China: Soft vs. Hard Landing

Actually the bulls now argue that the economic weakness is bullish for the China stock market because now the Bank of China will inject liquidity and the economy will recover again. That is a common fallacy in the first part of every recession.

In the U.S., we now hear that weak oil prices are bullish, that the record low prices of U.S. Treasury bonds are bullish, that the Fed will come out with QE3, etc. But all of these are signs of a rapidly deteriorating, global environment. We heard all that in 2007-2008, but these theories did nothing to support the markets, or the economy.

You see, declining oil prices signal a very weak economy. It is the "effect," not the "cause." Lower interest rates are produced by grave concerns at the Fed, not because the Fed wants to be nice. Of course, today the situation is that short term interest rates are basically zero, and those on Treasury bonds are at record, historic lows. That by itself signals that a grave crisis is in the works and that the big, smart money is going to safety. Last year's severe plunge from May to October was just a practice run.

For China now we hear that "the government will cut bank reserve requirement, allowing banks to make substantially more loans." These analysts don't realize that the government is far behind the power curve, meaning that the economy and financial condition of most firms is so bad that they can't get bank loans at any price.

The bulls say that there are 1.4 billion consumers who will support the economy. Well, China had that many in 2008 but it didn't prevent the crash of the Shanghai market of 71%. Most of those 1.4 billion people are so poor they have trouble feeding themselves.

The bulls say that China has $5 trillion of reserves which it can throw into the economy. They don't realize that most of that money is already spent in infrastructure, and $800 million is in U.S. Treasuries, which it really can't sell quickly. By the way, in 2008, China had about $3 trillion of reserves but it didn't prevent the China crisis that year.

Bloomberg reports that China's largest real estate developer, Vanke, said April sales fell a huge 35% from the prior month. That's incredible because March was already down 30% to 50% depending on the city.