Monday, April 14, 2014

Keeping an eye on China and Japan

Meanwhile in China, it was announced that the country’s exports fell -6.6% in March versus the year-ago period.  This frustrated Wall Street’s expectations of positive growth for China.  

Imports to China also declined -11.3% in March, which follows the -18% drop in exports February.  As Shiraz Mian, research director at Zacks puts it: “This is bad news, but interpreting Chinese economic data is never straight forward. The widespread perception among economists who closely follow the Chinese economy is that the export data from the year-earlier period was artificially boosted by over-invoicing, an illegal practice that Chinese exporters use to dodge tough capital controls and bring capital into the country.”

China’s industrial production in the first two months of 2014 increased at its slowest pace in two years and retails sales have also been declining. Chinese authorities recently announced a stimulus package in response to this slowdown.  Experts believe this may not be enough to nudge growth higher since bank lending remains restricted. 

Another looming problem for China is the possibility that the country’s housing market could crack.  Tighter lending and homeownership restriction’s by China’s government in recent years could lead to defaults among China’s 90,000 developers, according to a recent Bloomberg report.  China’s central bank initiated a liquidity injection on Thursday, the first in more than two months.  The rally in China’s stock market in recent days was likely in anticipation of this action.  We’ll find out in the next few days how helpful this action really was for China’s economy once March bank lending data is released.

China isn’t the only region of the globe experiencing deflationary headwinds.  An article appearing in Reuters suggested that U.S. stock market weakness is spreading to Asian markets.  Actually, the opposite is the case.  The Japanese Nikkei Index has been a notable laggard since the start of the year, as the following chart shows.  Moreover, recent upward pressure in the Japanese yen has caused financial institutions to react by unwinding the yen carry trade.  This in turn puts downward pressure on equities owing to the general need to raise cash.