Balancing out?

Good news and bad for the trade surplus, September 4:

Do we see positive signs for the trade balance in the latest CLSA Purchasing Managers’ Index (PMI)? Although the manufacturing sector continued to expand, most of the demand came from the domestic market. Export orders saw only a modest rise, which is seen as evidence that the removal and reduction in tax rebates on a wide range of exports is having its desired effect.

New orders were certainly at nothing like the levels recorded in May and June when manufacturers were rushing to get business done ahead of the tax changes. These changes were brought in largely to appease the hawks in Washington who were squawking about China’s trade surplus. Removing the tax rebates would push up export prices as suppliers moved to protect their profit margins, thereby making Chinese goods less financially attractive. Less exports means a lower trade surplus.

This is how the theory goes and, according to the CLSA figures, there may be some truth behind it: Output prices are at their highest in a year, although a spike in input prices may have had much to do with this.

The verdict for foreign buyers in China is not a happy one. “Profit margins will collapse in China if any weakness in top line sales emerge over the next few months on the back of a global credit crunch,” said CLSA Chief Economist Dr Jim Walker.

Tough love, September 13:

“Some investors, especially newcomers, lack securities knowledge, risk awareness, and the ability to afford losses,” said Shang Fulin, head of the China Securities Regulatory Commission.

Which roughly translates to… They have no idea what they are doing; they don’t know the meaning of the phrase “too much”; a lot of homes and cars are going to end up repossessed.

Isn’t it great when regulators turn to tough love? What’s particularly encouraging is Shang’s follow-up remark that brokerages should help make investors understand that the government won’t bail them out if the market goes belly up. Not only is China’s chief securities policeman talking tough love, he seems keen to practice it too.

But you have to wonder what would make a profit-minded Chinese broker talk people out of investing when his primary source of income is transaction fees. And when he has no means of hedging his risk to make money when the market falls.