Chinese manufacturing has been slowing for some time, and today’s HSBC China Flash PMI reading represents another data point in that trend. It is clear that China is slowing; the question is, why? It is true that China’s export growth has been slowing since mid-2010, so that is presumably part of the story; but I suspect that the squeeze on household income implied by high inflation (especially in food) and increasing house prices and then the government’s measures to curb these phenomena have taken their toll on the economy. If that is so, the outlook for China is good: if inflation continues to fall, as it is doing at present, then the government will relax monetary policy and growth should return. Inflation may return once that has happened, but their will be time for growth — and asset prices — to increase in the meantime.

None of this deals with the structural problems of China’s growth model. But so what? Structural problems do not mean that asset prices simply flatline forever. Improvement in short-term prospects means improvement in asset prices; Chinese purchases of Australian goods keep that country’s mining boom going; and so on. I am not predicting a relaxation of policy in China — that is hard to predict, and the property curbs may stay in place for a while (Wen recently said that property prices were still too high). This is about understanding whether and why policy is likely to be loosened, and what will happen when it is.

Irish Manoeuvres

The Irish government has come up with an interesting dodge to avoid making its annual payment to the Irish Bank Reconstruction Corp (the run-off vehicle that used to be Anglo Irish) while keeping to its obligations. IBRC has been using the payments to pay down its borrowings from the Irish central bank (i.e., effectively, from the ECB). The government has asked the ECB to accept an Irish government bond instead of cash; then the government could make the payment to IBRC and immediately sell it a bond to get the cash back, and IBRC could transfer the bond to the Bank of Ireland. This is a clever dodge; more importantly, however, it says something about the mood in Europe. Having previously rolled over and submitted to the Germans’ intimate demands, peripheral governments — the Greeks, as usual, but also the Spanish and now the Irish — are looking for ways to reduce the strictures of austerity. The effect of this, assuming austerity remains the path of choice, will be to dull but prolong their pain. However, if the EU continues its moves towards fiscal transfers — the likely endgame, though it will take years — then it makes sense for peripheral countries to minimise their suffering in the meantime.

Stupid Panic

EDF shares have fallen lately because of fears about the safety of nuclear reactors — and about the kind of safety measures the company might have to put in place to reassure regulators and investors. Bloomberg reports today that it is modelling the effect of a tsunami hitting Sizewell B, perhaps as a result of a collapse of part of the Canary Islands into the sea. This is completely daft: a tsunami has not hit any point of the British Isles for 8000 years (according to the British Geological Survey). I wonder whether EDF shares have fallen too far. On the one had, this kind of nonsense will increase its costs; on the other, Bloomberg reports that Britons’ support for nuclear power has been growing, and if we do not build new nuclear power plants then the shutdown of our existing facilities (by 2035) will leave something of an energy gap — the filling of which would conflict with the government’s clean-energy goals.


  • Existing home sales 4.59m ~a.e. Feb.
  • Weekly crude inventories saw their second drawdown of 2012.
  • New Zealand GDP 0.3% QOQ d.e. Q4.
  • Japan trade deficit narrowed more than expected. Exports -2.7% YOY vs. -6.5%e. Imports +9.2% YOY. The fall in JPY has presumably caused exports to fall less than expected.
  • HSBC China flash PMI 48.1.
  • Swiss trade balance b.e. and showed quite a high surplus, Feb. EUR/CHF remains sitting on the floor.
  • Eurozone flash PMI’s for manufacturing and services disappointed across the board. For the whole Eurozone, manufacturing 47.7 d.e. and fell; services 48.7 d.e. and fell. Austerity will continue to damage the Eurozone economy; the interesting question is whether, and when, markets will react to this.
  • UK retail sales -0.8% d.e. Feb.
  • Eurozone industrial new orders -2.3% d.e. Jan.
  • Initial claims 348k b.e. Level with recent post-crisis low. The US labour market continues to improve.

Coming Up

  • Draghi and Bernanke speak