5 Ways To Profit From A China Downturn In 2014

by James Gruber on January 5, 2014

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{ 9 comments… read them below or add one }

cerrajeros alcala de henares October 8, 2014 at 8:36 pm

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sam January 15, 2014 at 6:55 am

I am inclined to agree with most of your comments.4.8%-5.3% GDP are figures I expect before 2018

James Gruber January 12, 2014 at 2:17 pm

Vijay,

I hope I can address your queries correctly this time. What I am suggesting is that if China sells US treasuries on mass, US interest rates are likely to rise. If that were to happen, the US would employ several things to keep rates down, including printing a lot more money and keeping interest rates near zero. The former deflates the currency and people’s relative wealth. The latter would mean earning little interest on bank deposits. Both would put further pressure on people’s savings, making it more likely they’ll have to cut back on spending, rather than increasing spending and thereby lubricating consumption (70% of GDP).

Does that answer things adequately?

James

vijay January 9, 2014 at 8:06 pm

Hi James
Thanks for the reply and yes raising interest rate at this juncture will be detrimental to US economy. But I intended to ask something else. Perhaps I failed to put it neatly. I am trying to put it in full perspective now.
1. My query is why government will take private saving as a fund to purchase US traesuries sold by China ?
Government will for sure go for buying these Treasuries put on sale by China to avoid any upward pessure on interest rate. But if it will go for private saving it will has to increase interest rate to get more saving. And this will defeat the main purpose of buying these Treasuries sold by China. And sure this depletion of saving will dampen consumption. But it will end up in increasing rates which USA does not want now.
Fund can be arranged as
1. QE tapering can be delayed to absorb some of this sale.
2. Remember rates are at a historic low in USA. Some selling can be taken care of as long as domestic demand is strong.
Also this selling will help in ending the trade imbalnce vis a vis China. This will also boost growth and demand.
Am I right?

Thomas K January 9, 2014 at 5:21 pm

James,

yes, debt overhang seems to be massive and I think it is already challenging to define just how much it is.

The beauty of this debt is, that it is held purely domestic. Simply printing more money will not solve the problem, it will only increase the problem and result in much feared inflation (1989).

In my observation what we see here is the resurgence of the triangular debt of the 1990s, albeit on a much larger scale. And that can not be solved by macro-economic measures.

Best
Thomas

James Gruber January 9, 2014 at 4:34 pm

Thomas,

Your points are well made and thank you for them. I agree on the export mix change and higher value added theme for China in the long term. That’s why it would be wrong to rule China off during this cyclical downturn (which many have and will). In the meantime, it will need to deal with this debt overhang and deleverage in a variety of ways.

James

Thomas K January 9, 2014 at 4:14 pm

Hello James,

I am mighty impressed how you manage to boil things down to simple basics, congratulations.

Adding to the problems of turning China consumer-driven is an important soft-factor, people’s minds. Ask Japanese, Koreans or Americans about their attitude towards home-made products: Inevitably you will hear, they are the best. Not so in China, which domestically has maintained low-quality low-price combination, the consumer attitude is that import products are superior to anything made in China. Changing that will take a long time.

There are also hard factors standing in the way, discussing these would be too long here.

The turn to a consumer driven economy is a long and arduous task, and in the mean-time China will still build on exports, but in a different way.

Watching China’s policies and recent movements, I do not think that the Chinese incl. Mr Xi believe the end of export-driven growth has been reached. They continue to follow the example set by Korea and Japan.

If you look closely, then you will see that China is gearing up to push exports of high-value added products in all different categories. The high value-added industries are all propped up by the worlds lowest material cost (thanks to economies of scale paired with subsidies).

An example: There is no doubt exporting cars is high on the agenda, they only wait for the right time. During a coming downturn of the economy, car sales certainly will plunge. That will force Chinese car makers, incl. sino-foreign JVs of scale to export, for sure. The Ro-Ro terminals are there already.

Another one: China is systematically suffocating exports of (subsidized) primary industrial products such as steel, at the same time production remains high, and China offers benefits to exporters of goods made from steel, steel structures, oil drilling platforms, power plant equipment, wind towers, railway equipment, even complete infrastructure projects, et al. Recently a giant container terminal in my hometown Hamburg was finished, entirely made in China.

Meanwhile, specialized terminals for assembly and shipping of heavy equipment are being build.

China’s export financing actively supports this development.

One more: Chinese construction machinery companies have bought up all the worlds concrete pump manufacturers. Not because this is great business, but because these companies were small, cheap and gave them an excellent entry into the world distribution networks of construction machinery, an entry that is otherwise difficult or close to impossible.

Ultimately, the government surely also wants to see Chinese passenger jets entering the world market.

Chinese exports as such are here to stay, but the product mix will change significantly.

Best
Thomas

James Gruber January 8, 2014 at 7:39 am

Hi Vijay, Raising rates would kill the US economy right now. Already the jump in rates to this stage has slowed the housing recovery. Also history shows equities underperform once 10yr bond yields reach 4%. The so-called wealth effect would be gone. Not to mention that an increase in rates would lead to increased interest expenses for govt, a significant burden when debt to GDP is >100%. Also, an increase in US rates would put upward pressure on rates abroad. A jump in rates is the last thing fragile economies in Europe and Japan can handle right now.

So I just don’t think raising rates like this would have the desired effect.

Thanks for your query,
James

vijay January 7, 2014 at 2:54 am

How on stepping of purchase of Treasury bonds by US and sold by China will dampen consumption at home. Yes government will use private saving to buy these bonds. But what effect will it have on consumption? One way to look at this is that government will incentivise private saving . And this it can do by increasing rates. This will defeat all the effort it was intended to . What I am missing here

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