Update on China charts

If current trends hold, the yuan may begin depreciating by the fall.

Money supply growth continues to slow and unless that trend reverses, Chinese stocks will not reverse their downtrend.

Look for loan growth to print sub-15% YoY growth when the yuan depreciates.

China's economy slowly winds down

China has put up annual GDP growth of more than 7% this year, slower than previous years, but still impressive. M2 continues to grow at mid-double digits rates. The Shanghai Composite Index, meanwhile, is probing new 3 year lows and is within striking distance of the crisis lows! The actual low set on November 4, 2008 at 1706.7, a decline of 13.8% from today's close, a significant decline, but not unimaginable. Currently, at a November 2012 close of 1980, the Shanghai Composite is trading at levels last seen in November, December and January of 2008-2009.

I had to readjust the axis on the Shanghai Composite for the chart below, it was set at 2000. This shows continued deceleration in M2 and the sliding stock market.

Where is this headed? Some economic indicators are turning up, but the money supply figures indicate things are edging closer to deflation. What's most interesting is the hot money from QE3 flowed into China, yet didn't manage to push money supply higher; instead we saw the third month-on-month decline in M2 this year.

Technically, the 2008 lows are strong support. Psychologically, they are strong as well. However, it is a fragile psychology. The initial reaction will be: with 4 years of strong economic growth, why are stocks at 2008 crisis levels? Chinese stocks are some of the cheapest in the world, now is the time to buy!

The next reaction will be: what is wrong? If the answer to that question is debt and unsustainable earnings based on real estate and other speculative projects, then the lows could be breached with authority.

Shanghai composite has a bad July

The top chart shows returns by industry, the bottom compares July performance from the past 7 years. The best performing industry groups: consumer staples, agriculture, healthcare. The worst performing: trade, IT equipment, real estate, machinery, electronics.

China's Huaxia bank falls below asset value

And Chinese bank stocks are trading with P/Es between 4 and 7. Value and bullish investors won't find much better prices......unless the bears are right.

China's mainland market peaked in August 2009 and has stayed down, still some 60% off the peak in 2007. It sits roughly 20% above its 2008 low.

华夏银行跌破净资产 银行股白菜价是不是投资机会

Chinese M1 down to low single digit growth

Here's a chart comparing year-on-year growth of M1 and M2, along with the Shanghai Composite Index value.

China's ChiNext market under pressure

China's market for small companies is coming under pressure as many shares become unrestricted. According to this article, A股本周压力大：逾400亿解禁洪峰来袭, restricted shares amount to roughly 48% of existing shares. The article also notes that 4.6 billion yuan flowed out of stock funds in the previous week. Below is a chart comparing the Shanghai Composite and ChiNext Index.

China A-share ETFs

For U.S. investors who want to capture the A-share market in China, Market Vectors creates A-share exposure via swaps—but that exposes the fund to counter party risk, in this case Credit Suisse. The ETF has very low volume and assets; it's hard to know if this is because of the product or the terrible performance in the Shanghai Composite. I lean toward the latter explanation because investors don't seem to mind complex products with added risk. I'm not buying the fund because the market is weak and not worth the potential counter party risk. If the A-share market were looking very strong, I might consider the fund against the risks, but even then I'd probably prefer a sector fund or individual H-shares. Market Vectors China ETF (PEK) There's a similar fund in Hong Kong, iShares CSI 300 A-Share Index ETF (2846). It uses derivatives to achieve the returns, in essence similar to swaps. iShares has some other A-shares funds, if you follow that link you can find them on their HK website, if you're interested.

One positive for these funds is the announcement stock market reforms in China. One risk was that the institutions issuing the derivatives would be unable to hedge underlying assets and end up with a situation such as with iShares India ETN (INP), which turned into a closed-end fund when they couldn't create new shares. It traded at a big premium during the bull market and that led to losses when the premium eroded during the bear market. With the market opening up a bit, at least this portion of the derivative risk is lessened.

Below is PEK versus the Shanghai Composite; then against the index it tracks, the CSI 300. It does a reasonable job of tracking the index, but as you can see, it differs slightly from the reported Composite number.

Chinese M2, Shanghai Composite, Federal Reserve comparisons

Chinese money supply growth in December 2011 was actually about 16% year-over-year, not the 13.6% reported by the PBOC, because their number is the 2011 growth rate. I noticed this when I tried using their growth number and the previous year's M2 number to calculate December's M2 total and found it showed a decline in M2. However, I did match their numbers by going off of the starting M2 for 2011. In any event, here are some charts, some updated and some new.

The first compares M2 money supply in China and the U.S. The Chinese title is an idiom about a soldier who runs away for 50 yards laughing at the soldier who ran away 100 yards, alluding to Chinese criticism of U.S. money printing. The second is a new one, the year-on-year change in money supply as calculated by me, using PBOC and FRB numbers. The third is also a new one. Previously I've compared MTM changes in Chinese M2 to MTM changes in the Shanghai Composite. It gives a noisy picture of what the third chart, using year-on-year numbers, more clearly shows: a general deceleration in money supply growth and a decline in stock prices.