Morning Mumble: Obviously Chinese et Al (the Samaritans Addition)

So the obvious in yesterday's news was China increasing fiscal spending with the title: China's fiscal revenue growth modest, expenditure surges. Thankfully, relaxing with Wine and Food, I didn’t run to exert my views upon the modest masses of my blog, I elected to consolidate my thought process. Unusually, this is a weighty blog today, as its necessary.

What was obvious was the assistance the Chinese Government has been forced to give to the Real Estate/Construction sectors, with monies spent on social housing increasing massively to 201.9 Billion Yuan for those with only the normal about of toes, that's around $32.51 billion or £19.51B. An increase of what looks like 29% on the previous comparative spending period. 

What the press have yet again missed is the earlier announcement only in Chinese (yes I spend my time in those pages as well) whereby Real Estate Transaction Taxation Revenues are down near 39% between January and June 2014. I wouldn't call it an exclusive, more reading the proper items rather than headlining. So Chinese Taxation Revenue is up around 8.5% which would account for the increase Fiscal Spending. More importantly, for China they're noting an increase in the decline of taxation revenues across the board, with the trend increasing from May onwards, albeit saved by the advancement of stimulus by a massive 30% in June.

Now the Chinese VAT revenues grew fastest in the most obvious spending areas, Transportation and modern services (IT et al) VAT revenue where it grew significantly, an increase of 187% and 88.9%, respectively. No surprises here for the Sherlock’s amongst us whom clearly realised China was adamant on Transport projects and development funds for new/modern services. However, what was unsurprising was….In terms of industries, in 19 major industries, general VAT revenue increased slightly, but the sharp decline in individual industries; Among them, coal, steel billets, wine, oil industry, VAT revenues fell 27.8%, 18%, 12.3%, 11.6%. The stimulus amazingly is equal to the loss in revenues from the above declining taxation revenue sectors. In essence, spending on other items, Housing, Transport albeit focused on a bias to Urban Development, with the Rural development being a poor cousin.

Apologies for the weightiness of the above, but what I’m trying to get at is, with the sectors declining that I have “been banging on about” save for Wine, which I drink sometimes to excess, this does not support the commodity prices at all. The analysis of creating stability in China is ironically also “on the basis” of China increasing (read as bringing forward capital projects/investments) which avoided the slump that was continuing from the first quarter of 2014. So for the leveraged fears, with the Local Governments (LGs) of China have been taking the burden of debt by following the Chinese Central Government Policy, one won’t be surprised to read significant increases in LG debt in December 2014.

The end of 2013 saw an unsurprising increase in LG debt, to around 17.7 trillion Yuan ($2.85tn), up near 70% on 2012. Nothing to worry about in terms of comparison to Japan and the like for affordability, assuming there was not between 20-40% wastage. This year has already seen an increase in spending by LG’s by a further 30% on the previous year. Unsurprisingly, LG spending/borrowing increased as the ‘economy’ slowed. LG debt is likely to come in at around 25.1 trillion Yuan (just over $4 trillion) for the full year. 

If this is the case, with revenues increasing at a more modest rates, one questions when the Government has to consolidate not only the LG debt but the economy. It’s now looking likely that the Growth is now ONLY achievable by yet further stimulus. This is likely to mean additional stimulus as well as bringing forward items already planned. China needs to “condition” the world to a slower rate of Growth. Cutting the slack and waste out, 4.2% looks more likely, albeit I doubt the Global Analysts will like this. So for commodities globally and expansion in to Africa, it doesn’t bode as well in the short and certainly not the mid-term.

Bibliography: 

China June fiscal spending jumps 26.1 percent year on year (Reuters)

Analysisof tax revenues in the first half 2014 (in Chinese)

China's fiscal revenue growth modest, expenditure surges (CNTV)

Ministry of Finance Chinese Searches about Growth.

Chinese Ministry of Finance (MoF) Traditional Chinese) (Non-English Site)

Strengthen fiscal expenditure budget execution management actively revitalize precipitation funds (inc Agricultural Spending).

LocalGovernment Debt (BBC)

Now on to the realities of the market…sheesh even I need a coffee. Try typing and thinking about that crap whilst trading.

My emails have been banging on about Sound Oil (SOU) for which there appears to be a significant change in prospects for the company. Allowing for time, I’ll try and gain more of a view over the weekend. There announcement today is positive for SOU on their Santa Maria Goretti ("SMG") gas prospect albeit it does feel about the money.

Caledonia Mining Crp Q2 2014 Production Update & Revised 2014 Guidance update  comes as no surprises and their guidance of 45K ounces looks likely to be missed as well, one should be wise to price in 43K ounces for the year. CMCL have had a nice appreciation in their SP recently, so expect some knee-jerking in the SP. The company is one of my favoured purely on dividend.  

Weatherly International’s Quarterly Update is a positive for the company dogged by various issues. With the figures and production costs looking to improve, I’d envisage a cash cost of sub $2.25/lb for the 2^nd Quarter of WTI’s financial year (albeit the end of the quarter). One can but hope, at the price, it’s certainly a punt. The company is funded through to first copper, which reduces some of the risks of the past, albeit it’s likely another £1m is needed surely not below 4 pence.

Rumour of the day is Mothercare have another suitor at 315 pence, this would not bode well for those still short on Mothercare, the shorts should have been closed on the results. Alas, this is not hindsight but common-sense.

Parties will note my PLUS500 short, the trading update (1st July)  did little to stem the flow of sellers albeit for myself, despite having a target price of 185 pence, the market may not, so am closing positions as it drops to lock in that ‘thing’ called profit.

Atb Fraser