China's bad news is just plain bad news

Against a backdrop of poor manufacturing data, one troublesome bond is giving the whole issue a short fuse.

By Jim Cramer Jan 23, 2014 11:50AM

Image: China © Brand X, SuperStockIs bad news good news in China, too? Or is it just plain old bad news? On Wednesday night, when we learned of a downtick in a key gauge of the Chinese economy, a shudder went through Asian markets. There had been hopes that China could show some consistent growth in 2014, but those hopes were dashed when a manufacturing reading showed the first contraction in six months -- 49.6 when people were looking for 50.5.


For a very long time, weakness in China was taken as a prelude to expansionary policies that would put the country back on a growth path. Lately, however, the Chinese leadership has been trying to get off the treadmill of steroidal growth. That means reining in excesses, particularly at the heretofore autonomous state-run organizations. Many of these seemed committed to overproducing in areas in which production should be cut back, mostly for what appears to be personal gain.


The manufacturing-gauge slowdown shouldn't be that revelatory. In fact, if you have been watching the slip-sliding of the Baltic Freight Index for the past month, you know China's economy seems to have hit a real air pocket. That's been confirmed by the best China watcher I know -- Klaus Kleinfeld, the CEO of Alcoa (AA). He's got a lot on the line, because some of the Chinese state-run aluminum smelters are overproducing. That is causing a glut, and it's also contributing to the worst air in the world, soon to be a major Chinese export. The Street on MSN Money


With that backdrop in mind, enter Credit Equals Gold No. 1 Collective Trust, a $500 million piece of paper -- an exceedingly polite way to put it -- that appears slated for default at the end of this month. This is one out of billions of dollars' worth of wealth-management products that appear to be on the ropes because of sloppy bank practices. More important, if this is allowed to fail, it will be the first piece of paper for which losses will be truly shared by the public. No FDIC, Chinese or otherwise, on this one.


When I first heard of Credit Equals Gold No. 1 Collective Trust, a bond issued by China Credit Trust -- itself now probably considered on the ropes because of this kind of paper -- it made me snicker. How do they come up with these names? But then I remembered all of the silly and often highfalutin names our terrific bankers came up with here for terrible mortgage trusts that packaged the dregs of our housing loans.


How many times did those pieces of paper have to be downgraded and then defaulted upon before we realized that the bad news from the defaults was just plain bad news? The Federal Reserve, after all, either couldn't or didn't want to cut rates fast enough to stem the collateral damage.


Plus, in similar fashion to what occurred in 2006, nobody was buzzing about those bonds being infectious, a virtual Ebola virus bumper crop headed our way. Could that be what awaits China?


We know that the Chinese economy is a command economy. If Credit Equals Gold Number No. 1 trust doesn't equal gold and is, instead, left to equal dross, we know it will be because of a decision by the communists to let it happen. They'll have done it to change the culture of overcapacity for the sake of personal enrichment.


That, per se, is good.


But how about all of the imports that are needed to build things that are backed by these kinds of pieces of paper? How about all of the machines that won't be needed? How about all of the manufacturing products that we expect China to need? How about IBM's (IBM) warning that these state-owned enterprises are huge business generators for many of our tech companies?

 Jim Cramer on MSN Money


All of this just confirms what I have been saying since the beginning of the year: The No. 1 worry for our markets right now, the biggest concern we should have, is China. That's because right now, bad news looks like it's going to be bad news, at least for some time to come. This particular piece of paper is giving the whole issue a fuse -- a fuse that runs out in eight days.


Random musings: Credit Doug Kass with keeping this issue in front of us. He's got the best bead on it.


Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio and uncover the stocks Cramer thinks could be winners.


At the time of publication, the portfolio had no positions in the securities mentioned above.


More from TheStreet:

Jan 23, 2014 12:53PM
I blame our leaders, from Nixon to the present and all the congresses inbetween, for allowing the US to be hogtied to China.  We should be a sovereign country but we are not.  We have most of the natural resources we need to function, yet we have tied ourselves into knots with China and other countries.  Our fore fathers said it correctly, let the US have friends around the world but entangling alliances with none.  We are entangled up to our eyeballs and then some.  Just shows me that ALL of the self-serving buffoons in DC must be voted out, especially the lifers.  Go get a real job and quit sucking off the taxpayers teats.
Jan 23, 2014 1:09PM
communism is very efficient at making its leaders very rich
Jan 23, 2014 12:52PM
I disagree with 'next time up' that China is running out of American money. Nearly every bit of merchandise being sold in America says "Made in China", and the merchandise, which American retailers have long since outsourced the production of said merchandise, is pure crap!.  The stuff is made in China, exported to the U.S. and marked up 1000%. We pay the price for highly inferior products.  If manufacturers want to outsource, then they should just close their offices here in the USA and relocate to China, but DO NOT export your junk here, ever!.
Jan 23, 2014 1:13PM

"Just as the world’s largest economy is finally getting better, the public’s opinion of President Barack Obama’s handling of it is getting worse."


That's because MSN and the other liberal news outlets saying it's getting better does not really make it better.

Jan 23, 2014 12:51PM
To put it crudely, it looks like the poop's about to hit the shorts in China, and they may end up wiping their a$$es with US treasury notes.
Jan 23, 2014 12:41PM
We were waiting for a morning like this one for a while, they have tried, this is not their first attempt to bring these markets down big, just that we have been able to rebound nicely....Today, even though it is still early, it doesn't look promising at all.....Volume lower than the rest of the week and manipulators out in droves on and off the floor...We hear the goal is 200 points down on the Dow and they may just accomplish it....Great day to stay on the sidelines and watch these scumbags do their thing...Its not China's fault folks, nor it is McDonalds, oil or whatever excuse they want to give....It is market manipulators doing their thing early and often....Remember, they make lots of dough when they bring markets down....Of course we are not giving up. maybe this afternoon we could minimize the damage; the way things look now it appears doubtful though....Cheaters are in complete and absolute control...We will see...More later.
Jan 23, 2014 1:18PM
The pied piper is walking down the street. China has for many years had a HUGE real estate bubble. With GHOST cities waiting for the massive uprising about to take place. What's messed up is NIXON put them in bed with us years ago.  All the GOOD JOBS LOST for the sake of CORPORATE EARNINGS. Talk about shooting yourself in the foot to get rid of a headache.  Those multimillion dollar bonuses are about to mean NOTHING...
Jan 23, 2014 1:16PM
Everything is fixed to the advantage of the rich and powerful.
Jan 23, 2014 2:22PM

really sickofit,

I tend to agree with you, except for ONE thing. Don't VOTE out the politicians in DC [and elsewhere] HANG 'EM FROM THE NEAREST LAMP POST. NOTHING else seems to scare these wannabe dictators [socialists, progressives, whatever you want to call them] into STFU and LEAVING THE REST OF THE WORLD ALONE.

Newsflash for ALL you INTERVENTIONISTS AND SOCIALISTS in DC. The REST of the world DOES NOT NEED OR "WANT" our help.!!!! PERIOD!!!!

And someone show me where in the constitution that the government of the US has the AUTHORITY, let alone the RIGHT to INTERFERE with the rest of the world. And if you can't answer my last question by showing the SPECIFIC article, section or amendment to the constitution, take your thumbs down, and stick it where the sun doesn't shine. Because whether YOU want to admit it or not, YOU are the MAIN reason the US is hated so much all over the world.

Jan 23, 2014 2:00PM
I wonder if Cramer will find out the Fed is over 4 trillion dollars in debt from the give away to the banks at 80 billion a month. The tax payers will pay for this!!!!
Jan 23, 2014 1:56PM

Bull Market:

It isn't "China", it won't be the "Arab Rich States" tomorrow, nor will it be "India" next week..

The DOW had a "Great" run .. And the "Bear" is out of hibernation..

Get ready..

Jan 23, 2014 12:34PM
Someone needs to tell the Pope that Al Gore invented the internet.
Jan 23, 2014 12:09PM
Simply put China and the Asian rim are running out of Americans money.  This of course was never really anticipated to ever end much like these types think there will never be any substantial price to pay for all the debting that we as adults know is and will at some point in time become a falsehood.  Will the rose colored glasses be coming off Wall Street anytime soon? The five year Bull run appears to be weakening yet we have seen these false hickups way too many times.  JMHO
Jan 23, 2014 1:44PM
The  Average and Poor have demanded that the "Powers" bring the jobs back from China; and they have started to do that. Now, China may try to give us a poke in the nose. Be alert U.S.A. !
Jan 23, 2014 12:39PM
Many recognized China's ability to sweep under the rug the inherant problems in a demand economy. It seems as if the reality has caught up with some of the "dreamers" on Wall Street. Especially the years of underperforming loans made to Chinese government firms in the past.
Jan 23, 2014 1:03PM
The scrap metal business will certainly take a hit.  Whatever will we do with all our junk cars that are now shipped to China?  Time for Cash for Clunkers II?
Jan 23, 2014 2:16PM
Nothing new here.  Just like the fraud of U.S. Treasuries and currency.  Most of the earnings and price performance since 2000 is based on debt and the printing press.  There is only so much milk you can squeeze out of the dehydrated labor force to compensate for government control and confiscation before the whole thing implodes.

The federal government creates and protects the mega-corps and institutions and their political management class.  In the meantime, the masses play video games, engage in cyber (facialbook) relationships, watch reality TV/pro sports, and buy lotto tickets looking for a way out.

When the plug gets pulled, these proletariat will start looking for ANY good nationalistic sounding socialist savior and be more than willing to surrender their constitutional rights BECAUSE THEY DIDN'T TAKE RESPONSIBILITY TO BEGIN WITH.

Jan 23, 2014 1:58PM

China lies and manipulates statistics even worse than our government does. How can anyone trust them? Wall street stockers are the only ones who believe their bull. Don't worry stock people, the US government decides where the stock indexes will be. And right now they want dow 16,000 to send a psychological (And they are psychos) message that the US economy is doing great.  

Jan 23, 2014 12:06PM
So cramer -do you get $1 every time you mention klaus kleinfeld's name or is it just something your masters demand?
Jan 23, 2014 1:39PM
The Average and Poor have demanded  that the "Powers" bring the jobs back from China; and they have started to do that. Now, China may try to give us a poke in the nose. Be alert U.S.A.
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