Politico:Is China headed toward collapse?

Is China headed toward collapse?

But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
A Chinese collapse, of course, would have profound effects on the United States, limiting China’s ability to buy U.S. debt and provoking unknown political changes inside the Chinese regime.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.

Jim Chanos is no fool. When he speaks pay attention.

related topic:  China has more steel capacity than India and J apan combined.

Some Good News And Some Not So Much

from Bloomberg
Good
China’s industrial production grew at a faster pace in February as a 4 trillion yuan ($585 billion) stimulus plan took effect.

Output rose 11 percent from a year earlier, the statistics bureau said today. That compared with a 3.8 percent gain in January and February combined and 5.7 percent in December.

Not so great
Japan’s economy contracted at the fastest pace since 1974 last quarter as exports, output and business spending collapsed.

Gross domestic product shrank an annualized 12.1 percent in the three months ended Dec. 31, less than the 12.7 percent reported last month, the Cabinet Office said today in Tokyo. The median estimate of economists was for a 13.4 percent decline.

Bad
The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

Wood: Inflation Good For Japanese Stocks

From Bloomberg:

Japan's Inflation May Be `Hugely Bullish' for Stocks, CLSA Says

By Patrick Rial

April 28 (Bloomberg) -- Japan's stocks may benefit from the end of deflation as companies raise prices, improving margins, CLSA Ltd.'s chief strategist Christopher Wood said.

Rising inflation ``is potentially hugely bullish for the Japanese stock market,'' Wood wrote today in his `Greed & Fear' strategy note. The ``bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies' pricing power and, consequently, their profit margins.''

Christopher Wood is a terrific analyst who writes the Fear and Greed newsletter. I used to see the letter regularly and found his opinions to be well worth reading. Unfotunately, I no longer have access to his work so the Bloomberg article is the best link I can provide.
hat tip to Fullermoney. Chart is of Topix Bank Index provided by Fullermoney.

Eyeballing Japanese Stocks

In late 1989 the Nikkei Index of leading stocks in the Japanese stock market hit a high over 39000 while the S&P 500 Index of United States stocks had climbed to just over 400. Today the Nikkei is near 13000 down 66% from 1989 while the S&P is near 1400 up 350% since 1989. A remarkable divergence in behavior as two of the world's largest markets experienced tidal flows in opposite directions. (The first chart shows both markets monthly since 1987)

One of the interesting things about the long downtrend in the Nikkei was how closely the price movements correlated with the yield of 10 Year US Treasury securities. ( two charts show this relationship, one monthly long term, and one daily to illustrate recent movement)

The yield on 10 yr treasuries Friday was down to 3.59% and could go much lower as Japanese yields did during their decade long experience with deflation. But anyone who believes the economy is only going to have a mild recession rather than a Japanese style deflationary catastrophe has to be watching for signs these yields are nearing their lows, and if so should consider investing in the Nikkei or some other Japanese stocks. Further support of this argument comes from the last chart, of dividend yield on the Nikkei Index, which is at the most attractive levels in a decade both absolutely and relative to Japanese debt securities.

I haven't bought anything yet but I am ready to start tip toeing in to positions.