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Posts Tagged ‘Chinese economy’

Moody’s Issues Stern Warning On China’s Pyramid Bank Recapitalization Scheme; Has CIC Entered A Funding Crisis?

Moody’s Issues Stern Warning On China’s Pyramid Bank Recapitalization Scheme; Has CIC Entered A Funding Crisis?

Courtesy of Tyler Durden

Moody’s is out with a surprisingly frank appraisal of the Chinese banking system’s precarious capitalization trend, by looking at the recent RMB 54 billion capital raise in the interbank market by the domestic arm of the Chinese Sovereign Wealth fund (CIC), which was "the first part of an RMB 187.5 billion overall fund-raising program mainly to provide additional capital to the three largest state-owned banks, a policy lender, and a policy insurance company."

As Moody’s oh so correctly concludes: "Recapitalizing banks with bond proceeds from banks is credit negative because it increases the effective leverage of the banking system. The transaction’s impact on the system is limited in this case because the increased leverage is not significant, but it would be problematic if effective leverage continues to increase and China’s economic growth stalls." Moody’s stops one step short of calling this transaction what it is: using debt purchased by other banks to recapitalize deteriorating loans on the banks’ asset side: "the increases in assets and equity are artificial and without real economic substance: the increase in reported equity on banks’ balance sheets enables the banks to lend more and effectively leverages up the system. Assuming banks fully deploy the capital raised, the resulting increase in the risk-weighted assets would be RMB 187.5 billion divided by 11.5% (the minimum capital requirement)." What is also not said, but is glaringly obvious, is that the Chinese sovereign wealth fund is likely in a major need of recapitalization, courtesy of its extensive US financial sector equity holdings.

From Moody’s:

Last week, Huijin, the domestic arm of China Investment Corp (China’s sovereign wealth fund), raised RMB 54 billion in the domestic interbank market. It was the first part of an RMB 187.5 billion overall fund-raising program mainly to provide additional capital to the three largest state-owned banks, a policy lender, and a policy insurance company. 

Recapitalizing banks with bond proceeds from banks is credit negative because it increases the effective leverage of the banking system. The transaction’s impact on the system is limited in this case because the increased leverage is not significant, but it would be problematic if effective leverage continues to increase and China’s economic growth stalls. Even without an official breakdown of the bonds’


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The capital tsunami is a bigger threat than the nuclear option

The capital tsunami is a bigger threat than the nuclear option

Courtesy of Michael Pettis at China Financial Markets

Since this is another long posting, it might make sense to summarize briefly its two parts.  In the first part, expanding on an OpEd piece of mine published by the Wall Street Journal on Monday, I argue that China’s “nuclear option”, which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite — a tsunami of capital flooding into the country.  I try to discuss the economic implications and perhaps the implications for asset prices.

In the second part of this posting I discuss the slowing of the Chinese economy within the context of what I believe to be its stop-go approach to economic policymaking.  The one-minute take: I think policymakers will soon be stomping again on the accelerator, although there seems to be a real debate going on about whether this would be the proper policy response.

———

An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option.  Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their Treasury bond holdings.  Policymakers and investors, in this view, need to be very prepared for just such an eventuality

So worried have many been that last week SAFE even had to come out and calm people down.  According to an article in the Financial Times:

China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.

But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies. The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold.

It’s good that SAFE is trying to soothe worried investors and policymakers, although, as I have pointed…
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The G20’s China Bet

The G20’s China Bet

People walk in front of a construction site at Beijing's Xidan shopping district June 18, 2010. China's economy will keep up its robust pace of growth despite the euro zone debt crisis and may exceed the United States to become the world's largest economy in 2020, an academic adviser to the central bank said in remarks published on Friday. REUTERS/Bobby Yip  (CHINA - Tags: BUSINESS CONSTRUCTION SOCIETY)

Courtesy of Simon Johnson at Baseline Scenario

The G20 communiqué, released after the Toronto summit on Sunday, made it quite clear that most industrialized countries now have budget deficit reduction fever (see this version, with line-by-line comments by me, Marc Chandler and Arvind Subramanian).  The US resisted the pressure to cut government spending and/or raise taxes in a precipitate manner, but the sense of the meeting was clear – cut now to some extent and cut more tomorrow.

This makes some sense if you think that the global economy is in robust health and likely to grow at a rapid clip – say close to 5 percent per annum – for the foreseeable future.  With high global growth, it will matter less that governments are cutting back and unemployment will come down regardless.  Taking this into account, the IMF is actually predicting (as cited prominently by the G20) that budget “consolidation” actually raise growth over a five-year horizon.

There is no question that some weaker European countries, such as Greece, Portugal, and Ireland, had budget deficits that were out of control.  Particularly if they are to pay back all their foreign borrowing – a controversial idea that remains the conventional wisdom – these countries need some austerity.  But what about those larger countries, which remain creditworthy, such as Germany, France, the UK, and the US?  If these economies all decide to reduce their budget deficits, what will drive global growth?The answer in Toronto was obvious: China.  China is only about 6 percent of the world economy, measured using prevailing exchange rates, but it has a disproportionate influence on other emerging markets due to its seemingly insatiable demand for commodities.  It also has a relatively healthy fiscal balance – and its fiscal stimulus, working mostly through infrastructure investment, did a great job in terms of buffering the real economy in the face of declining world trade in 2008-09.

Now, however, the Chinese government is trying to slow the economy down – there is fear of “overheating”, which could mean inflation or rising real wages (depending on who you talk to).  Chinese economic statistics are notoriously unreliable, so reading the tea leaves is harder than for some other economies, but most of the leading indicators suggest that some sort of slowdown is now underway. 

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REVALUING THE YUAN – AND OTHER TALES FROM A DRUNKEN SAILOR

REVALUING THE YUAN – AND OTHER TALES FROM A DRUNKEN SAILOR

Drunk Man Sleeping After Party

Courtesy of Rohan of Data Diary:

[h/t Pragcap]

Not quite a random walk, more like the one lurch forward, two staggers back, that is how the market has greeted the ‘news’ that China will be taking the yuan to a crawling peg.  First, risk markets rallied as we all looked inquisitively at each other and asked ‘isn’t this what we wanted?’.  Then with bearish trend reversals prominent in markets across the globe, the real response kicked in.

The weight of money now seems to be gathering behind the notion that the Chinese are serious about slowing their economy – and that the crawling revaluation of the yuan is just another plank in this strategy.  The clearest prognostication of the markets reception of these moves to reign in Chinese growth is provided by the Baltic Dry Index:

Baltic Dry Index 400x323 REVALUING THE YUAN AND OTHER TALES FROM A DRUNKEN SAILOR

It’d be fair to say freight rates have collapsed over the last couple of weeks.  When we read that capesize freight per tonne rates from Australia to China were down 25% last week (from Cotzias Shipping here), the simplest interpretation is that the demand for bulk commodities has taken a turn for the worse.

To place this in a little context, consider the following chart of world steel production:

World steel production 400x209 REVALUING THE YUAN AND OTHER TALES FROM A DRUNKEN SAILOR

The importance of China to global demand for iron ore and coking coal is self evident.  But to make the point all the more clearly, consider this excerpt from the World Steel Association’s May report (here)

World crude steel production in May 2010 was 9.8% higher in comparison with May 2007, before the impact of the global economic crisis was felt. However, while China, South Korea and Turkey showed increased crude steel production in May 2010 compared to the same month 2007, the US, Italy, Spain and Japan are not yet back to pre-crisis production levels. The EU is -18%, North America -14% and Latin America -9.8% down on the five months to May total in 2007.

Now the point of this thinking is that the reaction of risk markets to the news about the revaluation is understandable.  If we make the broad assumption that the downside risks around Europe have been essentially factored into the markets (for the moment), and that those relating to the US are in abeyance (for the moment), then those around China are to…
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China: the coming costs of a superbubble

China: the coming costs of a superbubble

Courtesy of Vitaliy N. Katsenelson writing in the Christian Science Monitor 

Construction continues on the site of the World Expo in Shanghai

The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears. 

In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us. 

To understand the Chinese economy, consider three distinct periods: “Late-stage growth obesity” (the decade prior to 2008); “You lie!” (the time of the financial crisis); and finally,  “Steroids ’R’ Us” (from the end of the financial crisis to today).

Late-stage growth obesity

About a decade ago, the Chinese government chose a policy of growth at any cost. China’s leaders see strong gross domestic product (GDP) growth not just as bragging rights, but as essential for political survival and national stability. 

Because China lacks the social safety net of the developed world, unemployed people aren’t just inconvenienced by the loss of their jobs, they starve; and hungry people don’t complain, they riot and cause political unrest. 

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See also: China’s Red Flags - A White Paper by GMO’s Edward Chancellor. H/tip Zero Hedge. 


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Dubya, Hank Paulson’s Surrogate Mother, Urged The Bald To Exercise, Sleep

Dubya, Hank Paulson’s Surrogate Mother, Urged The Bald To Exercise, Sleep

Courtesy of Tyler Durden

Welcome to 1984, where outright propaganda and lies bombard you from current and prior administration officials each and every day. Here is the latest:

And here is our translation:

  • Bush has good, fundamental understanding of markets – Interpretation: see here.
  • Chinese save too much – Interpretation: Come to America and buy your plasma screens in this country
  • Americans borrow too much – Interpretation: Americans LTV is about 10E^TARP
  • US will get back every penny put into banks – Interpretation: US will lose every penny put into banks
  • Buffet was a "pillar of strength for Paulson." – Interpretation: Buffett’s multi-billion bet on the S&P never declining was a future pillar of destruction for BRK
  • He couldn’t say no to his country on Treasury job – Interpretation: he couldn’t say no to the opportunity to cash out of his $700 million Goldman stock stash
  • A faltering Chinese economy would be bad for U.S. – Interpretation: see here.
  • Without TARP US would have had 25% unemployment – Interpretation: With TARP Lloyd Blankfein will be a trillionaire, as companies cut SG&A to 0, unemployment hits 100% and Net Income becomes Revenue.
  • Chinese need to reform currency – Interpretation: We need to kill the dollar, those bastards over there are making it impossible.

 

 

 


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CHINA WILL BE A BIGGER BUBBLE THAN JAPAN

CHINA WILL BE A BIGGER BUBBLE THAN JAPAN

Courtesy of The Pragmatic Capitalist

 scale model of the Central Business District in Beijing Superb analysis out of SocGen analysts this morning.  Dylan Grice says the Chinese economy has many similarities to the Japanese economy before it imploded in the 90’s.  He cites 8 reasons why the Chinese economy is likely to be an even larger implosion than the Japanese economy:

Studying the lessons from Japan’s lost decade(s) is key for anyone seeking to understand today’s post-bubble world. But a closer reading of Japan’s financial history illuminates today’s China far more. In the early 1980s, on the eve of its financial liberalisation, Japan was the rising power from the East set to overtake the West. Younger and growing rapidly, it was still a decade away from its climactic and catastrophic bubble peak. This is where China is now.

  • Japan’s deflationary experience since its bubble burst haunts policy makers and investors, who are confronted with a bewildering range of theories explaining what has gone wrong and how a similar scenario can or can’t be avoided.
  • But the real cause of Japan’s deflation is probably more demographic than debt-related.  If so, maybe we should be more worried about the side-effects of an ongoing stimulus overdose aimed at reviving the dead, rather than fighting a more ordinary bout of flu.
  • Japan has been the first industrial economy to begin demographic contraction. Indeed, thanks to Deng Xiaoping’s 1979 one child policy, China will soon face the same problem.
  • But it is unlikely China will suffer the same immediate fate. In fact, further reflection on the similarities between China and Japan leads one to realise that many of the challenges confronting China today have already been faced by Japan, demography being only one.
  • From the strained currency diplomacy to the accusation of favouring exports over domestic demand, from the Western marvelling at Confucian capitalism to the sense of inevitability about the rising of a great power in the East ? all were as true for Japan 30 years ago as they are of China today.
  • And Japan 30 or so years ago might be a more fruitful analogy altogether. There is a clear historic coincidence of manias and geopolitical shifts. In the 1980s, Japan’s developing financial bubble reflected a shifting of the balance of power in its direction.
  • But the geopolitical shift towards China now underway dwarfs that seen in


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China’s present growth story is built on malinvestment

China’s present growth story is built on malinvestment

china investmentCourtesy of Edward Harrison at Credit Writedowns

Late last year, I predicted that China, as a major exporter to the West, would feel a huge impact from the meltdown in the global economy, taking it’s growth rate down to 2% (See Top ten predictions for the 2009 global economy). Forgetting about the fact that data are highly suspect in China, I see that prediction as very unlikely to come true due to huge fiscal stimulus in China. The Chinese government is very much wedded to it’s 8% growth target and will do whatever it takes to come close to that target – including flooding the domestic banks with a wall of money to lend.

However, preventing a downturn with easy money is a dangerous way to reflate the economy. The likely malinvestment will be large, something about which Andy Xie has recently warned.  Moreover, despite the implosion in house prices and shares in the Chinese market during the acute phases through to November 2008, a bubble has re-asserted itself there.  In a recent post, “Does Ben Bernanke blow bubbles too?,” I referred to research by James Montier, now at GMO, which indicated that large increases in liquidity can and will reinflate bubbles even in the face of investors who feel chastened by a previous downturn.  This seems very much to the point in China, where equity prices have risen some 60-odd percent since the trough in November.

Of course, all of this can continue for quite some time. And the Chinese are pulling out all the stops as the recent note by Marc Chandler, Chief Currency Strategist at Brown Brothers Harriman, attests.

There are several developments to note in China.                                  

First, with deflationary forces still gripping the economy (year-over-year CPI has been negative by more than 1% since Feb), weakness in exports, Chinese officials are unlikely to allow the yuan to appreciate very much during the second half of the calendar year.  The pricing of the non-deliverable forward implies expectation for less than 1% appreciation against the dollar over the next 12-months, the smallest expected gain in a couple of months.  Next month will be the one year anniversary of the Chinese decision that in essence appears largely tantamount to re-pegging the yuan to the greenback.  It has been


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Zero Hedge

Conrad Black: The Saudis Fear Western Alliance With Iran; Crashing Oil Is Their Retaliation

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Authored by Conrad Black via The National Post,

Responses to the decline in world oil prices have been mystifying — flummoxing, in fact. The secretary general of OPEC (the Organization of Petroleum Exporting Countries), Abdullah Al-Badri, said last week that speculation was to blame for the decline by 15% since the last increase in production. He ceremoniously denied that there was any attempt by the cartel to discourage production from shale or oil sands, or to put politi...



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Phil's Favorites

Maybe Oil Goes to $70 on its Way to $40

Courtesy of Charles Hugh-Smith of OfTwoMinds

A retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel.

When the conventional media ordains oil inevitably dropping to $40/barrel, I start looking for something else to happen--like oil going to $70/barrel. There are number of reasons this isn't as farfetched as it might seem at the moment.
  1. The huge gap begging to be filled on the chart of the Energy Select Sector exchange-traded fund XLE and a bunch of other energy-sector stocks and etfs. Gaps like this usually get filled sooner rather than later.
 

2. A bounce back to the 50-day moving average on the WTI oil index around $73 would be unsurprising. As the old sayi...



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Pharmboy

2015 - Biotech Fever

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

PSW Members - well, what a year for biotechs!   The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down!  The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months.  What could go wrong?

Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.

Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies.  A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...



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Chart School

Can you make a living trading Springs and UpThrusts?

Courtesy of Read the Ticker.

We tell the truth about trading springs and upthrusts, no holding back!

More from RTT Tv

NOTE: readtheticker.com does allow users to load objects and text on charts, however some annotations are by a free third party image tool named Paint.net Investing Quote...

..“The market always tells you what to do. It tells you: Get in. Get out. Move your stop. Close out. Stay neutral. Wait for a better chance. All these things the market is continually impressing upon you, and you must get into the frame of mind where you are in reality taking your orders from the action of the market itself — from the tape.”…

Richard D. Wyckoff
.."Markets are constantly in a state of unce...



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All About Trends

Mid-Day Update

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Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Insider Scoop

#PreMarket Prep Guest List For The Week Of December 22, 2014

Courtesy of Benzinga.

Brian Kelly, Curtis Erickson and Jerremy Newsome will all be guests on this shortened week of Benzinga's #PreMarket Prep broadcast, sponsored by Nadex.

Be sure to tune in at 8:00 am EST Monday-Friday here to tune in to the exciting show.

Don’t miss our #FedForecast2015 event either!

You can learn more about that here.

Monday, December 22, 8:35 a.m.

Jonathan Corpina (...



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Digital Currencies

Chart o' the Day: Don't "Invest" in Stupid Sh*t

Joshua commented on the QZ article I posted a couple days ago and perfectly summarized the take-home message into an Investing Lesson. 

Chart o’ the Day: Don’t “Invest” in Stupid Sh*t

Courtesy of 

The chart above comes from Matt Phillips at Quartz and is a good reminder of why you shouldn’t invest in s...



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OpTrader

Swing trading portfolio - week of December 15th, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Sabrient

Sector Detector: Energy sector rains on bulls' parade, but skies may clear soon

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of Scott Martindale of Sabrient Systems and Gradient Analytics

Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly.

Click here and sign in with your user name and password. 

 

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Option Review

SPX Call Spread Eyes Fresh Record Highs By Year End

Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...



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Market Shadows

Official Moves in the Market Shadows' Virtual Portfolio

By Ilene 

I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).

Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.

Notes

1. th...



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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!




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