China tempts consumers with discounts

China is offering consumers a 10 per cent subsidy for buying new television sets, washing machines, air conditioners and computers, in a sign that the government remains wary over the prospects of an economic rebound.

The government will earmark Rmb2bn ($292m) for the new program, the State Council, the country’s cabinet, said on Tuesday. The plan allows consumers in nine of China’s wealthiest cities and provinces, including Beijing, Shanghai and Guangdong, to claim 10 per cent of the purchase price of the new electrical goods if they turn in the old one for recycling.

The plan differs dramatically from an earlier “home appliances to the countryside” program under which Beijing encouraged rural dwellers to buy electronic goods.

That program has already boosted revenues and earnings, but it was slow to take off since it requires consumers to prove their status as rural residents, and only a certain range of low-end products selected by the ministry of commerce in several rounds of bidding are eligible. The new measure, is designed to kick-start buying as quickly and easily as possible as it does not mention any conditions and focuses on big cities with affluent consumers and well-developed retail networks.

Several bits of macroeconomic data indicated over the past two months that the Chinese economy was bottoming out, including the China Purchasing Managers’ Index which showed positive readings for two consecutive months in March and April. However, the optimism was further cooled by the shock announcement last week that China’s exports had dropped by another 22.6 per cent in April compared with the same month last year after the pace of decline had slightly slowed to 17.1 per cent in March.

Thus, in order to make up for the continued lack in export demand, China would need an even stronger push to domestic consumption.

Regarding to the auto industry, government would expand an existing program aimed at encouraging owners of old, less fuel efficient vehicles to trade them in for new vehicles. The alternative may be to introduce lease policy in the automobile market. The January stimulus package in 2009 for the auto industry, which also included a cut in small car purchase taxes, has boosted Chinese auto sales to record levels in the past two months, but government officials are understood to be concerned that the impact of that program may start to fade in the months to come.

Is “Green Shoots” a sign of recovery?

Many people are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the ‘green shoots’ of an economic recovery are blossoming. While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.

Although the outlook for global manufacturing and service sectors is still consistent with a significant fall in global GDP, the pace of contraction began to slow towards the end of Q1, even in Europe and Japan which have lagged the U.S. and China. Globally, surveys suggest that the manufacturing outlook has improved from the freefall of the end of Q4 2008 and early 2009. Some emerging economies like China may now be experiencing expansion based on government investment, but those of most advanced economies remain well in contraction territory. In part, inventory adjustment following the sharp destocking could contribute to a revival in demand, but a real increase in end user demand needed for a sustainable fast-paced recovery could be far off.

Another necessary condition for a global recovery is a bottoming in not only the U.S. but also global housing markets. So far in most markets, housing prices seem far from their bottom and the outstanding inventory continues to be very high.

Moreover there is a risk that the increase in commodity prices might choke off a sustainable recovery if it weighs on industrial production and consumption. The recent increase in commodity prices, driven in part by an increase in Chinese demand for crude oil and other commodities, has contributed to an increase in the Baltic Dry shipping index. Yet, given the significant inventory in commodities like oil, prices might suffer renewed declines. Moreover although trade finance is no longer quite as impaired as at the turn of the year, global trade continues to be quite weak as evidenced from recent data from China, the U.S. and other countries.

Accompanied by the rally in stocks starting in March, the wide variety of central banks’ liquidity facilities have finally started to show clear effects in the interbank lending and money markets. Stress indicators such as the 3 month LIBOR-OIS spreads have narrowed significantly as well as the TED spread. The stock market rally extended also to the bond market with spreads receding significantly and junk bonds outperforming all other asset classes in the month of April. It’s not the sign of that the worst is over, maybe markets just have overextended themselves.

Hedge funds cut fees for investors

The hedge fund industry, infamous for imposing high fees, is finally beginning to cut these charges amid heavy outflows and investor complaints after a year of losses.

Some hedge funds according to Financial Times admitted to cutting their fees for new investors, usually by lowering management fees by half a percentage point to between 1 per cent and 1.5 per cent, and performance fees from 20 per cent to 10 per cent.

A few privileged investors have always been able to gain such favorable terms. However, what makes the current trend striking is that the number of special deals is proliferating fast. The fee cuts started when some funds halted redemptions during the financial crisis. Some managers offered investors fee reductions in exchange for staying in. It could be expected that fees are coming down, and they will continue to come down generally the funds aren’t kicking and screaming too badly, they want more permanent capital. Now, new investors paying the standard 2/20 would be in the minority.

Pension funds, under pressure to regain losses, are also making a push for lower fees. A few months ago, Calpers wrote to the 26 funds managing its $6bn in hedge funds with a list of demands, one of which was a fee cut in the form of a “clawback” on fees if the fund did well after a money-losing year.