2015-03-30

China Entangled With Developing World

China helped fueled a credit driven boom in developing markets, such as Kenya, where infrastructure development is a significant portion of Kenyan GDP.

Kenya's debt to China hits Sh101 billion as external loans pile
Kenya owes $1.1 billion (Sh101 billion) to China, nearly a third of which was stacked up over the first half of the government’s current fiscal year. The debt stood at about $0.85 billion (Sh82.8 billion) at the end of last June.

While China’s lending to Kenya has been growing in recent years, Japan has been reducing its credit over the same period.
The total debt is not even 2% of GDP, but China is playing a large role in GDP growth.

World Bank Raises Kenya’s 2015 Growth Forecast to 6 Percent
China is helping finance and building a $3.6 billion standard-gauge railway from the port of Mombasa, East Africa’s busiest, to Nairobi, in what the government has described as part of the largest infrastructure project in 50 years since the country gained independence. The state targets boosting installed power-generation capacity by 5,000 megawatts by 2017.

Risks to the outlook include the threat of insecurity, which has hurt tourism, a key source of foreign exchange, and pressure on the budget deficit as the government increases spending, the World Bank said.

PBOC Follows Through on Mortgage Changes

Bloomberg: China Loosens Home-Buying Rules to Counter Economic Slowdown
The required down payment for some second homes was lowered to 40 percent from 60 percent, the People’s Bank of China said on its website. The finance ministry later said select homeowners will be exempted from a sales tax if they sell after holding a property for two years or more. The previous minimum to avoid the 5.5 percent tax was five years.

Beijing Land Sales Cool

While hope springs eternal in the real estate market, the land sale picture remains clouded.Beijing only sold 28 parcels of land in Q1, down from 50 parcels in Q1 2014. Revenue was ¥48.4 billion, down ¥26.9 billion from last year, a drop of 35.7%. Planned construction is 2.1 million sqm, down 52.4% from 2014. Residential land auctions resulted in 7 land sales in January, 3 in February and only 1 in March as developers have become more rational. Land sales within the 5th ring (higher priced real estate) have dropped from 60 plots in the 5 years from 2005-2009, down to 35 from 2010-2014. High priced apartments have been selling slowly. Developers are wary of overpaying for land and being caught in a cash crunch.

iFeng: 一季度北京土地市场遇冷 成交金额下滑三成五

2015-03-29

PBOC Set For Major Announcement on Mortgage Policy

Chinese media is reporting the PBOC is considering changes to mortgage policy and reduction in second-home down payment. Second-home down payments will fall to 50%.

iFeng: 购房者注意 媒体称央行即将出台一重大消息

The Chinese headlines says: Homebuyers Pay Attention, Media Says Central Bank Will Make Major Announcement.

The full court press on Chinese homebuyers is underway. This is the make or break period for China's real estate market. The next 6 weeks, through the May Day holiday, will either confirm the industry's hopes of recovery or crush them for good.

Put Yer Shorts On, It's Gonna Get Hot

I'll be shopping for puts this week.

Fears of a new global crash as debts and dollar’s value rise
Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.”

...It calls for a once-and-for-all write-off, instead of the piecemeal Greek-style approach involving harsh terms and conditions that knock the economy off course and can ultimately make the debt even harder to repay. The threat of a genuine default of this kind could also help to constrain reckless lending by the private sector in the first place.

However, when these proposals were put to the UN general assembly last September, a number of developed countries, including the UK and the US, voted against it, claiming the UN was the wrong forum to discuss the proposal, which is anathema to powerful financial institutions.

Pettifor shares some of the UK and US’s scepticism. “The problem for me is that the UN has no leverage here,” she says. “It can make these moralistic pronouncements but ultimately it’s the IMF and the governments that make the decisions.”
Additionally, if you're worried about a crisis in the first-world, developing countries will sink or swim on their own capital formation. Whether developing economies declare bankruptcy or not, foreign capital won't be available. What is available is likely to pour into first world countries because post-collapse, the first world economies will be paying high interest rates and growing GDP at rates associated with developing economies today. Developing economies that rely on foreign capital exist as extensions of the first world who provide food, medicine, capital and some legal structure. If the first world is absorbed in an internal crisis, developing countries without internal systems will not sustain development.

Finally The "Very Serious People" Get It: QE Will "Permanently Impair Living Standards For Generations To Come"
Global Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline

With a surging U.S. dollar and growth remaining sluggish in much of the world, Bank of America Merrill Lynch forecasts that world output measured in dollars could fall in 2015 for the first time since the financial crisis. Over the past 34 years, this has happened just five times.

Steve Keen Exclaims "The Fed Has Not Learnt Anything From The Crisis"
So where do we stand today on Fisher’s disequilibrium markers of debt and deflation? In a phrase, on the precipice. As Figure 3 shows, private debt has only been reduced by 25% of GDP, whereas the decline in debt from its peak in 1932 to the end of WWII was almost 100% of GDP (this graph combined Federal Reserve data since 1945 with Census data from 1916 to 1970, and rescales the Census data to match The Fed’s data in 1945). And though we haven’t had deflation as severe as in the Great Depression—when prices fell by more 10% a year—we are back in deflation territory once more.

2015-03-28

Hainan Debt Troubles

The housing bust is pushing local governments to the edge of solvency, with Haikou asking to have access to one-third of the province's local debt quota.

Chinese Official Downplays Debt Risk as Haikou Pleads for Relief
The governor of China’s tropical Hainan Island downplayed the risk of financial trouble after the province’s capital city said it might not be able to pay its debt and made a plea for help.

“I am confident in debt repayment at all government levels in Hainan,” Hainan Deputy Governor Mao Chaofeng said on the sidelines of the Bo’ao Forum on the island Friday. “I don’t think there will be a risk.”

Mao’s reassurances contrasted with a Feb. 4 letter from the political advisers of Haikou and posted on government website that said the city’s debt had “already exceeded the alarming line.” It said revenue would be flat and asked that the regional government allocate a third of its bond issuance quota to the city.

“It’s basically impossible for us to pay government debts with our own financial resources,” the advisers wrote in the letter.

2015-03-27

Central Planning Fails Again

Iron ore prices continue to fall as China's economy rebalances and futures prices are in backwardation. Near month futures are $57 December 2017 futures are at $49.50. China continues to produce iron ore at high costs mines though, in order to supply a steel industry that refuses to cut production. In addition to losses for iron ore and steel producers, China has lit the protectionist fuse across the globe as steelmakers seek protection from Chinese exports.

China's New Bubble: From Fireworks to Internet Finance

Panda Fireworks (600599.SS) is getting into the Internet business now that fireworks sales are sliding.

2015-03-26

Chinese Stock Accounts, Margin Surge

Fed Ignores Dog, Focuses on Tail

The potential for a negative confluence of events is in the cards with the Fed looking back instead of forward.

Federal Reserve Bank of Cleveland: Exchange-Rate Pass-Through and US Prices

Getting Deals Done in Beijing

Tycoon Said to Bring Down a Deputy Mayor, Control Key Beijing Land Deal
Starting late last year, a fight between Peking University Founder Group Co. Ltd. and Beijing Zenith Holdings Co. was ignited by disputes over control and terms of the pair's jointly owned Founder Securities Co.

Amid accusations of fraud and other wrongdoing, the business argument has spilled over into graft charges and led to the detention of top executives from both sides, including Founder Group CEO Li You.

As the investigations unfold, Zenith's founder, Guo Wengui, has entered the spotlight. With 15.5 billion yuan in personal assets, Geo, who is currently living overseas, has been found to be behind several political scandals and controversial business deals over the past years.

Denmark: Disaster In The Making

Six years of global central bank debt saving is reaching critical levels.

Realkredit

History and Future of Gold In China

Here are snips from a long piece on gold's role, or lack of one, over the past 60 years.

The KMT's plan to transport central bank gold to Taiwan was accidentally discovered by Western media and immediately reported. The widespread "gold run" on banks in Shanghai that ensued in the weeks afterward dealt a death blow to the regime's recently issued jinyuanquan, which had already been teetering on the brink of collapse. This also brought an end to the monetary system that the ROC government had been trying hard over the previous 10 months to build based on jinyuanquan, which was supposed to be strictly pegged to gold.

Many Chinese people at the time were either forced to exchange their foreign exchange and gold for jinyuanquan or did so willingly out of faith in the ROC government. The government, however, issued the currency at will and caused severe inflation. This cost it all the trust it might have had in the part of the country it still controlled, and was a major reason behind the KMT debacle that ensued. That was a lesson that its rival, the Communist Party, has carefully taken to heart.

On the very day that the first shipment of gold left for Taiwan, the party founded the People's Bank of China in Shijiazhuang, Hebei Province. This marked the birth of the current central bank and the yuan as its statutory legal tender.
The CCP allowed other currencies at first, but gradually replaced them with the yuan:
Things began to change as communist troops started prevailing in larger parts of the country. Inflation began to affect some liberated zones, especially coastal Zhejiang and Jiangsu provinces, where a more developed commercial sector attracted more material goods than anywhere else. Once in Shanghai, a severe crisis involving silver dollars, cotton yarn and grain erupted, a problem the authorities barely managed to control. The crisis was a battle over reserves of important materials fought between the new administration's currency – the yuan – and the old regime's payment instruments.

In 1950, the People's Bank of China began exchanging all existing dongbeibi – a currency used in the northeastern part of the country – for the yuan. It had allowed dongbeibi to exist in the year after the new government was established because it wanted the northeast to be economically independent and strong enough to serve as a supplier of materials. The strength of the dongbeibi lay in the economic foundation the Japanese had established during their occupation. It was also a kind of "goods-backed currency," as its value depended on the trade of grain and meat to the Soviets in exchange for military materiel.

Taking dongbeibi out of circulation signaled that the party was going to expand the scope of the yuan to the entire nation. By this time the economic and financial systems established by the various regimes that had controlled the nation since the 1911 Revolution were all gone. With the exception of Tibet, which kept its own currency under the Seventeen Point Agreement for the Peaceful Liberation of Tibet, the yuan was made the only legal currency in all of China.
Although gold plays no role in the value of the yuan, maybe it should:
The price of gold started plummeting in early 2013 as the U.S. economy became stronger and the market expected the Federal Reserve to stop its policy of so-called quantitative easing. Meanwhile, China's demand for gold soared. In the first half of 2014, imports skyrocketed, prompting speculation that the central bank was secretly beefing up its gold reserve.

Buying more gold seems to be a good choice for both the government and individual investors, given the new domestic and international circumstances. The yuan has been relatively stable throughout the most troubled times of the financial crisis, but its peg to the U.S. dollar means it will always fluctuate in sync with the latter, depending on the Fed's moves.

That is why it is extremely important that we have an "anchor" ourselves.

Gold is a currency that supersedes sovereignty issues, is politically neutral, and is not easily manipulated by monetary policy. Gold may not be able to compete with the currencies of the world's major powers, but it can certainly be used as an anchor.
Hedge fund manager Li Sheng concludes with:
In a 1966 essay, former Fed chairman Alan Greenspan wrote that gold is "a protector of property rights." This is true, but only in times of peace and in an open environment. The old wisdom of hoarding gold in troubled times is applicable only to eras of strife and war. In China in the 1960s, in Nazi-controlled Europe and in the Soviet Union under Stalin, gold could not buy one food, let alone protect property.

So instead of trying to peg the yuan somehow to gold to increase its credibility internationally, the government might as well work to establish rule of law and create a system where private property ownership is respected and the public believes in the strength of the monetary system. Confidence is more important than gold.

But that does not mean the yuan system does not need gold. It can be an anchor that stabilizes the yuan and increases people's confidence in it. It can also serve as a check to the power of any one major currency.

Caixin: Yuan and Gold: Old Enemies Should Finally Become Friends
Caixin: 人民币与黄金:荏苒一甲子、干戈化玉帛

2015-03-25

Growing Opportunities in Chinese Fixed Income

China's government debt-bond swap plan expected to draw investors
China's local government debt-for-bond swap programme, with an initial size of 1 trillion yuan (HK$1.25 trillion) this year, might attract a variety of investors without triggering a US-type quantitative easing.

The Ministry of Finance has asked provincial authorities to convert trillions of yuan of expiring debt into bonds that carry lower yields and longer-term maturities. The move is to improve transparency of liabilities and ease short-term repayment pressures for local governments.

Finance Minister Lou Jiwei told the South China Morning Post last week there was no need to get help from the People's Bank of China on the debt replacement plan. The sales of the bonds would be market-oriented, he said.

China's Shandong province has 1.1 trillion yuan in debt
Shandong, one of China’s largest and most influential provinces, estimates its local government debt to be around about 1.1 trillion yuan, making it the second province to reveal its official debt level to the central government, reports Caijing.

Last Minute Negotiations for Kaisa

China's Kaisa will die soon if creditors "do not cooperate," Sunac warns
Mainland developer Sunac China said on Tuesday it does not have much room to back down from an initial failed debt restructuring proposal to keep troubled Kaisa Group afloat as the firm it is buying is in much worse shape than expected.

“If creditors do not cooperate, the deal will not go through and we will surely give up,” chairman Sun Hongbin said. “The possibility (of a successful deal) is diminishing as Kaisa is now in a much worse situation than we expected.”

Kaisa had total debts of over US$10 billion as of the end of last year. Sun said Sunac had spent almost HK$10 billion yuan on Kaisa, which could otherwise have not survived last month’s Lunar New Year festival.

“If you don’t think you bought the wrong bond and still regard it as a good company, you just wait for it to die,” Sun said.