CER editorial staff recently attended a lunch address by CLSA’s China guru and occasional CER columnist Andy Rothman, who remains cheerfully and unapologetically bullish on China. Rothman doesn’t believe the Sino-US trade surplus is a serious problem (amen), he doesn’t believe bad local government debt is a challenge, and he thinks the worst risk China faces in the property markets right now is that it might drive prices down too far by accident. He also thinks inflation is being managed quite well; his assessment of Wen Jiabao’s recent comments on the subject is that Wen is just talking tough while he waits for the inflation figures to come out, showing that Beijing has grabbed hold of the CPI reins. Then the central government can relax and stop intimidating the market with threats about credit tightening and what-not.
Rothman is, as always, persuasive. This week, however, he is a bit short on company, especially in the equity and bond markets. The value of US dollar-denominated debt issued by Chinese companies dropped 1.5% in August, the largest decline since Lehman Brothers blew up back in 2008. And in the stock markets, the bears are definitely big convenience-ing in the Hong Kong woods.
Typical bear behavior, we know. Prices for put options which hedge against declines in the Hang Seng China Enterprises Index rose to 1.41 times the price of bull options, their widest spread since 2007. This sentiment is based on both macroeconomic anxiety and specific earnings disappointments: Foxconn missed its Q2 estimates, while Shanda Interactive profits declined 95%! Mainland stocks hit their lowest levels in over a year on Tuesday, and China International Capital warned investors to brace “for more pain,” causing yet another migration of bears into the woods. On the macroeconomic front, food price inflation – now the primary driver of consumer price inflation – kept inching up last week. Pork prices, for example, hit a record high of US$4.10 per kilogram. Food prices are to Chinese politics as vodka prices are in Russia (interesting reading here) – both being essential protections against starvation and reality, respectively.