Diary of a Financier

Chart Update: China/US Decoupling, Brief Relief Coming

In Capital Markets on Wed 28 Mar 2012 at 21:51

The leak in Chinese stock markets flowed faster today, so I wanted to record some thoughts. The aggregate of my analysis suggest a brief recoupling will materialize over the next week or two, with a relief rally in Chinese equities outperforming US constituents. In the intermediate weeks/months to come, China will nevertheless decouple again.

When I awoke this morning to check the futures & overseas markets, US assets and the mass media surprised me by fading China’s Shanghai (SHGIDX) -2.65%. Even upon my arrival in the office, CNBC snuck through a morning segment starring Jack Welch with nary a mention of the decline. I’m sitting here this evening reviewing everything, and even while the entire global trading day bleeds red off my screen, the -2.65% Chinese close is an outlier. I’m surprised by the snub:

I’ve waited patiently for a Chinese correction, so much so that I’m surprised at my restraint throughout this year’s underperformance. I derive part of my moderation from the charts’ analogue to 2010/11, which historical timeframe continues to prove its relevance across multiple asset classes du jour.

According to an overlay of the China ETF (FXI) v. SPY, China actually stabilized for a brief recoupling in 2011 after daily indicators diverged to an extreme relative to their US counterparts. In the daily chart below, note the yellow FXI/SPY ratio at the bottom. That ratio suggests an imminent pause in China’s underperformance. I’ve also displayed a purple correlation curve at the bottom of each the weekly & monthly charts, which show FXI captive to an erosive slide for the longer-term:

FXI v SPY 2011 analogue

Fundamentally speaking, broad Chinese demand has been weakening for more than 9 months now–a truth manifest in local equity performance. Quarterly earnings reports will reflect the slowdown in y/y sequences. I’ve raised the “hard or soft landing” question with management teams atop a handful of American conglomerates. I usually take their answers with a grain of salt, but a few Asia-Pac analysts independently offered the same insight I received from the corporate executives: ‘the government has quietly promised [selective] easing measures for deployment in 2q12.’

In neat harmony with the charts, these tactics could defer an immediate reckoning. This is a private sector brimming with liabilities at a high cost of capital. The system’s leverage has maintained its altitude. But something is different from the 2011 period cited in my analogue: stock indices are 25% lower today. The values of Chinese assets have regressed steadily (but significantly in absolute terms) since July 2009, over which period inflation has annualized 4.5-6.5%. This could be the early stages of a debt-deflation cycle. A deceleration in cash flows or transaction volumes will trigger write downs and a brutal unwind.

–Romeo

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  1. […] look to my SHGIDX 2011 analogue and find technical footing: SHGIDX 2011 analogue- daily shows fractal construction that should roll […]

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