In a story that can only be described with one word, "finally", the NYT tells us what we have come to believe about the real state of the Chinese economy since we first identified unusual weakness in commodities in general and oil's lack of response to provocative events about a year ago. The HSBC Chinese Flash PMI readings for China this year have diverged significantly from the official Chinese releases, one was closer to the truth while the other was moving much further from the truth. In a recent release of both, they finally converged and after 3 consecutive months of the Chinese version looking much better than HSBC's, the Chinese PMI that finally agreed showed extraordinary weakness, far removed from the previous 3 months of official readings; so it's no surprise when we read the following in
the NYT:
As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.
Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said."
Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.
...
But an economist with ties to the agency said that officials had begun making inquiries after detecting signs that electricity numbers may have been overstated.
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Another top corporate executive in China with access to electricity grid data from two provinces in east-central China that are centers of heavy industry, Shandong and Jiangsu, said that electricity consumption in both provinces had dropped more than 10 percent in May from a year earlier. Electricity consumption has also fallen in parts of western China. Yet, the economist with ties to the statistical agency said that cities and provinces across the country had reported flat or only slightly rising electricity consumption.
Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership.
Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists.
“The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.
The question is whether the actual slowdown is even worse. Skewed government data would help explain why prices for commodities like oil, coal and copper fell heavily this spring even though official Chinese statistics show a more modest deceleration in economic activity.
Manipulation of official statistics would also provide a clue why some wholesalers of consumer goods and construction materials say sales are now as dismal as in early 2009.
Studies by Goldman Sachs and other institutions over the years have strongly suggested that Chinese statisticians smooth out the quarterly growth figures, underreporting growth during boom years and overstating growth during economic downturns.
And Chinese officials have raised questions in the past about the reliability of Chinese economic statistics. An American diplomatic cable released by WikiLeaks shows that Li Keqiang, widely expected to become premier of China this autumn, said in 2007 that he regarded China’s broad measures of economic growth as “ ‘man-made’ and therefore unreliable.”
It looks like we were nearly 100% right about China, the reasons why we believed that an ultimately the motivation as China's biggest fear is civil unrest among its own population. What has been long suspected is finally being confirmed, I think this just goes to show how much more you can pull from price action than simple indicators would otherwise allow. However this will have strong consequences for the market as the last bastion of global economic growth is not only slowing down, but has been for some time and it is likely much worse than reported.
While it's not necessary to go in to details, it is important to understand that Greece's New Democracy party (pro-bailout-pro-EU) managed to win the elections by first seeming to be a steady hand as compared to Syriza, but also offering the Greek people some of what was so appealing about Syriza, the promise they would re-negotiate the terms of their bailout/s. Germany in numerous articles and interviews over the weekend has made clear, IT IS NOT HAPPENING. We may see a crisis of confidence in the new Greek government as Greeks now see clearly, perhaps the only way to effect change is through the heavy handed measures Syriza was willing to push through; half measures by the new Greek coalition are obviously being swatted down like flies by Germany.
As the EU is set for a key summit this week, it is unclear whether Samaras or the new Greek finance Minister can even attend as both are hospitalized for different reasons (a detached retina and fainting). In any case, there is nervousness about the summit as German 10-year (flight to safety) bonds are trading down to a 1.5% yield ahead of this week's summit. Concerns range from the lack of consensus on many ideas that have been put forth (many fall along the North-South divide I have been talking about ever since the French elections and the end of the Mer-Kozy alliance), also Germany's hard stance that Greece should not even bother asking for any loosening of conditions until they meet their originally promised commitments.
Yields in the 10 year space (except for Germany's) are rising. This week Italy has a slew of auctions through many different dates, the market will be watching what yields these auctions bring, especially the longer dated ones scheduled for this Thursday.
Spain, which has now completed private banking stress tests, was expected to formally ask for the EU banking sector bailout today, which was on hold until the banking stress tests were complete. The figure the tests came up with was about $62 bn, however the market is very distrustful of these banking stress tests and for good reason.
The bailout is expected to initially come from the EFSF (which has about $200 bn of capital available), then switched over to the ESM once it is operational as Germany still has not ratified the ESM permanent bailout mechanism.
It seems the exact figures are on hold until some decisions are reached at the EU summit, for instance, whether the ESM will be allowed to fund banks directly rather than fund th governments and the governments fund the banks, it may seem like a small distinction, but this goes back to the ESM debt being senior to all other debt and if it is given to the government, then Spanish bond holders would likely be subordinated. This is something we first talked about when the Finance Ministers agreed to a bailout of the Spanish Banking Sector and the problems that created for Sovereign debt holders and thus for Spanish Yields.
In an early response, Juncker has said there will be conditions for a Spanish bailout, something that was causing moral hazard with other countries that already received bailouts and were unhappy that it looked like Spain would get away with no conditions tied to their bailout. Remember Ireland asking for retroactive similar treatment as to what Spain was said to receive with no strings attached.
Also weighing on the market is the expectation that Moody's will cut nearly the entire Spanish banking sector to junk status shortly.
We can sum up the market's risk off reaction today as fear of the upcoming EU summit and proposals before it. As the market feared, Merkel weighed in this a.m. with some crushing statements, among which included: "EU is seeking an easy way out of the crisis"; "Living beyond means led to the EU crisis"; "Shared Euro-area debt is now counterproductive"; "Rejects joint Euro-bonds/bills" ; Rejects deposit insurance if it means joint liability".
Furthermore, the ECB's Notwotny says: "Don't expect much from the EU summit"; "ECB DOESN'T want to continue buying bonds" ; "ECB favors EFSF to buy bonds"; "Greek talks can't start with "wish for more time".
And just like that, Germany is backing away from helping any country should it mean other countries are liable for the help rendered, basically saying there won't be much more help. At the same time, the ECB says, "Don't loo to us to save you".
BAD NEWS in front of the summit!.
US financials are understanding the reality of large collateral calls as a result of their downgrades.
The New Home Sales beat is totally irrelevant in front of what the market is facing right now.
In the US we also may see a Supreme Court ruling on Obamacare as early as today although it is looking doubtful.
As to the markets:
After gapping down as FX trade opened this week, the Euro lost more ground.
3C on Crude seemed to indicate it would lose ground as it opened stronger than the FX correlation would suggest it should have, it seems 3C is working well on Crude Futures as they tumbled off their highs and in to the European open.
However they are seeing a positive divergence now.
ES pretty much stayed in line as it lost ground overnight in to the EU open.
It also is showing a positive divergence in to the US opening trade.
I would say the market is dealing with some unpleasant realities and elements of the EU summit are taking a very strong pre-summit stance.
