Whats happening in China

Topic: International Stocks — China
Jan. 6 2016, 11:01 PM ET - by VF member bz1516 (2482 )

Whats happening in China .................................................

It's important to put the current situation in context.

A 7% drop is a very serious drop because based on statistical inference if the total exchange is at -7% it means that many stocks have already reached their daily limit of -10%. This drop because it happened so early into the trading day is an historically large market crash, much steeper than 1929 or 1987.

The market in China is made up mostly of inexperienced retail investors and traders so it runs on emotion and is probably the least reflective of actual underlying business and economic conditions of any stock market in the world.

It is a cause for concern given the weakness in both their manufacturing and non manufacturing PMIs, both the official and the Caixin. It is the timing of the stock market rout and the PMIs that raises more concern with this selloff.

The increasingly rapid drop in the Yuan is an extremely important tell that the economic managers over there are circling the wagons.

The trade figures are due out in a few days. My guess is they would show even more deterioration than we have seen so far.

Also that the government made an early move to block selling by major stockholders underscores the seriousness of the crash and connects it to the PMI data and the exchange rate. All this suggests the economic problems may be much deeper than it appears from any data.

I have maintained for a while that we are in a hard landing. That has to be distinguished from both a soft landing and a crash landing or economic collapse.

We had a hard landing in late 2008 and the economic numbers were a lot worse. We had real sequential loss for one quarter. That is a long way down from 7% growth estimates.

The base case right now would be something akin to 2008, the equivalent of a moderate recession in the US. which is a big deal for a country which has not had one since its been industrialized.

Now that we have gotten this far into the hard landing and are virtually certain their economic numbers lack a grounding in reality, the door must be opened for the first time to a crash landing.

Right now the major probability is they will have a hard landing. However there is also maybe a 5% chance there will be a crash landing, that is something worse than we had in 2008.

While this is terrible for commodities and materials stocks, it will have very little effect on the US. My best estimate would be it hurts the US GDP by a maximum of ~0.3%. It will also not have a major effect on US companies overseas profits. China accounts for only a small portion of those profits, less than 10%. There is very little US bank exposure over there to the best of my knowledge.

Its possible European banks have a lot more exposure. The EU particularly Germany also has lot more exposure to foreign trade with China than we do.

All this suggests to me buy US stocks on the downside move, whenever you think the time is right.

Barry

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