opportunity to bring a positive investment methodology to the country. Chinese retail investors are seeking qualified trading sources whose expertise provides an easy path to follow. I’m encouraged by the fact that three of our expert, elite traders in our program are Chinese - currency trading experts who are trusted, local and skilled.

Add to this the attitude Chinese government is taking toward its currency in allowing the Yuan forwards to rise to combat import inflation. This presents the Chinese people with positive economic news - or at least less negative news - and helps bolster the attitude of some currency investors.

Ultimately, the investment style in China is a clear validation that copying the trades of professional Forex traders is in demand. And it’s the way many investors approach their investments there - with expert advice from trusted contacts. Further, the strengthening of the Yuan underscores the increasing global attention to currency markets and the importance of stabilizing local and regional economies.

In allowing their people to explore a different, innovative and online investment option, China has given me hope that we live in a world where social media tools can bridge the gaps between communities, countries and people. Currensee is moving forward with their 2011 goal of international expansion, first came the UK and now...

We’re going to China! It’s gonna be a great journey. Making stops in Beijing, Shanghai, and HongKong - Read our press release here.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

While cookouts and fireworks were certainly on our mind last week here in the US, we still kept an eye on the news. Here’s our roundup of top stories that we’ve read in between all of the celebrations:

After the Federal Reserve ended QE2 last week, many investors are now wondering what’s next for the U.S. economy for the rest of 2011. You can watch the experts debate what they think is next for QE2 by viewing our recent webinar. The good news, however, is that after two years of rapid decline, the dollar is now entering an uptrend, gaining against every major currency. In other news, the 2011 World Wealth Report that was recently released displays the staggering estimate that in 2010, 103,000 people out of 7 billion on the planet controlled 36.1 percent of the world’s wealth. Additionally, the report shows that hedge funds are no longer a favored alternative investment among the class of high net worth individuals. On the international front, the euro continues to weaken as interest rates rise, and China has begun to expand foreign exchange reserves using non-U.S. dollar assets – a sign that investment in the yuan may be on the rise.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.