Here’s the headline that popped up on one of my news feeds a day or so ago: “Chinese Carmakers Record Sales.”

That’s right, in the middle of a yearlong global recession, China is selling more cars than ever before. Skimming down through the article, one notes that sales of minivans are up some 40% Q1 2008 to Q1 2009.

China’s “Recession”

How can this be true? Isn’t China suffering too as depressed American and European consumers decline to buy their cheap T-shirts and lead-painted gewgaws?

Actually, China’s version of recession is a tad different than ours. It did indeed miss its target of a blistering 8% annualized growth rate for the first quarter of 2009, settling instead for a “mere” 6.1%, a figure for which most any Western finance minister would sell his children.

But even the threat of China’s growth approaching the ever-so-sluggish global norm threw Beijing into a printing tizzy as early as last November. Now 4 trillion yuan (US$586 billion) might sound like a drop in the bucket compared to the hundreds of billions of dollars Washington is inventing on a weekly basis. But then again, Beijing is only trying to keep its ball rolling along, while Washington is trying restart a mired economy.

But it isn’t just the fact that China is stimulating from the top down that is so fascinating. It is, after all, quite experienced at this whole centralized command economy idea that we are just cozying up to. It’s how it is going about it that has me laughing into my morning coffee.

A Gift From Uncle

Last month, Beijing began disbursing some 5 billion yuan ($731 million) into the hinterland to encourage folks to purchase new minivans. Now to my wife, the phrase “minivan” brings to mind a 4,500 lb. monster with a large six-cylinder engine replete with a quality sound system, electric doors, seats, windows and mirrors. Oh, and maybe a DVD player (we didn’t get one last time around, and they have been hassling me about it ever since).

However, when a Chinese family goes into their local dealership with their check from Uncles Wen and Hu, they find a remarkably different vehicle available to them. It generally has an engine half the size of an American van, which is okay since it hauls about half the curb weight.

If you are really lucky, the windows roll down by hand. Leather seats or airbags? As cousin Frank from Newark says, “Fergeddaboudem!” You want tunes? Learn to whistle. The good news is, these cheap little grocery haulers really are cheap. They only run about 33,000 yuan ($4,400) which comes to roughly 80% of the average Chinese citizen’s annual wage.

But is this spike in the sales of cheap vans truly good news? Or are China’s car companies traveling down the same road that brought GM and Chrysler to their corporate knees?

Death of a Thousand Cuts

In an attempt to increase fleet gas mileage and stretch its yuans a little further, Beijing is strongly suggesting that the checks be spent on smaller vehicles. It also has cut taxes in half on vehicles with engines smaller than 1.7 liters.

Unfortunately, as Mr. Xu Liuping, CEO of China’s number four manufacturer, Changan Automobile Group, recently warned at the Shanghai Autoshow, “Small cars mean small margins. There may be vehicle sales growth for the industry this year, but revenue and profit may fall.”

DongFeng Motor Corp.’s Liu Weidong further whined that “the auto industry no longer has extraordinary profit margins. Companies have been adjusting prices because of the government’s industry stimulus policies and to boost sales.”

“We Want a Piece of That Action Too!”

Yeah, that’s right: The Chinese aren’t making money selling small cars anymore than the Americans were. You want one more weird fold in the story? GM, who was so totally unprepared when gas skyrocketed here in the States, wants into the Chinese market in the worst way.

In fact, on the same Shanghai podium where Mr. Xu complained of profit difficulties, GM’s Kevin Wale bragged that China was a “very important market” and announced that GM (already a stakeholder in China’s biggest minivan maker) intends to double sales over the next five years.

Keep in mind that even that mighty global micro-car expert Toyota (TM:NYSE) cannot make a buck in China these days, as most of its line is considered “too large” to qualify for the subsidies that are driving this market. In fact, Toyota’s in-country partner, Guangzhou Automobile Group, actually registered a drop in sales and profits on Toyota’s offerings.

The Poisonous Teat

Kind of puts the lie to the idea most any manufacturer can do well while suckling at the government teat, eh? Which brings us back here to the States, where Ford (F:NYSE) – the only American builder to turn down Washington’s largesse – has posted yet another stellar week on its “Way Forward.”

Since hitting $1.01 last November, Detroit’s “Last Man Standing” has risen to $4.41. As you might imagine, a rise like that actually garners a little notice on Wall Street.

And so, after F shares have already gained some 194%, those bold folks at Goldman Sachs have actually shifted their stance from “neutral” to “buy.” Goldman’s Patrick Archembault even went so far as to predict that F could hit $6 in the next six months. Of course, he also larded his statement heavily with warnings that “an investment in Ford is not for risk-averse investors.”

Where Angels Fear to Tread?

Wow, that’s really putting it out there, Pat!

Come on, folks: It’s become god-awful obvious that most any investment in American Blue Chips stands a good chance of getting cut off at the knees these days. We don’t need GS’s caviling when plain old experience can tell us that!

But it is ridiculous to wince about like this when there is so much money to be made by being even just a little bold. Let me show you what I mean…

How to Trade the Car Biz

Back in March, when Goldman was still sitting on its thumbs, I asked WaveStrength Options Weekly readers to take a chance on some Ford call options. They cost a measly 80 bucks per contract. So far as downside risk is concerned, well, if you can’t afford to lose $40, you’re pretty much done.

As I sit to write, those calls are now worth $242 per contract. That’s a gain of 203% in about four weeks. And when Ford hits GS’s $6 target (which I will tell you right now will happen a lot sooner than six months), those calls will in all probability hit $400, rounding gains up to a neat 400%.

I am not bragging here (okay, maybe a little). Heck, I’m just a poor scribe operating out of a loft in downtown Baltimore. But don’t you think that that’s the kind of advice we ought to be expecting from Archembault and his friends in New York?

Source: The Bleeding Edge of the Car Biz

Investors who have studied the global trade figures lately are no doubt also aware that East Asian countries are in an entirely separate mess since their exports have dropped 30%-40% – or even more – in the past few months, because U.S. and European consumers have stopped buying their manufactured goods.

However, there is a third global disaster, equally intractable, in Eastern Europe – and it has nothing to do with the housing bubbles, falling exports, or the massive layoffs that are becoming problems everywhere. This third global disaster is being caused by a regional balance of payments problem and a localized currency crisis.

Internationally, that disaster is this week’s worry.

As the Eastern European countries closed in on membership in the European Union (EU) after 2001, preparatory to entering it in 2004 or 2007, they kept their currencies as stable as possible against the euro. At the same time, the economies of these countries were growing rapidly, so Western banks bought local operations and expanded their lending.

Local consumers heard from their governments that their currencies were now stable against the euro and noticed that local currency interest rates were much higher than euro, dollar or Swiss francs. Naturally, they borrowed from local banks in euro, dollars or Swiss francs.

This would all have turned out fine if the local currencies had indeed been stable against the euro (borrowers in dollars would have made out like bandits until last summer, and lost since, as the dollar reversed course and strengthened). However, in addition to foreign currency consumer loans, foreign investment of all kinds flooded into these countries; after all, they were EU members – or would soon become so – and yet they were growing much faster than Western Europe.

With all this money coming in, local wage rates and other costs rose. As a result, many Eastern European countries ran huge balance-of-payments deficits: For Latvia and Bulgaria, for example, the deficits were more than 20% of each country’s gross domestic product (GDP).

This all didn’t seem to matter too much at a time when world trade was robust and lending flowed freely (although those of us familiar with periodic Latin American catastrophes sucked through our teeth in a suitably concerned manner – we had seen it all before).

Since last September, however, world lending has stopped flowing freely – as has world trade. European, U.S. and Asian companies that had been madly keen to invest in Eastern Europe put their expansion plans on hold, as they discovered they had big problems of their own at home. Naturally, the Eastern European currencies started to decline.

This brought a horrible problem for the local banks, most of them owned by Western European banks. If they lent to local borrowers in euro, Swiss francs or dollars, their borrowers are suddenly in trouble.

For example, the Polish zloty has dropped by about a third against the euro in the last six months. Even without any decline in local real estate prices, an apartment in Warsaw is thus worth 33% less in euros, so the euro loan against it has suddenly become subprime. What’s more, the salary of the borrower has also dropped 33% in euro terms, so his ability to service the loan has declined correspondingly.

Conversely, if the foreign-owned banks lent primarily in local currencies, they internalized the problem if they borrowed in euros from their parent to do so; in that case, the bank is directly insolvent or close to it, rather than merely having a bunch of defaulting borrowers on its books.

The solution everybody is looking at is a bailout, and it will again have to be a big one. World Bank President Robert B. Zoellick is putting together a $25 billion trade facility, but he wants the EU to help with more money. Austria has tried to put together a $200 billion loan for Eastern Europe – not unreasonably, as Austrian banks have about $300 billion in loans outstanding to that area – equal to about 70% of Austria’s GDP.

Total Eastern European debt is reckoned to be around $1.7 trillion, with about $400 billion of it maturing this year.

With the EU, Austria and Eastern Europe all looking for money, the eyes of the region automatically turn to Germany. Germany has an almost balanced budget, and the German finance minister called British stimulation policies “crass Keynesianism” as recently as December. If it weren’t for Eastern Europe, Germany would be in pretty good shape. However, with 10 Eastern European countries among the 27 EU members, Germany’s finance minister better be concerned about getting his pocket picked.

My own guess is, the less the EU and the unfortunate Germans are forced to subsidize their neighbors, the quicker the problem will sort itself out, albeit at the cost of a lot of defaults on Polish home mortgages. In a world where all major countries are providing “stimulus” and bailouts for everything, the ultimate winner will be the country that bails out the least.

Bottom line? You might look at Brazil …

Source: Eastern Europe’s Banks are Next in Line for a Bailout