Broomer's Blog

From the category archives: China

Outlook June 2018

Geopolitical events invariably cast a shadow over markets, but it is relatively rare for them to manifest into something that affects the economic cycle. Events that alter the secular trend are even more exceptional but this is not to say that they don't happen. Thatcher's deregulation drive of the 1980s and FDR's 'New Deal' are examples and we suspect that Trumponomics may be another. Labelling Trump's policies as Trumponomics is unhelpful since it hints of an underpinning philosophy, which is entirely absent. Political direction rests with a demagogue.

For decades, economies and markets have quietly benefited from freer movement of goods, capital and labour. This is a trend that has not only been halted but sent into reverse. The direct impact of $20bn of tariff costs on a $20tr economy will be trivial but adds unwelcome grit to the running of the system. It will be interesting to observe voters' reaction as the repercussions are felt. Already, mid-Western soybean growers are grumbling as soon might the blue collar shoppers of Walmart where 70-80% of goods are sourced from China.

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China – cracked or crocked?

The FT reported recently that Charlene Chu, a highly regarded ex Fitch analyst, estimates that bad debts in China could reach $7.6 trillion. This analysis is based on the surge of lending made during 08/09 and from extrapolating experience of similar credit booms in other economies. Once the boom turns to bust, bad debt ratios have peaked at an average of 34%, well above the 5.3% of loans currently being officially recorded as non-performing or in trouble within China. It would take a hard landing to sour loans to this extent, nevertheless anything like $7.6trillion represents a gigantic number. To put this number into perspective, US and European banks lost in the region of $3trillion during the financial crisis. Concerns about the health of the Chinese banking system have been circulating for many years. How can so much money have been deployed so quickly, so effectively? How big are the problems hidden in the shadows, what is discounted in current market valuations and what steps have the Chinese auth ...

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Trump is going to end up with kimchi on his face

Donald Trump really does not need anyone's help to make him look foolish; he seems perfectly capable of doing this all by himself. Over recent weeks, I have been following his comments on North Korea with disdain and North Korean President, Kim Jong-un, must be relishing the propaganda victories that Trump has continually presented him.

My wife was born in Seoul, so I tend to follow events on the Korean peninsula with more interest than many. Events north of the border are often disturbing, sometimes weird and occasionally comical. This Telegraph report about Kim Jong-un's father provides some flavour to this. The people of the South are also incredibly proud of their small nation. Koreans are typically a passionate people and are sometimes referred to as being the Italians of Asia. If you are ever in search of an entertaining evening, I would strongly recommend taking a drink in a Korean bar when the national football team is playing.

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It’s Just Too Much

The recent announcement that Tata Steel is looking to pull out of the UK, which places the loss making Port Talbot at risk, has understandably made the headlines. What hasn’t made the headlines however is the vast size of the gulf between global steel supply and demand. To close this gap, it would not only require the closure of this plant, but also, the equivalent of all the capacity from Japan, America and Germany. 

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The Great Fall of China

The Chinese stock market peaked in June, ever since share prices have suffered a monstrous reversal.  With p/e ratios for glamour stocks reaching well into triple digits, this isn’t a massive shock.  What has been a surprise is the ham-fisted measures employed by the authorities to try to arrest the declines.  Measures such as bans on short selling and the establishment of support funds were soon superseded by increasingly farcical actions such as the arrest of 200 individuals for heinous crimes such as scaremongering blogging and the writing of emotive newspaper articles.

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