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Macro-Catalyst: China: Quo vadis, stimulus?

Tuesday, 19 May 2009

Summary

This trade has a one-month view. 

Readers know that we are great fans of China and most supportive of her governments' work to create millions of jobs each year. Nevertheless, please note that we wrote "governments' " in the plural just now: Beijing is not king, and China has no properly functioning federalist system whereby the Centre and the Provinces, Counties and Townships have clearly defined roles. So the place muddles through - pretty well, considering...

We walk you through a recent news on how "four trillion" that stimulus package really is, and how to make money off this once the current green shoot  glitz settles....within the next month

Topics Covered

  1. Beijing's surprising survey
  2. How to make money off this idea

Background

1. Beijing's surprising  survey

In today's Financial Times, p. 2 ("Beijing's stimulus measures questioned"), we read that China's National Audit Office (NAO) has just concluded a survey of 335 stimulus-related investment projects across China. Key findings are that (quotations from said pink slip) -

  • Delays. "China's...RMB 4,000 billion (bn) economic stimulus package is being delayed by local government unable to raise their share of financing..."
  • Lost in translation. "Central government has pledged RMB 1,200 bn...with the rest of the RMB 4,000 bn expected to come from local governments, state-owned enterprisees and private companies." This means that Beijing was going to pay for only 30% of the whole package. Besides, note the word "pledged": this means that none of the governments actually have paid these amounts!
  • Dissonance. Here are some reasons for "delay" of spending, according to the NAO:
    • "Some projects have been unable to start on time..." (strange grammar, giving these projects lives of their own, but you get the point);
    • "...while others have proceeded slowly because of a lack of funds..."
    • "...some local officials...made false reports on the progress of investment projects...", and
    • "...some had just used stimulus funds to pay-off old debts."
    • One friend added to this disturbing cacophony that a great deal of the stimulus money shot straight into the stock market.
We are pleasantly surprised that Beijing has the candour to release such hard-hitting results, and wonder whether these  will dampen market ebullience... After all, if the "four trillion" are not really "four trillion", then the growth effects have to be less stimulative than the markets currently think, n'est pas? 

 

2. How to Save/Make Money Off This Idea

  1. Always consult your financial adviser first. 
  2. For those of you who share my  skepticism about the robustness of China's recovery, invest in my mistake. On 8th December 2008 I recommended that you buy the ETF that shorts the China market, FXP:US.  Since my recommendation, it has crashed by 58.4%. But, for those of you who are independent contrarians, this is a way to invest in a longer-term bearish view of China. By "long term" I mean within the next month.

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