Wednesday, March 4, 2009

If China recovers who benefits?

Stocks worldwide had a one day bounce after 2 weeks of strong and consistent losses in most markets. The reason for the bounce – speculation re more China stimulus and on past China stimulus working.

How is China doing economically right now?

China growth last quarter of 2008 was 0%.
1. Indications from other countries about the fist 2 months of this year gives little hope there will be a bounce in economic growth in China this quarter.
2. China has large overcapacity in capital goods at the moment due to a huge buildup on the assumption that economic growth would stay strong worldwide. E.g. in Shanghai at normal yearly leasing rates there are 14 years of supply standing vacant.

So in summary as far as we know China is not growing and has no need for more capital goods – apart from what the government may pump in.

Who will benefit from the Chinese governments stimulus?
1. People with the Chinese government connections – i.e. the Chinese.
2. Suppliers of raw materials – Brazil, Australia.
3. Suppliers of low end goods – other SE Asian countries.

Who will not benefit?

Countries that supply capital goods and high end consumer goods to China – Europe, US etc. China doesn’t need more robots (they have plenty that are standing idle); they don’t want a lot more high end consumer goods (they are seeing contracting rather than growing wealth at this point, same as everywhere else).

What action does this suggest?

If there’s going to be a significant rally in equity prices (say greater than 10%) on the “China will save us” idea then I will
1. Short Europe and US stocks – as the economic data that follows will show the hope was misplaced.
2. To the extent that oil and commodity prices look to be rising in a sustained way and there are signs of growth in China’s economy; I will go long Australian mining and oil stocks.

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