Is China Contracting or Expanding? Maybe Both If You Only Read Headlines

It seems like almost every day now, there's a headline saying "Markets Rise on XYZ" only the markets are actually flat or down, not several hours later, but when the story was being written and right as it hits the wire. In some cases, there are many journalists who do not know the material they report on, or who fail to do simple fact checking.

Tim Knight caught this one, where the reporter didn't realize that the stock spun-off a huge division.

Then there's the headlines that deliver some type of assertion. My favorite is once in awhile, they will catch a news org running two completely opposite headlines, such as "Stock Drop on Jobs Data" right near "Stock Surge on Jobs Data."

This next headline isn't so bad, since it does have truth in it:

China Exports Unexpectedly Fell in March

What is unexpected about a drop in exports in the midst of a slowdown? Apparently, the analysts are still wildly bullish.

China reported an unexpected contraction in exports in March, raising the danger of job losses as Beijing tries to overhaul its slowing economy.

Customs data Thursday showed that exports fell 6.6 percent from a year earlier, well below analysts' expectations of single-digit growth. Imports contracted by 11.3 percent, highlighting the weakness in Chinese growth.

China's leaders are trying to nurture growth based on domestic consumption instead of a worn out model reliant on investment and trade. But those plans depend on strong exports to support employment during the transition. Beijing is forecasting annual trade growth of 7.5 percent, but so far this year, official data show total exports and imports down by 1 percent.

The Internet can move information instantaneously, but it still takes days for information to be absorbed by humans. For instance, the PBOC very early said there would be no stimulus, but it took more than a week for this information to spread, all the while there were stories on hope for a serious China stimulus plan, not the small effort announced last week.

More from the export story above:
In a speech Thursday, Premier Li Keqiang said the foundation for growth is "not strong" and the economy still faces "downward pressure." But he ruled out additional short-term stimulus.

"We will not adopt stimulus for short-term and temporary economic fluctuations, but pay more attention to the healthy development of long-term efforts to achieve sustainable and healthy development," the premier said at a conference in the southern city of Sanya, according to a transcript released by the government.

Analysts said March exports probably were stronger than they appeared. They said data suffered from comparison with last year, when exporters are believed to have reported inflated values for goods as a way to evade Chinese currency controls and bring extra money into the country.

"While the export data will add to worries among policymakers and in the market about growth slowing down precariously or China losing competitiveness, we would caution against such interpretations," said RBS economist Louis Kuijs in a report.

Kuijs said that with data distortions factored out, China's exports in March might have grown by as much as 5.2 percent, on par with South Korea.
That's true, last year's numbers were inflated by fake invoicing designed to arbitrage interest rate and differentials between HK and Mainland China, leading to a big rally in the yuan in April. So why didn't all the analysts adjust their estimates? Shouldn't they all have predicted the drop in exports against last year's inflated numbers?

China's trade surplus with the 28-nation European Union, its biggest trading partner, narrowed by 40 percent from a year earlier to $3.2 billion. The surplus with the United States contracted 26 percent to $8.1 billion.

Weakness in Chinese import demand could have global repercussions, hurting economies from Southeast Asia to Australia to South Africa that supply its industries with iron ore, industrial components and other goods.
Smaller trade surpluses (or even deficits) will lead to slower reserve accumulation and even a reversal, pushing the yuan lower. Even if the trade data is better than reported, the picture is not bright, only neutral.

However, Reuters reported: Asian shares rise on Fed, unfazed by China exports. Investors are not responding to the Chinese export numbers. There is a rally underway in the markets. Whether or not the drop in exports is meaningful will come out in the coming weeks and months.

China is now stuck in the box with Schrodinger's cat. On the one hand there is the CCP's history of pulling rabbits out of hats. Possibly solid trade numbers and still good GDP growth will allow the leadership to steer the economy towards a historical anomaly: a smooth transition into a new slower rate of economic growth. On the other, anecdotal evidence from the Chinese press isn't good. The reports on the ground in the real estate market are worse than they were in 2011. Trust market fundraising was down 40% in Q1, Li Keqiang just told us again not to expect stimulus, the PBOC shut down stimulus talk, and take your pick pick of real estate ghost city stories. Whatever happens, the media will tell you after the fact. They will report negative news once prices plunge, or positive news once the rally is already underway (a small one is underway right now).

The reason for this is social mood. The most negative news comes out once the stock market has already bottomed; the most positive stories come out as the market is in the process of topping, or perhaps has even topped already. As the journalistic profession is watered down, the influence of social mood becomes even greater. Social media may exacerbate this trend by providing more data points confirming the existing mood. So we get the story above about Sears plunging because the market is selling off and here's a stock down 50%......

Some good coverage still makes it through though. Here's two conflicting opinions on China's debt problems.

Deutsche Bank sees the positive: Deutsche: Chinese Banks Set Aside Ample Bad Debt Provisions; Buy
Combining corporate bonds and trusts defaults, Deutsche identified “credit risks worth Rmb237bn for these two markets, with listed banks exposed to 37% of these risks.” According to Deutsche, Chinese banks have provided RMB 819 billion provisions and their current valuations have priced in RMB 2.8 trillion non-performing loans, more than enough to cover the RMB237 credit loss.
Surprising the Chinese press is less optimistic, calculating higher default rates and exposing how the banks aim to cut their reported NPLs.

The IMF sees the risks: IMF Urges China To Rein In Credit, Even If Growth Slows

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