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War Room 27 June 2013
China’s Slowing Growth
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War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
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China’s Slowing Growth
I. China Boom – History + Current Snapshot
II. China Slowdown – Effect on Macro
III. China Slowdown – Effect on Markets
IV. Historical Comparisons + Scenarios
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HiddenLevers
CHINA BOOM – HISTORY + CURRENT SNAPSHOT
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China – Goodbye Mao, Hello World
1950s-1970s 4.5% GDP annual growth
1976 Death of Mao Zedong
1979 Free market reform Opened to foreign trade
1979-2012 10% GDP annual growth 500m people out of poverty economy doubled every 8 years
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China – Now World’s #2 economy
#1 merchandise exporter #1 manufacturer #1 holder of FX reserves #1 creditor nation
#2 economy #2 merchandise importer #2 receiver of foreign direct investment
source: IMF
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China – Overtake the USA as #1?China as B-M-O-C
Pundits thought China would be on top by 2014. #fail
source: Economist
From 2005
source: akarlin.com
From 2006
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China – 2008 Global Financial Crisis
CHINA GDP Growth
2007: 14.2%
2008: 9.6%
2009: 9.2%
2010: 10.4%
2011: 9.2%
2012: 7.8%
$586 billiongovernment stimulus
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China – Current Macro Picture
GDP slowing
real estate bubble popping
tightening liquidity
trade deficit
14.2
2013
below 7
2007
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CHINA SLOWDOWN – EFFECT ON MACROHiddenLevers
It ain’t over til its over
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China’s Global Investments
Source: Heritage Foundation
China’s global investments (energy is #1) are growing rapidly, and a pullback would be felt on every continent.
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China’s Trade Balance
Sources: China General Admin of Customs, ZeroHedge
2000 – 2008Steady trade surplus
2008 – presentToo many deficits to count
consume!
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China’s Import Trade Flows
Source: IMF, UN FAO
world’s largest importerwheat cornvegetable oil porkcotton rice
Chinese imports are 10% of GDP for South Korea and Taiwan
Significant GDP impact on most Asian neighbors and Australia
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Australia: Canary in the Coal mine?
Source: Heritage Foundation
• Over 25% of Australia’s exports directly to China• 70% of exports to East Asia (all dependent on China)• Australian Dollar down 14% over last month
-14%
Source: HiddenLevers
bummer
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Steel
Copper
Aluminum
Industrial Metals: Case of Chinese Bird Flu?1y
-68%
1y-20%
1y-11%
source: HiddenLevers
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HiddenLevers
CHINA SLOWDOWN – EFFECT ON MARKETS
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China Slowdown – Markets Reacting to Macro
Monday 24June5.3% down in a day
Shanghai Index4.5 year low
China A-Shares70% off since peak
China A-Shares15% down in June
Interbank rate 3.30% to 6.97%
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China Slowdown – Corporates with most exposureLuxury will suffer
(party’s over ladies)
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China Slowdown – Corporates with most exposureSpirits will suffer
(fake bags, fake booze)
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China Slowdown – MSG tainting EM funds?
source: HiddenLevers
EM funds keeping pace withShanghai Composite.
two possibilities1. PMs overexposed to China2. PMs unloading all of Asia
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China Slowdown – Sectors that will lose most?
industrial metals
mining + equipment
industrial transport solar energy
luxurycommodities
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China Slowdown – US Dollar will gain
source: HiddenLevers
Man that dollar sure is strong…
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HISTORICAL COMPARISONS + SCENARIOSHiddenLevers
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Historical Comparison: China vs Japan GrowthJapan grew explosively from 1960-1995, then flat lined.
China grew even faster: 1990-2010
What’s next?
source: World Bank
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Historical Comparison: China vs Japan Equities
-69%
-67%
China equity market decline mirrors Japan
China + Japan face same demographic problems
source: HiddenLevers
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Historical Comparison: Lehman vs China
Beijing home value / income = 22.3
NYC home value / income = 5.3
Similarities to 2008 Differences from 2008
China 2013 private credit / GDP = 180%
US 2008 private credit / GDP= 195%
US has free-flowing capital markets, 98% of China’s investment capital is domestic
US 2008 crisis occurred before Fed intervention, while Chinese central bank is heavily involved in capital markets
US real estate bubble popped when US entered recession – China GDP is similarly slowing
Chinese equities have already crashed, while US equities were near highs
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GoodSoft landing
BadHard Landing
UglyChinese
Recession
China Slowdown Scenarios
Copper prices a good metric for China’s economic health – key lever in scenarios
Commodities are most impacted sector in all scenario outcomes
China soft landing effectively priced in today
Recession in China (and current Europe recession) overwhelms US economic recovery
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China Scenarios – How priced in?
Copper and S&P: Correlated over past decade
Breakdown in Feb 2013: Is Dr. Copper right or wrong?
source: HiddenLevers
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HiddenLevers – Product Update
• Envestnet – Launch of Integration
• New Homepage + Headers
• New Levers – bond spreads
• Integration Partners – improved design
Coming soon:
1. Obamacare Scenarios
2. Non-correlated securities screener
3. SMA support