FOCUS ON CHINA & JAPAN

China:

China’s exports, although slowing were robust up to October (see Figures 1 & 2); but the global financial debacle caught up with China in November. Chinese exports fell 2.2% in November on a year ago. That was the first fall in exports for 7 years.

Figure 1 shows significant seasonality and falls in imports are not unexpected except the fall in November imports was a massive 17.9% on a year ago. The fall in imports reflects both volumes and prices and with China importing large amounts of oil and other commodities whose prices have fallen heavily, a large fall in imports is expected. November was an excellent month for China because the collapse in imports resulted in a record monthly trade surplus of US$40.1 billion. The recent trade data hides the truth that thousands of factories have closed, forcing millions of migrant workers to return to the countryside where they hope that their rural holdings have not been redistributed.

FIGURE 1.

Retail sales for November exhibited a year on year increase of 20.8%. Retail sales have slowed from a 21.9% y/y increase for the first eleven months of 2008. For the first three quarters of 2008, per capita income increased to11,865 yuan, or US$1,745; this was a y/y increase of 14.7%.

The trend in heavy industrial output up to September is shown in Figure 3. Growth in Heavy Industrial Output slowed in September from 30% to 25% on a year ago. This rate of growth is not supported by production of pig iron, steel products, motor vehicles and electricity, all of which fell 3% in October on a year ago -- see Figures 4 to 8.

FIGURE 2.

Investment in fixed assets in urban areas exhibited a y/y 26.8% increase for the first 11 months of 2008. China had 12,761.4 billion yuan invested in urban fixed assets in November. In round figures this is US$2 trillion. A 20% increase in 2009 would be equal to US$400 billion. By sectors there were some notable increases. Nonferrous metals showed a rise of 41.6%, and railway transportation 41.1%. Investment in the mining and washing of coal increased 34.8%. Electricity and heat was a laggard rising 15.7%.

There is no doubt that China’s economy is slowing markedly. It remains to be seen if recent announcements from Beijing to stimulate the economy, including the recent slashing of the prices petrol and diesel have any impact any time soon. Strong economic growth in China from 2002 was a boon to Japanese exporters, and a key factor behind an export led economic recovery in Japan. Now it is all over for Japan and there is cause for great concern. Japan has had almost zero interest rates for a very long time. Now the US is going down the same road hopefully to achieve a better outcome.

There has been a lot written about the slump in demand for iron ore. One of the most recent announcements was from RIO. RIO reported a 53% fall in iron ore exports from the port of Dampier in WA. Demand for iron ore in Asia has collapsed, evidenced by the fall in China’s production of pig iron. RIO’s response to dire times is slashing jobs and expenditures. BHP has said it will focus on brown-field expansions as opposed to new high risk projects in emerging economies.

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FIGURE 9.

Production of cement shown in Figure 9 looks set to fall apace following the fall in production of pig iron and steel products. It is difficult to see a significant hike in urban fixed asset expenditures in 2009 if current trends continue which seems likely, and perhaps worsening going into 2009. The mismatch between output and production is most likely to reflect a rundown in inventories. When conditions turn for the better, re-stocking will become an important factor to boost commodity prices. However, until the massive injections of liquidity start to induce a significant global growth in real money supply, which will happen, the outlook for hard commodity prices is down right poor.

Figure 10 is interesting because growth in China’s exports of garments has stalled. This is shown by the 12-month moving average. Looking at clothes in local department stores it is challenging to find articles not made in China. Garments might be one of the first industries where China’s penetration into key markets has peaked. The same can probably be said for many other areas like cheap machine tools and some electronic and electrical goods. Saturation of overseas markets will mean that future Chinese business investment in machinery and equipment to expand output will become more a function of growth in domestic demand rather than from overseas households and businesses.

China will enjoy low commodity prices, particularly the collapse in the price of oil that looks like testing US$35/bbl near term. Looking ahead, the pundits that thought China was insulated from problems in the West have been proven horribly wrong.  

FIGURE 10.

JAPAN:

The Leading Composite Index for Japan is shown in Figure 11, and just about says it all. At least the rate of decay is not accelerating downwards. Construction, shown in Figure 12, is lacklustre. Industrial Production of Final Demand is set to fall heavily with the rate of decay accelerating – see Figure 13.  Manufacturing, Figure 14, is falling apace and more sharply than in 2001.

FIGURE 11.

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FIGURE 13.

FIGURE 14.

Who would wish to own a department store in Japan where sales have been softening for at least 12 years? The credit crunch is having a dramatic impact on demand for autos. Exports have crashed and the derivatives suggest much worse to come – this is shown in Figure 16.

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FIGURE 16.

Figures 17 to 21 show some trends in Japanese exports. Charts of other export products are not dissimilar. There were clear signals that China might have problems early in 2008. This is when Japanese exports to China gapped down. Figure 21 shows exports of transportation equipment to the EU and US. There is worse to come and Japan’s consumption of metals will fall further before recovery. Welcome to 2009.

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