McVEAN
Trading Trading & & Investments, Investments, LLC LLC
CHINA’S CYCLE LEADS THE WORLD: TARIFFS ALONE CAN’T OFFSET STIMULUS GLOBAL INTERDEPENDENCE CENTER VICTOR, ID JULY 11, 2019
Michael Drury Chief Economist McVean Trading and Investments, LLC
Past Performance Is Not Necessarily Indicative Of Future Results.
1
CHINA SHIFTS TO DOMESTIC FOCUS
38%
CHINESE EXPORTS VS IMPORTS AS A % OF GDP
33%
28%
23%
18%
13% 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 r-0 p-0 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 r-1 p-1 a e a e a e a e a e a e a e a e Q1 ar ep ar ep ar ep ar ep ar ep ar ep ar ep ar ep aEXPORTS a a M S M S M S M S M S M S M S M S M Se M Se M SIMPORTS M S M S M S M S M S M S M S M Se19
Past Performance Is Not Necessarily Indicative Of Future Results.
2
PRIVATE SECTOR BEARS THE BURDEN
Past Performance Is Not Necessarily Indicative Of Future Results.
3
US FIRMS THAT DEPEND ON FOREIGN SALES ARE ALREADY HURTING
Past Performance Is Not Necessarily Indicative Of Future Results.
4
SOE PROFIT ARE CHINA’S SAFETY NET
Past Performance Is Not Necessarily Indicative Of Future Results.
5
CHINA IS INTRODUCING RISK INTO THE SYSTEM
Source: Wall Street Journal
Past Performance Is Not Necessarily Indicative Of Future Results.
6
2016 CHINA + HONG KONG EXPORT PIE $2.0 TRILLION
PACIFI C RIM
NORTH
AMERI CA
30%
PAC RIM EUROPE NORTH AMERICA SOUTH ASIA MENA LATIN AMERICA OTHER
EUROPE 24%
22% Past Performance Is Not Necessarily Indicative Of Future Results.
7
2016 US EXPORT PIE $1.5 TRILLION
OTHER 23%
NORTH AMERICA 34% NORTH AMERICA WESTERN EUROPE PACRIM OTHER
PAC RIM 25%
EUROPE 18%
Past Performance Is Not Necessarily Indicative Of Future Results.
8
THIS IS THE TARIFF ROUND CHINA FEARED MOST
YOU START WITH THE LOW HANGING FRUIT SOLAR & WASHING MACHINES
STEEL & ALUMINUM
25% ON $50 B
10% ON $200B
$36B, THEN $14B
25% ON JAN 1
15% MORE ON THE SAME $200B
INDUSTRIAL PARTS & CHEMICALS
CHINA TIT FOR TAT RESPONSE
25% ON $50 B MOSTLY AGRICULTURE
10% TO 25% ON $60 B
5% TO 25% ON ANOTHER $60B
Past Performance Is Not Necessarily Indicative Of Future Results.
9
FURTHER TARIFFS WILL LIFT US PRICES
Past Performance Is Not Necessarily Indicative Of Future Results.
10
THE NEXT $325 B LANDS OUTSIDE CHINA
Past Performance Is Not Necessarily Indicative Of Future Results.
11
CURRENT EXPORTERS OF INDUSTRY
Past Performance Is Not Necessarily Indicative Of Future Results.
12
CURRENT IMPORTERS OF INDUSTRY
Past Performance Is Not Necessarily Indicative Of Future Results.
13
NEXT GENERATION FOR INDUSTRY
Past Performance Is Not Necessarily Indicative Of Future Results.
14
CHINA CREDIT LEADS THE WORLD ECONOMY
1750
CHINA SOCIAL FINANCING VS US & EUROPEAN PMI
60
1500 55 1250
50
1000
750
45
500 40 250
0
35
06 06 06 07 07 08 08 08 09 09 10 10 11 11 11 12 12 13 13 13 14 14 15 15 16 16 16 17 17 18 18 18 19 n- un- ov- pr- ep- eb- ul- ec- ay- ct- ar- ug- an- un- ov- pr- ep- eb- ul- ec- ay- ct- ar- ug- an- un- ov- pr- ep- eb- ul- ec- aya J D M O M A J D M O M A J D M A S F J J N A S F A S F J J N J J N CHINA SOCIAL FINANCING (12 MO AVERAGE) AVERAGE OF EUROPE & US PMI (3MO AVG) May-19
Past Performance Is Not Necessarily Indicative Of Future Results.
15
CHINA FISCAL STIMULUS IS BECOMING A FLOOD • • • • • • • • •
Infrastructure -- mostly high speed rail -- raised by $80 billion Middle class income taxes and new deductions for key services Lowered interest rates and reserve requirements Pulled forward $220 billion in state government lending Small business loans increased Tariffs reduced (even for US) and export rebates increased Promised $300 billion in stimulus at National Congress Cut VAT from 1% to 3% depending on product $45 billion in new tax and fee reductions passed on April 15th
• Cumulative over 4% of GDP since mid-2018
Past Performance Is Not Necessarily Indicative Of Future Results.
16
CHINA LEADS THE GLOBAL MANUFACTURING China, Eurozone and US PMI 65
54
60
52.5
55
51
50
49.5
45
48 Eurozone
US
CHINA
Past Performance Is Not Necessarily Indicative Of Future Results.
Mar-19
17
CHINA & US EQUITIES ARE REBOUNDING 5000
3000
4500 2500
4000
2000
3500
3000
1500
2500 1000
2000
1500
500 SHANGHAI COMPOSITE
S&P 500
Past Performance Is Not Necessarily Indicative Of Future Results.
18
CHINESE RAILROAD FREIGHT VS ELECTRICITY PRODUCTION 3 MONTH AVERAGE % CHANGE FROM YEAR AGO 3 MONTH AVERAGE
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%
RAIL
ELECTRICITY PRODUCTION
Past Performance Is Not Necessarily Indicative Of Future Results.
May-19 19
BALTIC DRY INDEX 2500
2000
1500
1000
500
0
May -19 Past Performance Is Not Necessarily Indicative Of Future Results.
20
CHINA EXPORTS VS IMPORTS
6 MONTH AVERAGE %CH FROM 6 MONTH AVERAGE YEAR AGO 66.0%
49.5%
33.0%
16.5%
0.0%
-16.5%
-33.0% EXPORTS
IMPORTS
May -19
Past Performance Is Not Necessarily Indicative Of Future Results.
21
CHINESE PPI IS BOTTOMING
15
CHINA PPI CHANGE FROM SAME MONTH A YEAR AGO
10
5
0
-5
-10
Apr-19 Past Performance Is Not Necessarily Indicative Of Future Results.
22
MANAGING THE FREE FLOATING YUAN CORRUPTION CAMPAIGN CURRENCY BREAK
DE
UR N
EU CRISIS
RE T
CO RE
A TR
RECESSION PRE LEHMAN
OOPS
RY VE
SCHUMER
Past Performance Is Not Necessarily Indicative Of Future Results.
23
CHINA NOMINAL GDP GROWTH IN US$ CURRENT QUARTER % CHANGE FROM YEAR AGO
36%
32%
28%
24%
20%
16%
12%
8%
4%
0%
Actual: Q1 19
Forecast: Q3 20 Past Performance Is Not Necessarily Indicative Of Future Results.
24
IRON ORE 1000
900
800
700
600
500
400
300
Jun19 Past Performance Is Not Necessarily Indicative Of Future Results.
25
CRUDE OIL 140
120
100
80
60
40
20
Jun19 Past Performance Is Not Necessarily Indicative Of Future Results.
26
COPPER VS SOYBEANS 450
1800
400
1600
350 1400 300 1200 250 1000 200 800 150
600
100
50
400 Copper
Soybeans
Jun-19 Past Performance Is Not Necessarily Indicative Of Future Results.
27