The Pascometer red lines on China

You’ll have to forgive my focus on the media today. There’s no data so I’m forced to turn on my peers.

Regular readers will know of the existence of the Pascometer. That is, Michael Pascoe’s uncanny ability to call the precise opposite of the impending outcome. Sadly for the nation, today he covers China and the needle on the Pascometer flips into the red line with such force that the needle has snapped. From the SMH (h/t The Lorax):

First the good news: China is expecting a global recession and will set its economic course accordingly. And then the amusing news: the corporate bond market is full of wood ducks just asking to be taken advantage of, as BHP did last week.

Amid the seemingly endless European turmoil, obstinacy and plain wrongheadedness, never mind America’s intractable politics and unsustainable debt lurching back into the headlines, there was some seriously good news over the weekend.

Chinese Vice-Premier Wang Qishan made what Reuters described as the most bearish forecast ever by a top Chinese decision maker.

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” Xinhua, the official newsagency, reported Wang as saying. And Xinhua tends to check its quotes when made by vice-premiers.

What follows immediately is that Beijing is not about to engineer a hard landing in its efforts to smack the luxury apartment investors. In the short term, the message is being sent to Chinese banks to accommodate business needs (but preferably not real estate speculators).

And in both the short and medium terms, the transition to greater focus on Chinese domestic demand gets yet more impetus. The rise and rise of the Asian consumer matters much more than the faltering of the Old World consumer.

Which is all wonderful stuff for Australia as sustained Chinese growth means sustained Asian growth and therefore the fundamental underwriting of our economy remains in place even as the North Atlantic faces years of recession and/or stagnation.

The thing about being a contrarian, which the Pascometer most assuredly is, is that you have to do it by intellect, not reflex. People are forever describing MB as a “bear” blog but that’s rot. We’ll be bullish when there’s a reason to be. It’ll most likely be when everyone else is bearish. The Pascometer on the other hand, has a singular approach to his analysis. Take the issue of concern on the day and argue it’s not a problem (if you can call it argument, I don’t see anything above beyond a brief assertion that Chinese bureaucrats will be able to anything they like).

Well, right on cue, Fitch just released a report into the vulnerabilities of Asian emerging markets to the European crisis. The continental economies of China and India are seen as less exposed to a trade shock than are the mercantilist nations of South East Asia but China is seen more inhibited than other Asian nations in terms of its stimulus options:

China’s capacity for further stimulus may be more constrained than this analysis suggests amid mounting concerns about the asset quality of the banking system following the credit-led stimulus effort of 2009-2010. Purely fiscal metrics are less of a constraint given the strength of the overall sovereign balance sheet. This is even after taking into account that China’s government debt ratio is above the rating peer median based on Fitch’s estimate of general government indebtedness (including local government debt) of 48% for end-2010.

My own view is that China does have significant scope for further stimulus but not as much as it did in 2008 both for the reasons cited by Fitch and because the Chinese authorities have not come this far in suppressing a real estate bubble only to suddenly re-inflate it. That means any stimulus, which will no doubt be considerable, will still be able to repeat the bottom half of the below chart but not the top:

And the PBOC will definitely not be able to repeat the following:

How can they, when all that easy credit will simply head straight back into housing? (And thanks to Phat Dragon for the charts).

So, China will be able to stimulate some but several mechanisms of transfer will need to be kept out of it or used much more carefully. That suggests to me that if the Pascometer reading of an imminent hard landing in China is right, it will still be able to rebound relatively quickly, if not with the alacrity of 2009.

Houses and Holes
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  1. Surely the next round of stimulus will (or at least should) be directed at domestic consumption rather than heavy infrastructure or real estate?

    I mean, China may well be able to stimulate investment in more heavy infrastructure, but does it really help anyone (apart from Aussie miners) to build yet more bridges to nowhere?

    Pascometer says: Beijing is not about to engineer a hard landing

    Odds on a hard landing then?

    • Surely the next round of stimulus will (or at least should) be directed at domestic consumption rather than heavy infrastructure or real estate?

      A $900 cheque to every Chinese household?

      • “A $900 cheque to every Chinese household?”

        Which probably won’t work because most would just cash it out and stuff it under the mattress rather than spend it. The Chinese are notorious when it comes to saving.

        Better option would be a $900 gift voucher to Ikea….

      • Will higher yuan help consumption in China? Wrong. That would only allow the wealthy to benefit. They don’t need it. Far better would to allow ordinary workers to bargain for better pay. That would increase their capacity to consume.

        Many casual observers see high savings rate in China. But they don’t really know who the savers are. They are the businesses and governments. Ordinary people’s income is struggling to keep up with inflation in an economy growing at high speeds. Therefore consumption share continuously drops.

        • “Ordinary people’s income is struggling to keep up with inflation in an economy growing at high speeds.”


          So then answer these questions:

          1. Why is it that they have high inflation?

          2. What action would fix this problem of high inflation much faster and much better than credit rationing?, which has potential to lead to resource misallocation.

          The answer to number 1 is because they have a peg. The answer to number 2 is to float the yuan.

  2. Maybe Pascoe hasnt noticed that Chinese consumption is FALLING as a % of GDP not rising (“rise and rise of the Asian consumer”). So the very thing that is at the heart of their 5 yr plan is headed in the wrong direction.

    The consumer will therefore NOT make up for the coming hit to exports and fixed investments. This alone will bring lower growth, never mind all the other issues (e.g debt, shadow finance etc).

    Its possible to be correct in a general sense in that Asia esp China will continue to grow strongly… but be totally WRONG about the timescale, rate and smoothness of this growth.

    In other words, the peak is probably right now. Its down from here.

  3. HnH for Quote of the Week yeah yeah I know it is Monday!

    “People are forever describing MB as a “bear” blog but that’s rot. We’ll be bullish when there’s a reason to be. ”


    I gladly camp on the shoulders of greatness here with this as well.

    Totally agree.


  4. This is a good example of why Pascoe should be demoted to brew bitch and Jessica Irvine promoted to senior journo.