The main point though is one longer term members are familiar with, the Chinese provocation regarding the disputed ownership of the Senkaku Islands that Japan bought. The correlation we have noticed is China's saber rattling every time they see negative economic numbers.
Just yesterday the Chinese HSBC Flash PMI readings declined from 49.5 (last) which was also consensus to a drop to 48.5, anything under 50 represents contraction.
Worse than just the headline number was the deterioration in the Flash PMI sub indices.
The following indexes in the Flash PMI not only deteriorated, but changed direction from positive to negative:
Output, New Orders, Backlogs, Output Prices, Stocks of Purchases, Finished Goods and Quantity of Purchases.
Among those that worsened at a faster pace: Output PPrices and most importantly the Employment Sub-Index which fell to February 2009 levels.
I was sent this article today which is about the Chinese saber rattling in preparing for a quick strike against Japan, apparently an amphibious assault which seems to make clear that this was about the Senkaku Islands.
Being that China is facing multiple problems in which the solution to one exacerbates the other (such as providing liquidity to support banks with increasing bad loans or trusts in risk of failing, but needing to withdraw liquidity at the same time as the housing market is a bubble and inflation in various sectors, most notably housing and food is getting out of control).
My response to the email and article was as follows, I believe it tells us a lot about the state of the Chinese economy and thus the world economy. All of the observations made in this response are ones we have seen over and over when it comes to Chinese economic troubles mounting, it's so predictable that we get stories like the linked one above right after the very disappointing HSBC Flash PMI reading.
My response to the article...
"I think this is about more than economics, well not really, but you know what I've thought about this in the past. You know who the Chinese government is terrified of? Their own citizens, whenever you get a country that's going through economic pains and the population starts looking at the leadership with the hairy eyeball, the governments always do the same thing, they focus the populations' view on an external threat and stoke nationalism, take Nazi Germany for example before the war started.
This tells us quite a few things, one of which is Chinese officials know how bad their economy is. They are also known for making long term economic decisions unlike the F_E_D, but that is also a lot of time for the population to suffer through, I think that's what we are seeing, an attempt to stoke nationalism."
As you know, for a while I've been hoping for a counter trend rally in FXI (china 25) to open a long term / trend short in FXP long (inverse/short China 25). I'll take a closer look at these and see if there's any opportunity, but I do like this as a core short as it diversifies positions and I think China is at a pivot from external export driven economy to trying to move to a consumption driven economy, it could be a painful process, but Chinese seem to always think in very long terms, I'm not so sure the Chinese population will feel the same, thus the stoking of nationalism over the disputed islands. Last time this happened (sometime within the last year) it worked as Chinese citizens desecrated and vandalized Japanese assets such as Toyota dealerships in China.
I'll be taking a closer look at these and seeing if this may be an area worth investigating as I believe China has multiple problems that are beyond their long term transition from an export to a consumer led economy such as inflation, bad loans threatening banks and trusts.
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