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Is China Leading the Global Economy Down?

August 28, 2012 | About:

The macro demand picture out of China is rather gloomy. The question is whether the sharp drop in Chinese equities is a leading indicator of what might happen with the S&P and other major markets.

According to Bloomberg, profit at industrial companies continues to slide.

"Income dropped 5.4 percent last month from a year earlier to 366.8 billion yuan ($57.7 billion), the fourth straight decline, National Bureau of Statistics data today showed. That compares with a 1.7 percent slide in June and a 5.3 percent drop in May."

The Chinese stock market has plunged to 2009 lows. For example, the China 25 Index (FXI) is down 17% this year while most global markets are flat. However, the FXI is still 30% above its March 2009 low.

Furthermore, there are serious signs that commodity demand has slowed massively in recent months. Spot iron ore prices are down about 50% from last year. Coking coal prices are down about 55%.

Some noted short-sellers like Jim Chanos have been bearish on China and iron ore companies for over two years.

"The most outspoken Sino-Skeptic is Wall Street short-seller Jim Chanos, who over the past several years has placed negative bets on the stocks of major Chinese banks, real-estate developers, and mining concerns, like Australia’s Rio Tinto (ticker: RIO) and Brazil’s Vale (NYSE:VALE), which are major suppliers to the Chinese fixed-asset orgy. Never one to mince words, Chanos contends that China is headed for a hard landing of epic proportions because of its shaky financial system and an imminent collapse in its property market, which undergirds the entire economy. “I’m being conservative when I say that the coming bust in China’s real-estate market will be a thousand times that of Dubai,” he told Barron’s."

One of Chanos' bearish picks, Brazilian ore producer VALE, recently hit fresh 52-week lows.

Rating: 3.0/5 (3 votes)


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