A theme we’ve latched on to in the past few weeks on the site is Chinese-focused demand weakness. On that theme, we’ve initiated FXI, TIF, and YUM put spreads so far, and will likely execute more trades with a bearish Chinese bent in the future.
Two charts today highlight the difficult predicament of the Chinese economy. Both are courtesy of the Short Side of Long Blog, which sourced the first chart from alsosprachanalyst.com, and the second chart from UBS.
The first chart shows Macau Gaming Revenues charted with Chinese GDP growth:
Anyone familiar with China knows that Macau gaming revenues are a good indication of luxury demand in China. In line with corporate commentary from many different types of companies throughout earnings season, Chinese demand is clearly in decline.
The bullish case is of course based on more stimulus to combat this decline in demand. Chinese policymakers though, are stuck between a rock and a hard place because many now view the stimulus program in 2009 as a wasteful, inefficient form of spending that contributed to inflation and current overcapacity. Another large infrastructure program would help the short-term problem at the expense of an even larger long-term overhang.
The second chart illustrates the existing overhang quite well. It shows steel inventories in China:
All-time high steel inventories are mirrored by all-time high copper inventories as well, both indications of tepid industrial demand. This type of overcapacity will likely take years to work off. In the meantime, we expect Chinese demand to remain a source of weakness in the months to come.