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China eschews fiscal fanfare for supportive spending - Fullermoney

China eschews fiscal fanfare for supportive spending - This is a topical and informative article by Nick Edwards for Reuters. Here is a section:

Christopher Wood, equity strategist at brokerage CLSA reckons the clearest sign of Beijing preparing a major stimulus effort would be the Shanghai index climbing above 2,600.

Instead it fell 2.1 percent last week, the same week Beijing announced a 26.5 billion yuan ($4.2 billion) programme to subsidize purchases of energy-saving household electrical equipment - a drop in China's 50 trillion yuan economic ocean.


Some analysts say there is no need for Beijing to spend big as China is stronger than in 2009 when 4 trillion yuan ($635 billion) of stimulus came in the wake of the 2008-09 global financial crisis.

Back then firms had axed around 20 million Chinese jobs as global trade ground to a standstill, threatening the social stability China's Communist Party says justifies its rule.

Today's labour market is tight, wages are rising and employers struggle for staff.

That implies a risk of inflation catching hold if policymakers loosen too aggressively - it took two years to bring prices back under control after the last stimulus effort.

The 10.7 trillion yuan local government debt mountain created at the same time still remains to be conquered.

Analysts at consultancy GK Dragonmics applaud Beijing's resistance to a spending splurge as a sign that coddled state-backed firms should stop expecting handouts at the first whiff of economic woe.

They say a minor counter-cyclical boost is all the current downturn needs. A softly-softly approach is clearly underway.
Fiscal data for the first four months of 2012 shows year on year central government spending growth of 26.2 percent, more than twice the 12.5 percent growth in revenue.

The last time spending outpaced income in the first four months was 2009 when it jumped 31.7 percent year on year and revenue fell 9.9 percent.

Spending on education is up 31.3 percent to 468.6 billion yuan. It's up 17.7 percent on social security and job creation at 457.9 billion yuan. Agriculture spending is up 35.7 percent to 278.9 billion yuan. Transportation spending - a risk area from 2009's stimulus - is up 84.5 percent to 197.1 billion yuan. And 70.7 billion yuan has been spent on affordable housing.

Meanwhile budget allocations for fixed asset investment projects jumped 40 percent year on year in March and April.

My view - With the exception of the "local government debt mountain", this economic data is in stark contrast with what we see in the west and Japan. China is reflating, incrementally, selectively and without running up central government debts.

This is hugely important because while problems in Greece and Spain garner more headlines and roil markets, China remains the main engine of global GDP growth.

This item continues in the Subscriber's Area.

Japanese banks: The performance has been a horror story so what lurks in the vaults? - Well, I have a recent report which will cast some light on recent events but it has been a problematical journey, to put it mildly, for the Topix Banks Index as you can see from these price charts (historic, weekly & daily).

This item continues in the Subscriber's Area.

Email of the day - On investing in Asia:

"Dear David, following your comments today stressing the Autonomies and some dividend aristocrats, do you think Asian markets could be a good choice for where to invest? Most of the Asian ex-Japan dedicated long-only funds that I follow have lost 25% to 28% average in the last 12 months. They seem to be very linked to what China could do with its economy and its growth. Thank you for your thoughts."

My comment - Thanks for an email of general interest.

This item continues in the Subscriber's Area.

The Weekly View: S&P 500 Testing Key Initial Support - My thanks to Rod Smyth, Bill Ryder and Ken Liu for their highly regarded strategy letter published by RiverFront. It is posted in the Subscriber's Area but here is a brief sample:

Institutional reforms will ultimately be necessary to maintain the long-term integrity of Europe's currency union, but disruptive short-term economic adjustments may prove too onerous for political stability. In this highly uncertain environment, investors have sought relative safety, driving US, UK, and German government bond yields down to record lows (following Japan's interest rate path). Unlike the Bank of Japan though, we do not believe the Fed, the Bank of England or the ECB will passively tolerate deflation, but economic conditions and inflation expectations may have to deteriorate further before there are more aggressive policy responses. We think that if measures of inflation expectations fall significantly below 2%, the Fed will likely pursue further monetary stimulus, as they did in 2009, 2010 and 2011.

My view - Inflation is a lagging indicator and it should moderate in line with the declining Continuous Commodity Index (CCI) (weekly & daily) which I last reviewed on 14th May 2012 (will require subscription registration).

This item continues in the Subscriber's Area.

My personal portfolio: Two trading stops triggered - Details and charts are in the Subscriber's Area.

Additional commentary by Eoin Treacy

The Autonomies and mean reversion This has been a trying couple of months for global stock markets with almost every sector displaying susceptibility to increased volatility and selling pressure. Despite the deterioration there has been a clear divergence between companies leveraged to industrial production and those focused on the growth of the global consumer base. This characteristic was also evident from July 2011 and reflected the competition between the views that the global economy was slowing down versus the resilience of Asia's growth economies.

The Autonomies which we define as truly global companies, that have outgrown their respective markets, have brand recognition, dominate their respective niches, possess solid cash flows and a strong record of dividend increases have mostly outperformed. However, even among these companies mean reversion towards the 200-day MA is evident.

During my tour of the USA with The Chart Seminar from early April it was evident that many of these shares had entered periods of mean reversion following very impressive performances from Q3 2011. Many have returned to interesting levels so it appears an opportune time to review the sector.

This extensive chart review continues in the Subscriber's Area.

Musings from The Oil Patch Thanks to a subscriber for this edition of Allen Brooks ever interesting report on the energy sector for PPHB. It is posted without further comment in the Subscriber's Area but here is a section on the cost of the UK's renewable energy:

We found the comments about the impact of rising natural gas prices and the impact of renewables on energy bills very interesting. It is even more so when one understands that only 63% of a homeowner's electricity bill is related to the wholesale price of energy. As reported by Ofgem, the medium annual electricity bill in the UK is £424 ($670.70), based on 3,300 kilowatt-hours (kWh) of consumption, or about 0.1285 pounds ($0.20) per kWh. Given the average bill, £267.12 ($422.54) represents the fuel component. The incremental costs for wind and renewables seem reasonable, but we are hard pressed to think that gas prices have contributed nearly half of the electricity fuel bills. If, however, we add the fuel component of electricity to the share of the gas bill, then we are talking about a total fuel component equal to £656.24 ($1,038.07), which says that the high cost of gas impacted the bill by nearly 20%. That doesn't fit with the statement from Ecotricity that the impact was 10%. We conclude that Ecotricity related the gas cost to the combined gross electricity and gas bills, which is the wrong analysis since there are components of customer bills that are unrelated to commodity market forces such as the cost of distribution and transmission (regulated by Ofgem), meter costs and valued added taxes. The environmental component relates to the government programs to save energy, reduce emissions and deal with climate change. According to Exhibit 8, environmental program costs account for 10% of gross electricity bills and 4% of gas bills. Combined the environmental component impact on the consumer's energy bill is 6.5% of the total.

Email of the day on gold's p&f chart:

"I have a technical issue regarding the P&F charts, in particular Gold. It reversed upwards and hence has 3 "X"'s. On 21 May the closing price was 1593 which is above 1584! [Ed. $12 box size] Therefore I would expect to see an additional "X" to form 4 X's in a column! I thought that you only needed to see a price close above the line to initiate another X or O in the column?"

My comment Thank you for this question which others may also have an interest in. Point and figure charts only measure price increases as increments of the box size. Since the P&F chart you are looking at has a $12 box size, gold will need to rally by at least $12 on a closing basis to warrant the introduction of a new x'. This would require a close above $1596 ($1584 + $12). Since we use three box reversals for our P&F charts, gold will need to fall by at least $36 ($12 x 3) on a closing basis to register the next reversal.

Email of the day
on an addition to the chart Library and the Irish fiscal treaty referendum:

I trust you are well; would you mind adding Manx Financial (AIM code MFX) to the chart library. More importantly I would value your personal take on the likely outcome of the Irish referendum?

My comment Thank you for your well wishes and this suggestion which has been added to the Chart Library. Opinion polls continue to favour a yes vote. I don't think anyone would argue with the idea of a fiscal responsibility clause in Irish law. However given the predicament the country faces I question whether this is the best time to implement one.

The Chart Seminar 2012 - Following a well-received tour of the USA I am looking forward to our next venue in London which now only three weeks away. Anyone interested in securing a place at any of our events should contact Sarah Barnes at:

The remaining dates and venues for The Chart Seminar in 2012 are:

London - May 24th & 25th 2012 at the Radisson Edwardian Hampshire

London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire

The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates. 

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