Thursday, July 9, 2009

Yet another huge number coming out of China - consumer car demand

Some huge, hard-to-believe numbers coming from the Chinese - if I had a nickel for every time I wrote that... I could melt all those nickels, sell it on the spot market and buy enough gold to plate my new ZH decal.

But seriously - is anyone buying this? The story being put forward by the Chinese is that the government pumped in some stimulus which has been enough to get the crank rolling again and leads to statements like:

"China’s downward slide is clearly over,” said Wang Qingtao, an analyst at First Capital Securities Co. in Shenzhen.

We don't want to be the Debbie downers here but where is this demand coming from? Have Chinese consumers suddenly rationalized their government's stimuli against the precipitious declines in aggregate global demand, the drops in real income and the dismal employment picture and come up with a "buy" signal? Unless market psychology runs differently over there, we have to wonder how much stock to put in these numbers. Our frequent readers know that we typically will do a deep dive into the data but in this case, we're SOL for two reasons - 1) I don't read Chinese (raw data somewherehere) and 2) the next best thing, the Bloomberg article, is a little sparse on some of the details. For example, this little tidbit REALLY needs some explaining:

First-half sales jumped 18 percent to 6.1 million after the government cut some retail taxes and handed out vehicle subsidies in rural areas to spur demand.

Now, some retail tax cuts and vehicle subsidies to spur demand could be a harmless few percentage points here, a 0% APR or $1500 cash back there, but there is a slight possibility it could be quite a bit more drastic than that (especially in light of the strong political pressure to maintain the "all is well" message). The end message is: who really knows? Ultimately, this fails the sniff test. The "China bubble" theory is pretty well-established by this point even if the proponents have screamed themselves hoarse (your beloved correspondent included) as the SHFE runs a marathon with the bulls and this seems yet another data point to shake our heads at.

The other interesting message is that this growth in Chinese demand may have positive spillover effects into Western companies like Alcoa. Indeed, Alcoa CEO Klaus Kleinfield comments:

Alcoa, the largest U.S. aluminum producer, expects government stimulus spending in China and the U.S. to boost metal demand enough to help the company start generating cash again.

On this specific example, I would refer you to an excellent post by Macro Man who basically concludes that the better than expected news can mostly be attributed to aggressive cost cutting rather than any sustainable increase in revenue. The other alleged spillover industries are in similar straits so I won't belabor the point but suffice to say that GM is still not a good buy for the US taxpayer.

To be fair - there is a tremendous amount of latent demand in China. As the below graphic shows, Chinese demand has a long way to go before reaching an appropriate % of GDP (thanks to Brad Setser/Paul Swartz for the graphic).

However it's just too soon. This sort of macro shift cannot possibly be expected to happen in any given 3 month period and especially in the context of crappy ROW macro data (green shoots aside), it's tough to swallow. The long term story is definitely very bullish on China but only when the macro pieces are there - until then, it's a pretty tough pill.

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