Chinese economy contracts in March

An initial reading the Chinese manufacturing sector saw activity drop to an 11-month low in March, but analysts may be more worried about the government’s push for much-needed structural reforms. Here is a direct video.

Listen to the long always Fidelity salesperson in this clip explain how they are not concerned (ie. reducing their equity exposure on this news–because they need to keep the equity dream alive for people to keep buying their funds), or as she says they remain confident that Chinese consumers will start spending any day now to drive the economy so that the government firehouse of debt-spending (that has quadrupled total credit in the Chinese economy since 2008 to now some 282% of GDP) can back out as the primary growth engine it has been over the past 8 years.  Best wishes.

In reality, consumer spending in China has declined with employment since the 2008 recession. Chinese people are still largely responsible for their own social security and healthcare and save about 35% of their income as a result (compared with maybe a 5% savings rate in North America). The Chinese saving rate is going up not down.  Moreover while many were trying to improve their net worth by using free-flowing credit to speculate on housing the past few years, home prices are now in retreat and in February, registered 6 straight months of decline in 69 of 70 Chinese cities.

The trouble with investing speculating on credit is that when prices fall you are left with not just capital losses on the property but negative equity and often negative cash flow after making the debt payments.  This is what prompts people who thought they were ‘investors’ to suddenly start liquidating.  If they can find a buyer.  Which drives prices down further and compounds losses…and so on.  The world over, it is always the same.

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