Chinese Whispers

Asia caught a big bid last night due to press reports that Friday’s May Industrial Production number will come in ahead of estimates…+8.9% YoY vs ests of 7.7% and an April number of 7.3%. Commodities have understandably rallied hard as people hang their hat on the horns of the Chinese Bull run. Remember, as noted before, China power generation is down YoY which doesn’t fit with increased IP.

I mentioned yesterday the strong increase in Iron Ore imports despite flat steel production and have previously doubted China’s ability to lead us out given their export based economy. Today, Macro Man presents some interesting charts showing vast increases in import volumes from China in coal, copper and iron ore, and way above trend from 2003-2008. Interestingly, this is not the case with oil however which is only on trend.

So we see imports up, exports down, and down again in April vs the bounce in March
And South Korea, which releases macro data the quickest just came out with export data for May, showing a fall again…so we may infer exports economies are continuing to suffer.

How then is China holding up so well? Ok it could be data manipulation for sure, but I read an interesting piece from Brad Setser the other day. He posits that while China relied heavily on exports for growth, there was an underlying domestic demand which remained unrequited as the government kept reserve requirements high and loan/deposit ratios low to keep the economy from overheating. So now that exports have fallen, is that pent up domestic investment demand being satisfied as banks are freer to lend? Can it offset the export fall? It’s certainly a theory. I’m not so sure. Most of what I’ve read points to government banks lending to government sponsored projects and then there’s the whole issue of power generation decrease. Still, it’s food for thought and something to keep in mind. We’ll see what IP number is released on Friday although I can’t imagine it will be anything other than bang on the whisper.