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Current Value: 48.7%

Current Value: 2.7%

Current Value: 48.7% CSM’s China Highlights:

1. Earnings.

Remy Revenue Misses Estimates on Weak Chinese Cognac Orders

Bloomberg, July 21

Kumba Iron Ore, Africa’s largest producer of the steelmaking ingredient, axed its dividend

for the first time since it started trading in 2006 as profit declined 61% after prices

plummeted… due to a surplus as China’s economy grew at the slowest pace in more than

two decades.

Bloomberg, July 21

Elevator sales heading down in China

United Technologies cut its annual profit forecast, pinning a share of the blame on Otis, its

business which has been making elevators for more than a century… new orders dropped

10% in China in the quarter to the end of June.

FT, July 21

Audi has agreed to offer $194 million, in subsidies to its dealers in China, a move that

comes at a time of shrinking growth.

WSJ, July 20

VW Group sales fell 4% globally in June, the worst performance since 2009. China sales

were down 17%, offsetting ex-China growth of 2%.

Bloomberg, July 21

Revenue was dragged down by a 40% decline in China, where IBM suffered from signing

fewer large transactions.

Bloomberg, July 20

See page x for other company announcements.

1. 15 multinational companies suggest growth is not 7%.

2. Deflationary events are unfolding as companies dump inventories.

3. It’s not at all clear that Beijing’s 37 market supporting steps will help the stock market, let alone the economy.

Is the China Hard Landing Here?

As Chinese growth slows, multinational companies are getting

hit hard. From automakers, to consumer companies, to

commodity producers, to shipping companies, the slowdown is

very broad-based. And, as sales slow, companies are cutting

prices, squeezing profits, and putting China at risk of deflation.

π

Alongside China’s four domestic bubbles, investment, credit, stock/margin debt, and inventories, there’s an external bubble that’s bursting: multinational profits.

Is the China Hard Landing Here?

Is the China Hard Landing Here?

Is The China Hard Landing Here?

Is The China Hard Landing Here?

China Is Faced With 4 Significant Deflationary Headwinds:

1. Unwinding of an investment bubble.

2. Unwinding of a credit bubble.

3. Unwinding of a margin debt bubble.

4. Unwinding of a inventory bubble.

These forces help explain why commodity prices are declining. And the inventory bubble is starting to put downward pressure on car prices, etc.

China’s big players are gearing up for a price war in the high-end

smartphone sector.

China Daily, July 20

Price cuts by both foreign and local auto brands in the past months have

done little to spur demand.

Bloomberg, July 10

Audi has agreed to offer $194 million in subsidies to its dealers in China,

a move that comes at a time of shrinking growth.

WSJ, July 20

... 2003- of the level and yy percent change in china eps as a precursor to all of the bad earnings announcements. N

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China EPS (IBES)LTM Jun: 6.5 RMB

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China EPS (IBES)LTM Y/Y % Jun: 1.6%

China’s Slowdown Is a Significant Headwind for Multinational Earnings.

China's company EPS surged 360% over the past 12 years, which obviously helped multinational company earnings. But now, that era is over. China’s EPS growth has stalled. And based on the latest multinational earnings announcements (see next 2 pages), even this EPS series from the MSCI China may be overstated.

Remy Revenue Misses Estimates on Weak Chinese Cognac Orders

Sales fell 9% on an organic basis in the three months through June, the

Paris-based company said.

Bloomberg, July 21

If 2Q Chinese Growth Was Really 7%, Why Are 15 Multinational Companies Getting Hit?

Kumba Iron Ore, Africa’s largest producer of the steelmaking

ingredient, axed its dividend for the first time since it started trading in

2006, as profit declined 61% after prices plummeted.

Bloomberg, July 21

Elevator sales heading down in China

United Technologies cut its annual profit forecast, pinning a share of

the blame on Otis, its business which has been making elevators for

more than a century… new orders dropped 10% in China in the quarter

to the end of June.

FT, July 21

VW Group sales fell 4% globally in June, the worst performance since

2009. China sales were down 17%, offsetting ex-China growth of 2%.

Bloomberg, July 21

Revenue was dragged down by a 40% decline in China, where IBM

suffered from signing fewer large transactions.

Bloomberg, July 20

Samsung Electronics Sees Seventh Straight Profit Decline

The company also saw its market share eroded by a number of low-

cost competitors from China and India, a threat that may continue.

Bloomberg, Jul 15

10.

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14.

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Brilliance (BMW partner), -40% profit warning Toyota (not profits, but 48% drop in exports Jan-May)) Audi (Chinese deliveries dropped 5.8% in June) GM sales flat in June, despite up to 20% price cuts Jaguar cut sales targets and prices in China Burberry saw double digit decline in 2Q Hong Kong sales, less mainlanders in Hong Kong Carrefour (French firm below) , 2Q sales in China fell 12% Mead Johnson (cut sales forecast to 2% from 7%), infant formula Yum! (10% drop in 2Q sales, a bit better than 1Q’s 12% drop) … maybe seafood will help? Eek Komatsu (excavator demand down 50%) Hitachi (expanding factory cuts due to excess inventory)

Burberry said Wednesday that same-store sales dropped by a low-single-digit

percentage in the Asia-Pacific region in the three months ended June 30. That

compares with double-digit percentage growth for the region in the same period

last year.

WSJ, Jul 15

Brilliance China, which makes BMW cars for sale in China, said: The Group is

expected to record an approximate 40% decrease in the unaudited profit for the six

months ended June 30th as compared with that for the same period in 2014.

FT, July 13

Toyota’s exports from Japan in the January-May period to China fell 48% due to

excess inventory.

WSJ, July 10

Audi Said to Revise China Target as Stock Rout Saps Demand

Audi’s Chinese deliveries dropped 5.8% in June

Bloomberg, July 16

Jaguar Land Rover, the U.K. luxury-car unit of Tata Motors, cut its sales targets

and prices in China amid slowing demand in the world’s largest auto market

Bloomberg, July 14

General Motors sales in China were flat in June from a year earlier despite cutting

prices by up to 20% as growth in the world's hottest car market continues to cool.

Bloomberg, July 14

Carrefour, France’s largest retailer, reported slowing sales growth as business at

the company’s Chinese stores was weighed down by weak consumption.

Bloomberg, Jul 16

Komatsu’s concerns in China mirror those of Hitachi Construction Machinery,

which said excavator demand this quarter is running almost 50% below year-ago

levels. In response to conditions in China, Komatsu is reducing labor costs,

while Hitachi is cutting stockpiles by operating Chinese plants at half capacity.

Japan Times, June 30

Samsung Heavy Industries warned about an operating loss as large as $873

million, the latest blow for an industry already reeling from weak orders in China

and South Korea.

WSJ, Jul 7

If 2Q Chinese Growth Was Really 7%, Why Are 15 Multinational Companies Getting Hit?

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China Business Confidence (MNI) Current Conditions

Seas. Adj. Jul: 48.8%

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China PMI Employment (HSBC & CFLP) Mfg & Svc Eq. Wts.

Jun: 48.9%

Slowing Business Confidence Is Putting Downward Pressure on Employment.

Business confidence in July fell 4.7 pct. pts., matching April’s level, which was a 6-year low. Depressed business confidence is putting downward pressure on employment, and in turn retail sales.

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Shanghai Composite Jul 22: 4026

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07 08 09 10 11 12 13 14 15 16

China Business Confidence (MNI) Current Conditions

Seas. Adj. Jul: 48.8%

The Shanghai Rally Failed to Produce an Uptick in Business Confidence, But the Decline Hurt July Confidence.

The 159% rally in the Shanghai did not boost confidence. But, the 22% drop in the Shanghai since its peak is putting downward pressure on confidence. The effect is unbalanced, i.e., there was no boost on the way up, but damage is being done on the way down.

Chinese business sentiment fell sharply in July, suggesting that recent dramatic

falls in company share prices had severely dented optimism.

FT, July 22

+159% -22%

Desperate Efforts to Support China’s Stock Market.

We’ve counted 37 steps by Beijing to support stocks since the Shanghai’s June 12th peak. We expect this list to keep growing, including typical easing moves out of the PBoC, e.g., lending rate and RRR cuts, and perhaps some more desperate, heavy handed moves, e.g., stringent capital controls. That said, these moves, so far, are not helping boost growth.

See next page for steps 1-18.

#Date of

AnnouncementChina's Steps to Try and Support the Stock Market

37 Jul-22 China's Securities Finance Corp is now among the top 10 shareholders of at least 8 firms.

36 Jul-21Capital injection of $109b into 3 policy banks ($48b to China Development Bank, $45b to Export

Import Bank, and $16 to Agricultural Development Bank).

35 Jul-19Increased regulations on internet financing and P2P lending. Client funds must be parked at

established banks, and more disclosure and clearer warnings about risks required.

34 Jul-16

Report that roughly $483 bill ion was made available to China Securities Finance Corp to

support the stock market was leaked ($209b of which from China's biggest banks), boosting

stocks today.

33 Jul-15

Hundsun Technlogoies, which owns HOMs (biggest portal for non-brokerage margin trading)

was blamed for stock market declines. New account openings were banned, and funding of

existing accounts was suspended.

32 Jul-12National financial stabilization law to be created to legitimize govt intervention during stock

market turmoil.

31 Jul-9China Securities Finance Corp, the state margin finance company, is seeking 1 tril l ion RMB to

buy stocks in hopes of supporting the market.

30 Jul-9The Xinhua News reported Beijing is cracking down on those found to be maliciously short

selling the market.

29 Jul-9 Today, 60% of A-share companies have been suspended from trading.

28 Jul-9China's Banking Regulatory Commission said it's encouraging banks to renegotiate maturity

terms regarding lending stock as collateral.

27 Jul-9

Shenzhen's largest companies will consider share buybacks and employee share schemes, and

improve corporate governance, as published and signed by 97 companies on the official China

Securities Journal website.

26 Jul-9PBoC has approved the CSFC to issue bonds, including short-term commercial and interbank

paper, to provide liquidity.

25 Jul-9China's Financial Futures Exchange will increase the margin requirement on all contracts for

short positions from 20% to 30% (it was just increased to 20% on July 8th, from 10%).

24 Jul-8 China's security regulator bans shareholders with stakes >5% from selling for 6 months.

23 Jul-8China's State-Owned Assets Supervision Administration Commission ordered govt-owned firms

not to sell shares they hold, despite volatil ity, while encouraging them to buy more stocks.

22 Jul-8China's Securities Regulatory Commission will purchase small and medium-sized stocks (in

addition to buying blue chips).

21 Jul-8China's Financial Futures Exchange increased the margin requirement on all contracts for short

positions from 10% to 20%.

20 Jul-8China's Insurance Regulatory commision increased the cap on insurance companies' maximum

equity investment from 30% to 40% of total assets.

19 Jul-8Over 700 companies l isted on the Shanghai and Shenzhen stock exchanges were suspended

today, with the total suspended rising to almost half of the 2,781 cos.

Desperate Efforts to Support China’s Stock Market.

Here’s the rest of the list … it would be illegible if we kept it to just one page.

China police to investigate malicious short selling of stocks.

Xinhua, July 12

#Date of

AnnouncementChina's Steps to Try and Support the Stock Market

18 Jul-7200 companies l isted on the Shanghai and Shenzhen stock exchanges were suspended today,

with the total suspended rising to 769 of 2,781 cos.

17 Jul-5A division of Central Huijin, China’s sovereign-wealth fund, said it would continue to purchase

ETFs.

16 Jul-5

The market regulator announced the PBoC would provide liquidity to support the govt-backed

China Securities Finance Corp.  This comes just a few days after announcing the SFC would

boost its capital base to 100 bill ion yuan from 24 bill ion yuan.

15 Jul-4 IPO issuance was suspended.

14 Jul-3Brokerage firms planned to set up a fund worth 120 bill ion RMB, or $19.4 bill ion, to buy shares

in the largest companies.

13 Jul-3PBoC introduced 250 bill ion RMB, or $40 bill ion, in 6-month funding to 11 market institutions

(via the medium-term lending facil ity).

12 Jul-3 The China Financial Futures Exchange suspended at least 19 accounts from short-selling.

11 Jul-2The China Securities Regulatory Commission pledged to investigate manipulation of stock

prices.

10 Jul-1 Rules requiring investors with margin ratios over 130% to liquidate their shares were eased.    

9 Jul-1Brokerages’ margin trading rules were relaxed, allowing open-ended contract rollovers

(previously capped at 6 mos.).

8 Jul-1 Transaction fees in Shenzhen and Shanghai were lowered by 30%.

7 Jun-30Margin requirements were lowered for several large brokerages.  And, according to one report,

real estate became an acceptable form of collateral for margin traders.

6 Jun-30Pension funds were given approval to invest up to 30% of total net assets in equities (up from

roughly 0%).

5 Jun-28

Base lending and deposit rates were both cut 25bp, to 4.85% and 2.00%, respectively.  In

addition, the PBoC cut the RRR 50bp for some rural/agricultural banks, and 300bp for financial

companies (i.e., financing arms of state firms). 

4 Jun-25China scraps the 75% loan/deposit ratio, supposedly l ikely to support stocks as opposed to

fi ltering into the economy. (June 25th)

3 Jun-18 Govt to help trade growth by reducing operation costs for cos … reduce fees and charges.

2 Jun-17 Certificates of deposit offered for the first time (demand was not high for this).

1 Jun-12PBoC boosted supply of long-term financing (while draining short-term liquidity through repos)

… targeted easing.

#Date of

AnnouncementChina's Steps to Try and Support the Stock Market: Margin Debt Related

35 Jul-19Increased regulations on internet financing and P2P lending. Client funds must parked at

established banks, and more disclosure and clearer warnings about risks required.

34 Jul-16Report that roughly $483 bill ion was made available to China Securities Finance to support the

stock market was leaked ($209b of which from China's biggest banks), boosting stocks today.

33 Jul-15

Hundsun Technlogoies, which owns HOMs (biggest portal for non-brokerage margin trading)

was blamed for stock market declines. New account openings were banned, and funding

existing accounts was suspended.

31 Jul-9China Securities Finance, the state margin finance company, is seeking 1 tril l ion RMB to buy

stocks in hopes of supporting the market.

26 Jul-9PBoC has approved the CSFC to issue bonds, including both short-term commercial and

interbank paper, pledging to provide liquidity.

25 Jul-9China's Financial Futures Exchange will increase the margin requirement on all contracts for

short positions from 20% to 30% (it was just increased to 20% on July 8th, from 10%).

21 Jul-8China's Financial Futures Exchange increased the margin requirement on all contracts for short

positions from 10% to 20%.

16 Jul-5

The market regulator announced the PBoC would provide liquidity to support the govt-backed

China Securities Finance Corp.  This comes just a few days after announcing the SFC would

boost its capital base to 100 bill ion yuan from 24 bill ion yuan.

14 Jul-3Brokerage firms planned to set up a fund worth 120 bill ion RMB, or $19.4 bill ion, to buy shares

in the largest companies.

13 Jul-3PBoC introduced 250 bill ion RMB, or $40 bill ion, in 6-month funding to 11 market institutions

(via the medium-term lending facil ity).

10 Jul-1 Rules requiring investors with margin ratios over 130% to liquidate their shares were eased.    

9 Jul-1Brokerages’ margin trading rules were relaxed, allowing open-ended contract rollovers

(previously capped at 6 mos.).

7 Jun-30Margin requirements were lowered for several large brokerages.  And, according to one report,

real estate became an acceptable form of collateral for margin traders.

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Jan-14 Jul-14 Jan-15 Jul-15

Shanghai Margin Debt Outstanding Jul 21: 929 Billion RMB

Of the 37 Steps, 13 Are Related to Margin Debt.

After surging almost 500% y/y, margin debt started to plunge after the govt suggested it had increased too quickly. Now, the govt is restricting margin debt in some cases, and encouraging it in others. Despite the $483b “pledge” of support to China Securities Finance Corp, the state margin finance company, it’s not clear this money will be utilized. At “best”, margin debt for now, has just stabilized. Stay tuned.

These interventionist steps by the govt show China’s Heavy Hand in the stock market, superseding prior efforts to move towards a freer market.

China’s Heavy Hand Is Intervening in the Stock Market.

#Date of

AnnouncementChina's Heavy-Handed Stock Market Actions

10 Jul-12National financial stabilization law to be created to legitimize govt intervention during stock

market turmoil.

9 Jul-9China Securities Finance Corp, the state margin finance company, is seeking 1 tril l ion RMB to

buy stocks in hopes of supporting the market.

8 Jul-9The Xinhua News reported Beijing is cracking down on those found to be maliciously short

selling the market.

7 Jul-9 Today, 60% of A-share companies have been suspended from trading.

6 Jul-8 China's security regulator bans shareholders with stakes >5% from selling for 6 months.

5 Jul-8China's State-Owned Assets Supervision Administration Commission ordered govt-owned firms

not to sell shares they hold, despite volatil ity, while encouraging them to buy more stocks.

4 Jul-8China's Securities Regulatory Commission will purchase small and medium-sized stocks (in

addition to buying blue chips).

3 Jul-4 IPO issuance was suspended.

2 Jul-3 The China Financial Futures Exchange suspended at least 19 accounts from short-selling.

1 Jul-2The China Securities Regulatory Commission pledged to investigate manipulation of stock

prices.

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Nov-14 Feb-15 May-15 Aug-15

Shanghai-HK Connect Net Flow into Shanghai

Jul 21: -3.1 Billion RMB

Inbound capital

Outbound capital

Beijing’s Manoeuvres Disenchant Global Investors

Chinese regulators shot themselves in both feet, first allowing trillions of yuan of margin to inflate an

enormous stock-price bubble, then undoing previous attempts at market reform by intervening when

the bubble popped … The final straw was allowing half the companies listed to be suspended from

trading, effectively turning A-shares into an un-investable market.

WSJ, July 14

Market meddling threatens to further delay MSCI inclusion after the index provider decided to leave

China’s domestic shares out of its equity gauges in June.

Bloomberg, July 10

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China House Price Index (NBS/CSM) Newly Built Residential Buildings

Seas. Adj. by CSM Jun: 125.4

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China House Price Index (NBS/CSM) Newly Built Residential Buildings

Y/Y% Jun: -5.6%

China's dramatic stock market collapse appears

to be spilling over into the country's real estate

market, where investors are rushing to sell their

homes or abandoning plans to buy a new

property as they nurse hefty losses on equities,

local media reports.

CNBC, July 10

China’s Property Market Is at Risk If Equities Decline.

China’s property market finally appears to be stabilizing. But, if stocks resume their decline, it may put additional downward pressure on real estate.

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Outward Jun: $118.6B

Inward (Utilized) Jun: $126.9B

China Direct InvestmentSeas. Adj. by CSM 12 Mo. Sum

Will China’s Heavy Hand Clamp Down on Outward Investment from China?

It’s becoming consensus that Chinese outward investment will soon exceed inward foreign investment. But, as domestic activity slows, could Beijing close the doors to Chinese companies doing business outside of China? Stay tuned.

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China Nominal GDP Y/Y% 2015:2Q: 7.2%

98 00 02 04 06 08 10 12 14 16

CopperJul 22: $2.45 e

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GSCIJul 21: 400.1

Slowing Chinese Growth Is Putting Downward Pressure on Commodity Prices.

Log

Scal

e

The sharp acceleration in Chinese nominal GDP growth during the prior decade was a key driver of the commodity super cycle. But with nominal GDP growth now in a slowing trend, commodity prices, including Dr. Copper, are in turn falling. And despite the recent moves to support the stock market, commodity prices are generally still in declining trends. Commodity prices are one indicator we're watching to see if the stimulus is working.

Russia (M2) 30%

China (M2) 18%

Brazil (M4) 17%

India (M4) 17%

Average Money Supply Y/Y%

2003- 2013

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CopperJul 22: $2.45 e

Log

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-45%

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Iron Ore Jul 22: $51.76

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GoldJul 22: $1092.80 e

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CopperJul 22: $2.45 e

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Brent OilJul 22: $56.66 e

`

-42% Volcker Killed

Inflation

Log

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Despite Lower Global Short Rates, Commodity Prices Remain in a Declining Trend. Why?

Log

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-45%

-73%

We believe there are structural

headwinds offsetting the stimulative

impact of the recent decline in global

short rates. For example, the PBoC

has eased significantly, but the

economy continues to weaken as

China unwinds its bubbles. Similarly,

the ECB has done QE, but structural

headwinds have mitigated the full

stimulus from that easing, etc., etc.

From their 2011 peaks:

1. Gold has declined 42%.

2. Copper has declined 45%.

3. Brent has declined 55%.

4. Iron ore has declined 73%.

-55%

EM Central Banks Attempting to Kill Inflation

This goes up with Commodity Prices.

The weakness in gold, copper, and iron ore

prices all suggest the plunge in oil prices

has more to do with global macro forces

than simply OPEC/U.S. supply metrics.

That is:

1. Since 1978, there’s been a 91%

correlation between gold and oil

prices.

2. Since 1978, there’s been a 92%

correlation between copper and oil

prices.

3. Since 1993, there’s been a 94%

correlation between iron ore prices

and oil prices.

From their 2011 peaks:

1. Gold has declined 39%.

2. Copper has declined 46%.

3. Iron ore has declined 73%.

4. Brent has declined 55%.

BRICs Money Bubble

Downside Breakout

Downside Breakout

1. Margin debt data, which are available daily. From its peak on June 18th,

margin debt has declined 37%, but is still 240% above its level a year ago.

2. Copper, which today is plumbing new lows, and is down 17.2% from its May

peak.

3. Consumer confidence (Westpac/MNI), which declined in June to a

depressed 111.2 (3 mo. avg.). July’s reading will be out on July 28th.

4. Vehicle sales, which declined 1.9% m/m in June, and were down 2.1% y/y.

The July reading will be out the second week of August.

5. Composite PMIs (HSBC/CFLP), which in June ticked down to 51.3%, 7.4 pct.

pts. below its 2007 high of 58.7%. The July readings will be out on August

4th.

6. Composite PMI for employment, which in June declined to 48.9%, the

lowest level since February 2009.

7. Business confidence, PBoC’s series declined in 2Q to the lowest level in 15

years. 3Q data won’t be out until September. And, MNI’s survey of

business confidence was out today. It declined 4.7 pct. pts. (see pages 7-8).

8. Property transactions, which are up 75% y/y through July 21st. But with

residential inventories still up 22% y/y, there’s a lot of excess supply. In

addition, Bejing’s new rule allowing real estate as collateral for Chinese

stock margin trading is a potential complication for the housing recovery.

9. M2 growth, which in June accelerated to 11.8% y/y, from 10.8% in

May. Could M2 growth be bottoming? July data will be released the

second week of August.

10. SHIBOR, which has ticked down 12bp over the past month, but is still 30bp

above its June 2015 low.

Will China’s Recent $483b “Pledge” of Support to China Securities Finance Corp, Help Boost Economic Activity? What to Watch.

CSM Survey: 54 % Say That China’s Stimulus Will Not Boost Growth.

+ 4.6%

+ 19 bp

- $1.04

Thanks to all who joined us for lunch in CT on Monday. Between now and the end of the year, the general expectation for the markets was pretty quiescent. And consensus was for U.S. real GDP growth to remain basically unchanged at the current underlying trend, i.e., a touch less than 3%. However, for China, consensus was that the underlying trend in economic activity is 4.4%, versus 2Q’s reported 7.0% y/y.

End of 2015

S&P 2,129

10-Year Yield 2.70%

Brent $66.38

Y/Y% in 4Q of 2015

U.S. Real GDP 2.8%

Japan Real GDP 1.7%

Eurozone Real GDP 1.5%

China's underlying economic activity 5.5%

Is the Chinese stock market a bubble?Yes: 85%

No: 15%

CSM's Institutional Investor Survey

Nancy Lazar, NYC

June 9th, 2015

EU U.S. China Other EM

31% 23% 23% 23%

Which stock market will outperform over the next 12 mos?

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3

4

What is your favorite sector?

EU U.S. Japan

38% 31% 31%

Which stock market will outperform over the next 12 mos?

End of 2015

S&P 2,223

10-Year Yield 2.53%

Brent $55.69

Y/Y% in 4Q of 2015

U.S. Real GDP 2.7%

China's underlying growth rate 4.4%

Will China's stimulus boost the economy?Yes: 46%

No: 54%

CSM's Institutional Investor Survey

Nancy Lazar, CT

July 20th, 2015