The Independent Market Observer

9/19/12 – The China Channel

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 19, 2012 10:11:35 AM

and tagged Yesterday's News

Leave a comment

Perhaps I should be more like my cable provider, which seems to have a channel for any conceivable interest, by starting a China channel, as there will certainly be enough content to fill it. The news from China continues to be worrying on both a political and an economic front.

On the political front, the trial of the police chief who assisted Bo Xilai is over after two days. The Financial Times (FT) reports “Trial of Bo police chief ends” (p. 6), the New York Times (NYT) has “Trial of Ex-Police Chief in China Scandal Ends in a Sign of Leniency” (p. A4), and the Wall Street Journal (WSJ) has “Hints of Leniency for Chinese Police Chief” (p. A11). The good side of the story is that the police chief may get off lightly, and the bad side is that the stories suggest that Bo Xilai may get a much harsher penalty. This is important because, not that long ago, Bo was a major candidate for a central Chinese leadership position. It will be interesting to see, in light of the pending leadership transition, how the Chinese government handles Bo’s trial—if there is a trial at all, even a two-day one. I say again that if China’s economy depends on competent and consistent government, the past couple of months make me even more concerned than I was before.

Other concerns are geopolitical and economic, and the two are intertwined. The FT has a good article, “Protests fuel fears on China-Japan trade ties” (p. 6), that elaborates on the point I made yesterday about how both China and Japan have extensive trade relationships, and any conflict will have significant negative economic effects. The NYT (p. A8) also weighed in on increasing protests, and noted that, although the protests were large and angry, they were also better controlled than the weekend protests, suggesting that the authorities had reasserted control. In the WSJ, “Leaders’ Struggles in Beijing, Tokyo Escalate Island Dispute” (p. A11) talks about how both the Chinese and Japanese governments have backed themselves into a corner over the island dispute, to a point where it is very difficult to even negotiate. The story makes the point that domestic politics are constraining what the leaders can do, which may force continued escalation of the conflict despite the economic consequences.

Neither country needs more economic challenges. The Bank of Japan just held interest rates at the same low levels they have been at for years, as its economy continues to stagnate, while the Chinese slowdown continues to develop. The WSJ’s “FedEx: China’s Problems Growing” (p. B1) highlights how one firm expects the Chinese slowdown to continue—and provides a good overview—and the title of an op-ed in the FT, “China’s credit tide leaves a foul stench as it recedes” (p. 14), is pretty self-explanatory.

Chinese nationalism will not stop at Japan, either. The WSJ, in “Protesters Surround US Ambassador’s Car” (p. A11), and the NYT, in the story mentioned above, cite that the car of the Italian consul in Guangzhou was attacked. If the situation continues to worsen, do not expect China to limit its animus to Japan. Given China’s huge role in the global economy, we can expect this will roil markets if it gets much bigger.

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®