China: Hope of the Industrialized World   

• No sooner had the ink had dried on our bearish outlook for China (i.e., a potential negative GDP surprise) than news began filtering out that China's PMI was bottoming, demand was returning for iron ore from Australia and of significant loan growth in other words, signs that China's $585 billion stimulus package was starting to kick in.
• The CLSA and Nomura surveys of Chinese manufacturers offer encouragement that producers are getting inventories under control, while Australian iron ore exporters say China demand is returning. On the other hand, the Xinhua Finance/MNI China Business Sentiment Survey indicates that new orders have dropped sharply and prices have plunged to the point where deflation could become China's battle as well. The gloom in this survey was reflected in other key indicators such as new orders and production. Plunging exports from Japan, South Korea and Taiwan in January also indicate continued weakness in import demand. 
• Ironically, the industrialized world is hoping that enough of the old centrally-controlled China (as opposed to the modern capitalist China) is left for a major shift to domestic demand sufficient enough to offset a dearth of exports.
• While the risk of another downleg in equity markets remains, the China news last week offered a ray of hope amidst a steady dirge of dreary economic and corporate news. Hope of an early recovery in China already triggered a nice pop in the volatile Baltic Dry shipping index (BDI) and a rally in the China ETF (FXI), sending traders in Japan, Australia and Asia scurrying for BDI/China proxies, such as iron ore producer BHP Billiton, shipper Kawasaki Kisen, trading company Sumitomo Corp. as well as the SEA ETF and the S&P Materials SPDR.
• While the prognosis for Japan's economy in 2009 remains bleak especially through the first half to September, stocks of Japanese trading companies, shippers and construction equipment companies are being positioned for a tradeable rally. We believe some money can be put to work on such China plays for at least a short-term break-out to the upside. If the yen happens to weaken further in the interim, the budding bear market rally will be all that more powerful.

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