Posts Tagged ‘RMB’
Emerging Markets in 2009
Tuesday, December 30th, 2008
Michael Hartnett, Chief Global Emerging Markets Strategist, Merrill Lynch is interviewed by Bloomberg TV, December 12, 2008 (click to view below), regarding his outlook for Emerging Markets in 2009. Here is a summary of that conversation:
- Volatility of all markets has meant that correlations have been very high.
- It’s been fiendishly difficult for EM to break away decisively from what’s going on in Washington and New York.
- China is a big factor that could help the rest of the EM break away.
- In China there’s a raging debacle over what the economy will do next year.
- People are quite pessimistic about what’s happening.
- If the Chinese economy is able to come back more quickly and more strongly than a number of other economies around the world, that probably would be the moment you’d see the other EMs break away (from the high correlation).
- (anchor) Jim O’Neill from GS said that he likes China now for the first time in a while.
- We’ve been overweight China since the end of August.
- Its been a good trade thus far, with A shares and Hang Seng up nicely.
- Its not because China is going to be fabulously strong growth wise - those markets love when they get lots of liquidity.
- That’s what’s happening at the moment - There is a big easing of monetary policy and credit policy.
- The RMB is expected to remain robust.
- China is the one equity market where the banks have outfperformed.
- It doesn’t feel as if there’s an impediment to the stimulus that you’re getting from the Chinese government - I think the Chinese market will outperform next year.
- The consumer theme is very strong in China, and Emerging Markets.
- If you go back a year ago, we were worried about inflation. Why?
- Inflation compromises the purchasing power of the billions of consumers in these markets .
- They couldn’t afford to spend on anything but food, and food prices were going through the roof. Its the complete opposite of that now. Oil is at $40, not $140 and food prices have come down a lot.
- There’s a lot of purchasing power in China, India - obviously there’s a cycle as well - its not as if the numbers are going monstrously higher.
- Today (12/12/08) we saw China report a 20%+ increase in retail year-over-year. That’s incredible when you consider that we’re in a global recession.
- We think the demand story is there.
- In non-Emerging Markets there are a lot of US and European companies that are going to benefit enormously from the consumer story in EM.
- Thinking laterally, there are a number of companies outside the EM that can benefit from that relative growth.
- The other story in the EM - You’ve got a number of countries that are attempting to reflate forcefully - India, Korea, South Africa, Brazil.
- There are going to be opportunities in all of those countries.
- The other thing to think about is the “Best Companies,” the “Best in Breed,” concept.
- We think the best in breed idea will be a big outperformer next year.
Where not to invest? (for now)
- There are a number of countries that have large current account deficits and you have to worry about how they are going to fund those deficits.
- There are some currencies, particularly in the Eastern European region to avoid.
- Russia has a big problem right now, as it has destroyed a great deal of shareholder trust.
- At some point next year, when the rouble troughs, and oil prices trough, Russia is going to move up significantly.
- At the moment we recommending that our clients take their money out of Russia.
- They have a big problem there like Saudi Arabia; they’re a one trick pony.
- As long as oil prices were strong so was the economy, but with the lower oil price the economy has weakened.
- Unless we get the oil price moving up in a strong fashion, its going to be very hard to persuade investors to put a large chunk of capital there.
- Certain places like Iceland and Hungary have gone to the IMF - its going to be very difficult for those economies to come back in a meaningful way.
Opportunities in Emerging Markets?
- India, Korea, Turkey and South Africa were taken to the brink by markets and now there are a lot of swap lines to support them.
- What they’re doing in these countries is something almost revolutionary.
- They have big deficits, they’re currencies have gone down a lot, and guess what they’re doing?
- They’re cutting interest rates - (and they have lots of room to do it).
- If they can convince the markets that their interest rate cuts can rescue their growth situations - those currencies are going to do very well.
- In India for example, Industrial Production fell and policy formation (favours profound monetary easing).
- India has great companies.
- our clients are increasing their weightings from being underweight most of the last year since markets were overvalued and earnings expectations were too high in contrast to the idea that the economy could not do well in the context of high oil prices.
- Now oil prices have fallen, and the current account deficit is improving and they’re cutting interest rates.
- They are increasing their weightings to neutral, if not, overweight at the moment.
Rule of Thumb?
o We like large , not small companies.
o Looking for decent balance sheets, good management, and good brand.
o Survivors who can gain market share from those affected by the global credit crunch.
Click play to view
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Tags: Bloomberg Tv, Chinese Economy, Chinese Government, Chinese Market, Correlations, Debacle, Emerging Markets, Food prices, Global Markets, Hang Seng, Impediment, liquidity, Merrill Lynch, Michael Hartnett, Monetary Policy, O Neill, Outlook, Purchasing Power, RMB, Stimulus, Strategist, Volatility
Posted in Markets, Oil and Gas | No Comments »
Must-Read China Reading: World Bank Quarterly
Thursday, November 27th, 2008
If you read one thing on China this week/month/quarter/season, let it be the new World Bank China Quarterly. Superbly useful stuff.
Get it here.
[via Brad Setser]
“Here are some of Brad Setser’s notes from his CFR blog:
1. China was no workers’ paradise during the boom years.
GDP growth has been quite strong. But wages have fallen from around 50% of China’s GDP at the start of the decade to around 40% of GDP. That – not a high rate of household savings – is the main reason why consumption is a very low share of GDP (See Figure 15 of the World Bank Quarterly). If China’s workers had secured a bigger share of China’s output, they could be better off now even if China had grown somewhat less rapidly. There is good reason to think that a world where China subsidies US borrowing (and consumption) isn’t the best of all possible worlds. The fruits of the recent boom weren’t shared broadly in either the capital-exporting countries or the capital-importing countries.
2. China really is a manufacturing and investment driven economy.
Even when compared to Korea in 1990 or Japan in 1980, China stands out. Investment accounts for a large share of GDP than it ever did for the smaller Asian miracles and manufacturing accounts for a higher share of China’s GDP than it ever did in other Asian manufacturing economies (Figure 14). Given China’s size, it is pretty clear that China cannot continue to grow by investing ever more and manufacturing ever more. China ultimately has to produce for Chinese demand not world demand.
3. China’s current slowdown was made in China, not in the world.
Yes, growth in “light manufacturing” (toys, shoes and textiles) has slowed. But electronics and machinery exports are still doing very well – even if they don’t get the press (Figure 3). Or perhaps I should say were still doing well in the third quarter; must has changed recently. China’ problem this year is simple: labor intensive export sectors have slowed more than capital intensive export sectors. Overall though China’s real exports grew at a 10-15% y/y clip in 08 – far faster than the overall growth in world imports. China’s real export growth is forecast to outpace its real import growth in 2008 – which implies that net exports will still contribute positive to China’s GDP growth. True, the net exports won’t provide as much of a positive contribution as in 07, 06 or 05. But they are still adding to growth not subtracting from it.
Why then is China slowing so sharply? Simple, real estate investment has hit a wall. After growing at 20% y/y for a long time, real estate investment stalled – with a y/y growth rate of around 0% (Figure 5). That means that China is in turn producing more steel and cement than it needs, and producers of steel and cement are cutting back. That in turns hurts iron ore exporters …
This though is very much a result of China’s own policy choices. Rather than allowing the real exchange rate to appreciate back when China was truly booming (05-late 07/ early 08), China’s policy makers opted to rely on administrative curbs on credit growth. That left China more exposed to global slump in demand – as it kept exports up by limiting real appreciation even as it credit curbs limited the amount of froth in the real estate market back when China was booming and real interest rates were negative. China invested a lot in real estate, but it is no Dubai. But China’s policy makers still look to have slammed the brakes on a bit too hard. Rather than slowing gradually, real estate investment fell off a cliff (Figure 5).
4. There is more bad news ahead.
While real exports contributed positive to GDP growth in 2008, they won’t contribute in 09. The World Bank forecasts that for the first time in a long time, 2009 real import growth will exceed real export growth. In 2005, real exports grew about 10% faster than real imports (23.6% v 13.4%). Many economists remain – for reasons that to be honest elude me – reluctant to draw the obvious connection: the most likely explanation for China’s strong real export growth is the large depreciation the RMB in 2003 and 2004. That combined with administrative controls – which limited lending, investment and ultimately imports – to create China’s large current account surplus. Real export growth exceeded real import growth by 5 percentage points in 2006 and 2007 – and by 4 percentage points in 2008.
The positive contribution of net exports to GDP is forecast to end in 2009: real import growth will exceed real export growth by 3 percentage points.
That though doesn’t mean that China’s currency isn’t undervalued. China’s exports are forecast to grow faster than the world’s imports, meaning China’s global market share is still increasing (see Figure 2). And if 2008 and 2009 are taken together, China will still be drawing on the world for its growth: the drag from net exports in 09 will be smaller than the contribution from net exports in 08 (see Table 1)
I fully realize that China is appreciating quite significantly now in real terms – just global demand for China’s goods is falling (Figure 11). The tragedy is that this appreciation is coming now – not two or three years ago when domestic Chinese demand was booming and China didn’t need to draw on the rest of the world to sustain strong growth.
5. The fiscal stimulus is real, but modest. China’s fiscal balance is expected to swing from a 0.7% of GDP surplus in 07 to a 2.6% of GDP deficit in 09. That is a 3.3% of GDP swing. In 2009 alone, China’s deficit is forecast to rise by 2.2% of GDP. See Table 1. That shift is important and will help to support China’s growth– but it will likely lag the swing in the US fiscal deficit. Hopes that surplus countries will end doing more than deficit countries seem unlikely to be ratified.
6. The last thing anyone needs to worry about is fall in Chinese demand for US treasuries.
The Treasury market obviously isn’t worried - not it 10 year Treasury yields are under 3%. And there is little reason for the bond market to be worried if current trends continue.
The World Bank forecasts that China’s current account surplus will RISE not fall in 2009, going from an estimated $385 billion to $425 billion. How is that possible if real imports are forecast to grow faster than real exports? Easy – the terms of trade moved in China’s favor. The price of the raw materials China imports will fall faster than the value of China’s exports. China’s oil and iron bill will fall dramatically.
In macroeconomic terms, China’s fiscal stimulus will offset a fall in domestic investment leaving China’s current account (i.e. savings) surplus unchanged. The 2009 surplus is expected to be roughly the same share of China’s GDP (9%) as the 2008 surplus.
In dollar terms, the World Bank forecasts that China will add almost as much to its reserves in 2009 than in 2008. That is a bit misleading: the 2008 reserve growth number leaves out the funds shifted to the CIC (ballpark, $100b in 08) and the rise in the foreign exchange reserve requirement of the state banks (ballpark, another $100b). But it captures a basis truth. Even if a fall in hot money inflows means that China will be adding $500b rather than $700b to its foreign assets, its foreign assets will still be growing incredibly rapidly. China already has – counting its hidden reserves – well over a $2 trillion. It is now rapidly heading for $3 trillion.
In broad terms – if oil stays at its current levels – China will be the only large surplus country in the world, and it will essentially be financing a US deficit of roughly equal magnitude to China’s reserve growth. It makes everything plain to see.
7. The way China manages its reserves matters immensely for the world not just China
China shifted from buying Agencies to buying Treasuries in July. Others did too, but no one has quite the market impact of China. China doesn’t disclose what it is doing with its reserves, but the recent shift in Chinese demand isn’t really in doubt. The market knows it. The TIC data for August showed it. And the latest Fed data strongly suggest large ongoing migration from Agencies to Treasuries.
China now accounts for such a large share of the world’s reserves that it is hard to see how the FRBNY’s custodial data doesn’t reflect, at least in part, a shift in Chinese demand.
A key themes of this blog has been how the internal imbalances of China’s economy are a reflection of its undervalued exchange rate – and that China’s surplus has implications for the world. It has to be balanced by large deficits elsewhere. Another key theme has been that the Fed has been pushed to absorb risks that other central bank reserve managers now shun. Nothing illustrates this more clearly than the Agencies. Foreign central banks are scaling back their Agency holdings. The Fed is gearing up to buy. Big Time.”
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BCA: Is China Losing Competitiveness
Tuesday, August 26th, 2008
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
The mainstream media has been filled with reports about Chinese companies closing production facilities due to rising costs. Some analysts have concluded that China is quickly losing its competitive edge, and international producers are moving to other countries. In reality, there has been no meaningful decline of China’s export market share, particularly when exports of oil-producing countries are excluded. Indeed, China’s slowing export growth in recent months is a reflection of changing global market conditions rather than a deterioration in Chinese producers’ competitiveness. Rising input costs due to higher commodities prices are not unique to China: manufacturers around the world are suffering similar cost pressures and margin squeezes. In addition, the RMB’s appreciation has not been excessive, rising at a 3.5% annual rate in trade-weighted terms since its 2005 de-peg from the U.S. dollar. The trade-weighted yuan is still below its 2002 levels, when the economy was struggling with a deflationary shock. Finally, recent weakness in the export sector can be partially attributed to the Chinese government’s voluntary export restraints, which have been part of the country’s broader growth-rebalancing strategy. These policies could be removed any time if excessive weakness develops. Already, the government has increased VAT rebates for textile and garment exporters since the beginning of the month.
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Tags: China, Commodities, Dollar, Economy, energy, International, oil, risk, RMB, Yuan
Posted in China, Commodities, Economy, Emerging Markets, FXI, FXP, International Markets, Markets, Russia, inflation | No Comments »
Jim Rogers: All My New Money Is Going To Commodities and China
Wednesday, April 30th, 2008
April 27, 2008 - A recent Bloomberg article quotes Jim Rogers as to his bent for Chinese stocks and Commodities. Specifically, Rogers is focusing his attention in China in the areas of agriculture, airlines, tourism, and education.
“All my new money goes to commodities and China,’’ said Rogers.
“All the panic looks like a bottom,’’ he said. “I have bought in the last four to five weeks. I’ve been buying shares in China for the first time in a long time.’’
“China has a huge agricultural problem,’’ Rogers said. The “government is doing everything it can to revive the agriculture industry.’’
Rogers was bullish on the Chinese yuan, saying it could eventually rise to 2 yuan per dollar.
“Don’t sell your renminbi (yuan), because it will go a lot higher in the next 20 years,’’ Rogers said.
Apparently the folks at Morgan Stanley do not agree with Rogers, saying that China is a “sell.” Rogers appears to disagree vehemently.
Selling Chinese shares in 2008 “is a big mistake,’’ said Rogers, adding that he had also bought stocks in Singapore, Taiwan and Hong Kong. “I have never sold any Chinese shares.’’
The complete article is available by clicking below:
Investor Jim Rogers Buys Chinese Shares as Markets Hit Bottom, April 27, 2008, Bloomberg
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Tags: Agriculture, Bloomberg, China, Commodities, Dollar, Focus, Hong Kong, Jim Rogers, Markets, RMB, Singapore, Taiwan, Yuan
Posted in Agriculture, BRIC, China, Commodities, Crude Oil, Emerging Markets, Gold, Infrastructure, Markets, inflation | No Comments »
Jim Rogers: Long agricultural commodities, RMB, Short investment banks
Sunday, March 30th, 2008
March 30, 2008 - On March 12, 2008, Jim Rogers appeared for a live interview on CNBC Europe. If you missed it, just click on the link below.
Just watched it… It is a must watch. In his usual candour, Mr. Rogers tells it like it is. If he woke up in Bernanke’s place, he would quit, and then abolish the Fed for providing t”socialism for the rich.”
His calls - Invest in agricutural commodities (in his opinion, this will be the most profitable trade for the next 2 to 5 years), long the Renminbi, short the investment banks.
http://www.cnbc.com/id/15840232?video=682734828&play=1
Even if you don’t like the guy, its a good interview with one seriously interesting and knowledgeable person.
Thank you Mr. Rogers.
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Tags: Agricultural commodities, Agriculture, Banks, Bernanke, Commodities, Currency, Euro, Fed, interview, Investment, Investment Banks, Investment Strategy, Jim Rogers, Markets, RMB, Video
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