Category: China & HK

[IMF China mission chief Nigel] Chalk argues that China faces a potent cocktail of ingredients pushing house prices up:

• High domestic savings, and limited opportunities to take cash offshore
• Limited domestic savings options and bank deposit rates below the rate of inflation
• No property tax or capital gains tax, which makes it cheap to buy and hold property
• Rapid growth, high wages and urbanization, which mean real demand continues to grow

The government’s crackdown on high housing prices has had some success. But Chalk believes that the restrictions on speculators introduced so far treat the symptoms, not the causes, of the malaise.

via Whack-a-Mole: IMF Not Impressed With China Bubble Management – China Real Time Report – WSJ.

China’s growth in bank lending has slowed to an annual rate of 15% from its peak of 35% in 2009, but indicates that further tightening is required to bring the inflation hangover under control.

The main point is that China’s debt burden is far higher than it likes to admit, and much of that debt has piled up in the past few years, as a result of Beijing’s response to the global financial crisis.

“Even though headline sovereign debt levels are low in China, so much quasi-sovereign activity happens through the banking system that if you include some of those contingent liabilities, the number can get very big,” says Charlene Chu, head of Fitch’s China Bank Ratings.

“People forget that China undertook its fiscal stimulus package through the banking system rather than by issuing public debt in the way that other countries did.”

via Behind its lectures, China is a sinner, too – FT.com.

The Shanghai Composite displays a similar bullish divergence on 21-day Twiggs Money Flow to the DJ Shanghai Index. Follow-through above 2660 is likely, but resistance at 2820 is expected to hold.

* Target calculation: 2600 – ( 2800 – 2600 ) = 2400

The Hang Seng Index shows a similar (Twiggs Money Flow) bullish divergence to the Shanghai Composite, but both display a sharp fall on 63-day Momentum below zero, warning of a primary down-trend. Expect a rally to test resistance at 21500, but the bear market will continue.

* Target calculation: 19500 – ( 21500 – 19500 ) = 17500

Despite the global bear market, Dow Jones Shanghai Index rallied above resistance at 330, with bullish divergence on 21-day Twiggs Money Flow indicating buying pressure. Expect a test of 360. In the long term, breakout above 360 would signal reversal to an up-trend.

* Target calculation: 330 – ( 360 – 330 ) = 300

Dow Jones HongKong Index displays a similar bullish divergence on 21-day Twiggs Money Flow, indicating buying pressure. Resistance at 450 is unlikely to hold, leading to a re-test of 480.

* Target calculation: 450 – ( 480 – 450 ) = 420

China’s growth over the past couple of decades was based on large increases in government-directed investment. As a consequence, it had to run large trade surpluses to absorb the resulting excess capacity in manufacturing……. This can’t continue.

~ By Michael Pettis – WSJ.com

As Japan and other fast-growing economies in the past have discovered, continued infrastructure spending grows increasingly wasteful and fails to deliver further growth. Subsidizing business through artificially low interest rates may encourage private investment as an alternative, but leads to:

• bloated, inefficient corporations;
• high inflation; and
• massive speculative bubbles.

Options are narrowing and a shift to private consumption as the main driver of future growth is not without its risks:

• low interest rates and high inflation are eroding private savings;
• higher interest rates, however, would unmask business inefficiencies and collapse the speculative property bubble;
• higher wages, on the other hand, will fuel inflation.

This Chinese puzzle may not be easy to solve.

Mr. Zhao said that if China keeps running a trade surplus, which amounted to $22.3 billion in June based on the latest official data, it would have little choice but to keep buying U.S. Treasurys.

via S&P Downgrade of U.S. Puts Pressure on China to Spur Domestic Consumption – WSJ.com.

…….. or remove the peg to the US dollar. Either action would be painful. (CT)

The Shanghai Composite Index followed through below 2620 Monday, after breaking primary support at 2650 Friday, to confirm a primary down-trend. The index fell to 2500 before recovering weakly to 2527 by the close. HongKong fared slightly better, with the Hang Seng Index initially falling to 20000 but recovering to test 20500 by the close. Target for the down-swing is the 2010 low of 19000*.

* Target calculation: 22000 – ( 25000 – 22000 ) = 19000

Similarly, the Dow Jones HongKong Index broke support at 445 to signal a primary down-trend. Target for the down-swing is the 2010 low of 365.

* Target calculation: 445 – ( 510 – 445 ) = 380

Posted August 3, 2011 8:00 p.m. ET (10:00 a.m. AET) on Trading Diary.

The Shanghai Composite Index is testing primary support at 2650 on the weekly chart. Follow-through below 2600 would confirm a primary down-trend. Declining 13-week Twiggs Money Flow again warns of selling pressure.