Japan’s trade deficit widened in August from a month earlier as both exports and imports fell, data released Thursday showed, but the results still managed to beat expectations. Total exports for the month dropped 5.8% from a year earlier, the Finance Ministry reported, though exceeding expectations in a Dow Jones Newswires poll for a 6.2% decrease. August imports lost 5.4%. The trade deficit reached 754.1 billion yen ($9.62 billion), below the year-earlier ¥777.5 billion deficit but wider than July’s ¥517.4 billion trade gap and undershooting expectations for a ¥797.9 billion deficit. Exports to top trading partner China fell 9.9%, offset somewhat by a 10.3% rise in U.S.-bound shipments. Exports to the European Union fell 22.9%. The yen lost a bit of ground following the data, with the dollar USDJPY -0.07% rising to ¥78.40 from ¥78.38 ahead of the numbers.
September’s HSBC China Flash PMI just printed at 47.8, a slight beat of the final August print at 47.6 but still below 50 – for the eleventh month in a row. With only one month of expansion according to this data since June of last year, it seems more reverse repos are ahead (since as we already discussed in detail here - they are caught between a rock and a hard place on easing as the economy ‘supposedly’ transitions not-so-softly). Market reaction to this potentially good-is-bad data print (i.e. not cold enough to warrant massive China stimulus) is USD strength, EUR weakness, and modest S&P futures selling pressure.
- *SHANGHAI COMPOSITE INDEX FALLS 1%, APPROACHES 2009 LOW
Now Societe Generale’s Wei Yao is out with a new note in which she questions the ‘hype’ over the stimulus projects as well.
She also thinks markets should stop expecting a massive stimulus along the lines of the 4 trillion yuan package in 2008:
- All the plans that have been approved are scheduled to take place over the next five years and it is unclear how local governments are going to finance the projects. Funding from land and tax revenue is unlikely to be as easy as before since the growth of both has slowed. And banks are concerned about bad debts.
- The project approvals themselves are ‘misleading’ since they were posted on September 5-6, but they were approved from April – August. “Hence, a sudden increase in the number of website posts does not mean a sudden increase in Beijing’s willingness to push projects through.”
- There will be a lag between when the projects are approved and when they start. This is because any project that needs public funding in any way has to go through a long process – before it can set off.
- The 4 trillion yuan package announced in 2008 was implemented in two years. In the current round, 50 percent are expected to take four to five years, 40 percent are expected to take six to eight years, and the final 10 percent are likely to take three years. “Hence, the average investment per year is actually not that impressive, and any disruption can happen during the life of the projects.”
Yao is also skeptical that the 1 trillion yuan of fiscal reserves that premier Wen Jiabao pointed to because the use of this “fiscal lever” has to be approved by a budget process which would have to take place during the National People’s Congress in March.
As recently as 2007, China, the largest economy by far among the emerging and developing economies with large stock market capitalizations had a smaller total stock market cap than India or Russia. Both Hong Kong and Taiwan were then close to China’s nominal stock market cap. Still today a few large or mega cap companies like Apple, Microsoft or General Electric have capitalizations close to, or above the stock market caps of whole countries like Mexico – if not Taiwan, Hong Kong or India. Today China, Hong Kong, Brazil, India, Taiwan and South Korea figure in the world’s Top Twenty, but their combined stock market capitalization is far below the OECD trio of either the US, or Europe plus Japan. http://eprints.soton.ac.uk/171483/
What counts are two usually neglected factors: Asian stock exchanges dance closer to ruling political leaderships in their home countries who are in a panic mode very similar to their Western opposite numbers, than exchanges do in “the West”, defined as including the US, Europe and Japan. Secondly, financial integration of Asian stock markets is today arguably at least as advanced, or more advanced than in the West despite the apparent near-total integration of US and European stock markets.
The key question of whether the Asian markets can both signal, and then lead a general downturn is already answered by history: yes. The Asian financial crisis of 1997 gripped most of Asia from July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. At the time, the much smaller size of Asian stock markets, and lower integration prevented the crisis from spilling over to the west. This is no longer the case.
The crisis started in Thailand with a monetary crisis comparable with the threatened euro meltdown: the Thai baht collapsed after the Thai government was forced to float the national money, cutting its peg to the US dollar, after exhaustive efforts to support the baht’s value – which had soared on the back of an unrealistic and unsustainable real estate boom….
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