China: Those marvellous men in their flying machines
Summary
Markets stand in awe of China's recovery. One area constantly alluded to is industrial production. We take a back-stage look at this aggregate, and tie this into China's Economic Clock®. We have been humbled into admitting our grave error on China - and thus on Hong Kong. Nevertheless, we still get to cast seeds of doubt on this undulating sea of admiration....Topics Covered
- Excess supply of goods by sector
- Worsening profits
- How to save money off this idea
Background
1. Excess supply of goods by sector
In the South China Morning Post of last Thursday, there were three useful articles covering this subject. We plagiarize from these liberally and indefatigably. We emphasize that these data in the real economy reflect China's stark excess supply of money - as made evident in her perniciously strong lending figures. Indeed, lending so far has equated to the size of Australia's economy, or about US$ 1.1 trillion! Here are some real economy "love handles" underlining China's excess supply of goods:
- Iron ore and steel. "Since February, building has begun on a number of new steel mills that were illegal or failed to obtain official approval..." " 'Iron ore inventory at mainland ports has reached 100 million tonnes, representing more than two months of consumption in China...This means that iron ore imports will slow down in the fourth quarter...' ";
- Charter rates for large vessels. "The price index for the Capesize vessel, which is about 175,000 deadweight tonnes, has slid 29 per cent in the past month.";
- Ship building. "The country's shipbuilding industry has excess annual capacity of more than 16 million deadweight tonnes, accounting for 25 per cent of total production capacity, and fixed asset investment in this sectgor rose 55.5 per cent in the past five months.", and
- Cement. "...the mainland's annual cement production capacity will rise to 1.8 billion tonnes by the end of this year, while demand will be 1.6 billion tonnes, resulting in excess capacity of 200 million tonnes."
2.Worsening profits
Sales and profitability are faltering. "In the first five months of this year, the proportion of large industrial companies that were loss-making reached 23 per cent, with losses rising by 14.3 per cent. Companies that were profitable saw earnings drop by 17 per cent. Sales fell by 0.8 per cent in the period. 'Industrial prices remain weak, indicating still rife overcapacity...' "
3. How to Save Money Off This Idea
- Always consult your financial advisor first.
- Avoid stocks and bonds issued by companies belonging to the sectors mentioned above.
