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

The Real Story Behind Goldman's Q2 Trading Loss: How A $100M Gas Bet Went Awry

Courtesy of ZeroHedge. View original post here.

Goldman Sachs FICC-trading income was an unexpectedly ugly blemish on what was already a poor Q2 earnings report. And while the FDIC-backed hedge fund initially blamed the decline on lower trading revenues, lack of volatility and depressed client activity...

... there was more to the story. T...



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ValueWalk

The Entire Medical Industry Is About To Change

By The Sovereign Investor. Originally published at ValueWalk.

The doctor straightened and pulled the stethoscope from her ears. “I don’t hear anything on the right side.”

Sometimes silence is a good sign. When it comes to listening to my husband breathing, it’s not.

One quick X-ray later and we discover that his right lung had collapsed. There was also air putting pressure on his left lung.

The fix was easy. The doctor inserted a slender tube into his chest, sucking out the air. His lung reinflated in a matter of minutes.

I caught the doctor later and asked her why this had happened. When the pain started, he’d been watching TV.

She shrugged and admitted that sometimes it was just something that happened to men who are tall and thin.

Of course, the answer to the question of “How do we avoid this?”...



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Phil's Favorites

Investment Advice in Four Words: Have Patience, Avoid Bubbles

Courtesy of Mish.

A relations manager for Ted Thomas reached out last week and asked: “What is your most valuable advice to people who are beginner investors so that they can get great results in the long term?”

The answer form had no formatting options. Here is a detailed response, with links.

Have Patience, Avoid Bubbles

The TINA theory (there is no alternative other than stocks and bonds) is a path to poor returns.

Cash and gold are indeed options. I discussed TINA in Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice

I recently discussed gold in ...



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Insider Scoop

Things To Like, Things To Watch At The Gap

Courtesy of Benzinga.

Related GPS 20 Stocks Moving In Friday's Pre-Market Session A Peek Into The Markets: U.S. Stock Futures Edge Higher Ahead Of Consumer Sentiment Repor...

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Chart School

Volatility on the Rise

Courtesy of Declan.

Today's losses look big on current charts but in a historic context, they weren't too severe. However, big red bars are not to be ignored and 'market leading' Small Caps have felt the full brunt of the selling from July which is bad news for the broader market.  Today's losses in the Russell 2000 undercut the 200-day MA leaving 1,345 as next support (of which I would not be too confident of it holding).


If the Russell 2000 gives up 1,350s then a drop to 1,150s could be on the cards. Things could get ugly if this scenario pl...

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Digital Currencies

Ukrainian Lawmakers Disclose $45 Million In Bitcoin Holdings

Courtesy of ZeroHedge. View original post here.

As Ukraine's crackdown on corruption continues, three lawmakers from Ukraine’s ruling party revealed this week that they own a combined $45 million in bitcoin, according to a report by RIA Novosti, a Russian foreign news service.

Their holdings came to light during mandatory financial disclosures by members of the Ukrainian parliament, part of an IMF-approved strategy to tamp down corruption in Ukraine. The country's democratic institutions, which were never very robust to begin with, have been further destabilized by...



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OpTrader

Swing trading portfolio - week of August 14th, 2017

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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Biotech

Editing human embryos with CRISPR is moving ahead - now's the time to work out the ethics

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

Editing human embryos with CRISPR is moving ahead – now's the time to work out the ethics

Courtesy of Jessica BergCase Western Reserve University

There’s still a way to go from editing single-cell embryos to a full-term ‘designer baby.’ ZEISS Microscopy, CC BY-SA

The announcement by researchers in Portland, Oregon that they’ve successfully modified the genetic m...



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Members' Corner

Why we need to act on climate change now

 

Why we need to act on climate change now

Interview with Jan Dash PhD, by Ilene Carrie, Editor at Phil’s Stock World

Jan Dash PhD is a physicist, an expert at quantitative finance and risk management, and a consultant at Bloomberg LP. In his thought-provoking book, Quantitative Finance and Risk Management, A Physicist's Approach, Jan devotes a chapter to climate change and its long-term systemic risk. In this article, Ilene interviews Jan regarding his thoughts on climate change and the way it can affect our futu...



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Mapping The Market

The App Economy Will Be Worth $6 Trillion in Five Years

Courtesy of Jean-Luc

This would be excellent news for AAPL and GOOG to a lesser extent although not inconsequential:

The App Economy Will Be Worth $6 Trillion in Five Years 

In five years, the app economy will be worth $6.3 trillion, up from $1.3 trillion last year, according to a report released today by app measurement company App Annie. What explains the growth? More people are spending more time and -- crucially -- more money in apps. While on average people aren't downloading many more apps, App Annie expects global app usership to nearly double to 6.3 billion people in the next five years while the time spent in apps will more than double. And, it expects the...



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Promotions

NewsWare: Watch Today's Webinar!

 

We have a great guest at today's webinar!

Bill Olsen from NewsWare will be giving us a fun and lively demonstration of the advantages that real-time news provides. NewsWare is a market intelligence tool for news. In today's data driven markets, it is truly beneficial to have a tool that delivers access to the professional sources where you can obtain the facts in real time.

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Kimble Charting Solutions

Brazil; Waterfall in prices starting? Impact U.S.?

Courtesy of Chris Kimble.

Below looks at the Brazil ETF (EWZ) over the last decade. The rally over the past year has it facing a critical level, from a Power of the Pattern perspective.

CLICK ON CHART TO ENLARGE

EWZ is facing dual resistance at (1), while in a 9-year down trend of lower highs and lower lows. The counter trend rally over the past 17-months has it testing key falling resistance. Did the counter trend reflation rally just end at dual resistance???

If EWZ b...



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All About Trends

Mid-Day Update

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

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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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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