2016-02-09

Financial Contagion Has Arrived

Preferred stock is sending a warning signal.

Deutsche Bank Analyst Stares Into the Abyss

I don't blame the analyst for recognizing the problem, but some of the things on the to do list are the exact opposite of what is needed.

ZH: Deutsche Bank Is Scared: "What Needs To Be Done" In Its Own Words
So back to the original question WHAT NEEDS TO BE DONE. Simple?

1. Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don't raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
2. Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
3. China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
4. And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
5. how about some fiscal stimulus
6. on negative rates -- instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest -- put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.
The last suggestion would work as well as the power company announcing it will stop sending you electricity and even drain your solar panels if you have them, but still send you a bill. How long before you end your relationship with the power company?

McDonald's Of the Future Hits Wangfujing

Xinhua: McDonald's woos customers with "futuristic" burgers
Since the opening in downtown Beijing's Wangfujing Street, McDonald's "experience of the future" concept restaurant has been filled with curious customers every day.

The most distinctive feature of the restaurant is the personalized burgers, which allow customers to design their own tastes by freely choosing from 24 ingredients. With a smart phone, customers can complete the design and order anywhere in the venue, and then have staffs send food to their table with the help of table locators.

..."It makes me relax after a stressful day," said Miss Wang, who placed her order via the touchscreen. She felt happy even though it took her half an hour to get the burger.

This is also in New York: McDonald's Create-Your-Taste Kiosks Hit New York City in the Gut

Also: Local McDonald’s Tests ‘Create Your Taste’ Custom Burger Experience

Remove the human labor from ordering; increase labor for food prep and service. Upgrade the quality of the product and increase choice.

Cheap fast food will head towards full automation. Labor is stripped out (first cashiers, then cooks) and a uniform product is created with no human labor.

Coal: Cut 500M Tons in 5 Years

CRIEnglish: China Pledges to Cut Coal and Steel Overcapacity
The State Council, China's cabinet, has announced plans to cut steel production capacity by 100 million tons over the next five years.

The country will also not approve any new coal mines before the end of 2019.

...The country will also shut down 500 million tons of coal capacity and consolidate another 500 million tons into the hands of fewer but more efficient mine operators in the next three to five years.

China Daily: China stops approving new coal mines
In the past five years, China eliminated about 560 million tons of coal production capacity and closed 7,250 coal mines.

The country had about 11,000 coal mines at the end of 2015 with a total capacity of 5.7 billion tons.

Bloomberg: China Puts Coal Production Capacity on Chopping Block
The plan comes a day after similar scheme for the country’s steel industry was unveiled. The world’s biggest producer will close between 100 million and 150 million metric tons of annual crude steel capacity by 2020, according to an outline published on the state council’s website Thursday. The steel industry cuts -- amounting to 13 percent of capacity at most -- fall short what’s required, according to analysts from Capital Economics Ltd., Macquarie Group Ltd. and Argonaut Securities.
Maybe it is window dressing to send a signal of "we're serious", but the ban on new mines is a red flag that the underlying problem of cheap credit may not be dealt with. The government will not cut off funding to the industry and let the inefficient producers and incompetently managed firms die, it will artificially suppress production and pick the winners. At least it makes investing easier.

China had about 10800 mines at the end of 2015, and more than 7000 of have production below 300,000 tons, about 10% of total output. All of those mines will be closed in 1 to 3 years, as will any mines with serious accidents. Through mergers and acquisitions, have all Chinese coal miners producing at least 3 million tons annually within 3 years.
煤炭业化解产能意见出炉 3至5年内退出产能5亿吨

More real Estate Bailouts Coming in Q1

Sales are already rising, but more help is on the way...
Jiangxi proposed urban housing for first-time buyers, qualified to give financial subsidies to farmers, migrant workers and will explore individual businesses into the housing accumulation fund system range. Henan Province put forward to support the improvement of housing conditions for workers paid into the provident fund loans, the resident population will have a stable labor relations into the provident fund coverage, encourage farmers into the city to purchase. Meanwhile, also in an orderly Henan agricultural work Citizenship.

Inner Mongolia proposed that in order to digest solid real estate inventory, Inner Mongolia will study the housing fund to support farmers and herdsmen in the city to purchase policies to encourage financial institutions to grant the transfer of migrant farmers and herdsmen purchase loans. In addition, the common property will also explore other measures to gradually absorb the large square housing stock, restrictive cancellation policy, release stiffness and improve housing demand. Hebei Province, said that to resolve the real estate stocks, advancing to meet the new demands of the public housing system reform starting point, stabilize the real estate market, household population by 2020, the resident population urbanization rate of about 48% and 67%, respectively. Jilin Province put forward to encourage and support real estate development enterprises due to lower housing prices, to help solve the problem of financing, while according to regulate the supply of land "to stock" in progress.

Hunan proposed monetization is an effective means to inventory, in principle, in 2016 shed change monetization of not less than 50% of the high proportion of resettlement areas and projects will be given funds tilt. Qinghai suggested further relaxation Xining (REF) settled in the city limits, the establishment of farmers and herdsmen town buyers and renters financial subsidies.

From the first-tier cities, the local two sessions related issues are more around the support reasonable housing needs, and promote the healthy development of the market to expand. Beijing (REF) said that this year will begin to study wards live zero level tax policy under the premise of balance, to encourage the public to change the housing from the office closer to the place. Shanghai said the purchase of the policy this year will continue to implement, but it will increase the supply of small and medium size, so that the housing price in young people after efforts can bear. During the two sessions, Guangdong Province, the Guangdong Provincial Department of Housing and Urban-Rural Construction Department, said Wang Peng, Guangdong will cancel the purchase of limited credit and other regulatory policies, but not mandatory, especially for Guangzhou (REF), Shenzhen (real estate) in big cities like specific policies still make a judgment according to the local government market.
iFeng: 一季度楼市或迎密集宽松政策 成交料稳中有升

Fresh Concerns of Solar Overcapacity

2015 PV cumulative installed capacity of about 43GW, ranked first in the world this year in the new scale will be 20GW to 23GW, while the A shares of solar power generation concept Listed companies 70% of companies expected net profit growth of over 50%, even up to the highest 1500%. At the same time, the differentiation phenomenon is obvious, the upstream business is still mostly a loss.

Insiders call on guard against a new round of power plant overcapacity, and discard light, subsidies, land three mountains obscure short-term, will continue to erode the power plant profits. Thirteen Five-Year period, with the decline in the cost of photovoltaic power generation and the development of the situation, the price level will be reduced, and strive to achieve the 2020 parity user side, multisectoral currently brewing "reduce costs" combined.

...According to the China Photovoltaic Industry Association Secretary-General Wang Bo Hua, new PV installed capacity in 2015 is about 15GW, an increase of more than 40% for three consecutive years first in the world, of which 84% was ground stations, and distributed power plants accounted for 16%. The total installed capacity of about 43GW, ranked first in the world.

Affected by this pull, midstream component of corporate earnings also improved significantly. China Photovoltaic Industry Association data show that in 2015 assembly production exceeded 43GW, an increase of 20.8%, 51 assembly enterprises average capacity utilization rate of 86.7 percent, up 6 percentage points over the first half of 2015. The top ten more than double-digit profit margins, after 33 standardized conditions by enterprises in 2015 operating results analysis (statistical excluded due to several heavy historical burden resulting from loss of business), only four business losses, the average profit margin of 4.8%, significantly higher than the 3% average for the electronics manufacturing industry, but also two to three percentage points higher than in the first half of 2015.

The fiery momentum from the earnings of listed companies can be further confirmed. According to WIND data, as of January 29, 23 of 37 listed solar companies released 2015 annual results notice, 18 had yoy net profit growth, including 15 with expected growth rates of more than 50%, Jiawei (300317) saw growth of 1490.16% to 1519.51% to come out on top, followed by Shanghai Aero Auto (600151), net profit is expected to grow 382% to 415%, and Risen Energy (300118) and ZJ Sunflower (300111) are expected to grow 363% and 393%, respectively, from 140.22% to 166.91%.

But it is worth noting that differentiation phenomenon is obvious. Scale, brand, technology components and full corporate orders, orders difficulties of SMEs, mostly for OEM products or to provide for their own power plants. Upstream polysilicon enterprises in worse trouble in the global PV market, seasonal changes, polysilicon is also under pressure than other sectors as the most important, the price all the way down, most companies are still losing money.

"At present, the polysilicon business situation remains severe and complicated, foreign polysilicon companies are still looking for loopholes in the Chinese market, duties for Korea 'dual' tax rate is too low, some companies tax rate of only 2.4%, resulting in a substantial increase in imports from South Korea polysilicon a serious impact on China's polysilicon industry, while the European Union to take the price guarantee mechanism intended effect is not obvious, a significant increase in re-exports by Taiwan polysilicon. "Vice president of China nonferrous Metals industry Association Zhao Jiasheng said.

...Brownouts problem is equally bleak. Data show that in 2015 the national grid scheduling abandoned cumulative photovoltaic capacity range of 46.5 billion kwh, abandoned solar rate 12.62%, all concentrated in Gansu, Qinghai, Ningxia and Xinjiang in Northwest China's four provinces. Wherein the Gansu abandoned solar rate of 30.7%, 22% in Xinjiang.

...According to her estimates, the cost of land in the initial investment is not higher than 0.5 yuan / kwh, to run for no more than one yuan / square meter, reflected in the cost of electricity is 0.04-0.05 / kWh. The favorable financial environment can be expected, if the financing costs lower and lower interest rates by one percentage point, electricity demand is reduced by about 0.03 yuan / kwh. In addition, tax policy also need to win, Jizhengjitui 50% VAT tax, electricity demand is reduced by about 0.04 yuan / kwh.
Lower interest rates far enough and anything can become profitable. For a time.

CE.cn:新一轮光伏电站产能过剩隐忧初显

How Long Can First-Tier City Home Prices Rise?

So asks the headline of this article originally from China Economic Net. Conclusion:
Under improper regulation, if asked high prices can sustain long? You can not have normal thinking or analysis to judge, it can only be resigned. And this situation, inevitably the status quo can not last long.
If it continues on this way, with first-tier and top second-tier city prices rising, with land prices rising and new land kings crowned month after month:
So, in 2016, the luxury market or markets, market prices are high, the competition will become more intense, melee situation will be quite tragic. But the market is good or bad, regardless of the ups and downs of small and medium housing prices housing prices, has nothing to do with ordinary people, of course, has nothing to say small series of settling the new media is only relative. From 2015 the land market performance, if the land market, "King" continued frequent phenomenon continues, then this means that in 2016 the property market will fall into a Great Depression.
The overall tone of the article is not so negative. It says prices can rise (even double) over a longer time frame, but if the frenzied pace continues, another bust will quickly follow.

iFeng: 一线城市房价上涨28% 高房价还能撑多久?

2016-02-08

Hunan Eliminates Agricultural Hukous

Hunan has eliminated agricultural and non-agricultural hukou differences, unifying the hukou registration system.

iFeng: 湖南正式取消农业户口与非农业户口区别

The Crunch, or Farewell My Eurodollar

Jeffrey Snider is putting out a steady stream of great articles describing the retreat of the eurodollar and the deflationary wave currently unfolding.

Alhambra: The Monetary Root
Alhambra: No Surprise To Find Dealers Hoarding For A Third Time

The petrodollar is drying up too. Here's FTAlphaville: Foreign cbank drawdowns, int’l drawbridges and a Fed moat
Remember, decades worth of dollar claims have by now been built up against the US system. Most of this time, such dollars were reinvested right back into the US economy creating a virtuous circle of ongoing demand for value added goods produced abroad, albeit funded by the US system’s underlying and growing petrodollar debt.

At some point, however, these dollars also began to be reinvested abroad, funding the continued consumption of dollar-denominated goods (such as commodities) but this time in countries which had no control over the underlying dollar availability or the size of the petrodollar debt, and who certainly couldn’t afford to be gouged at the same rate that the developed US system could.

Inevitably, the commodity correction will encourage defaults in that regard. And inevitably this will see dollar surplus countries confronted with a mismatch between dollar inflows and their their dollar liabilities. Dollar stocks will have to be drawn.
Snider gives some monetary history, explaining the central bankers still haven't figured out the eurodollar 50 years on:
Real Clear Markets: There Was Never a 'Greenspan Put'
Unlike August 1971 when Nixon "closed the gold window" for good, there is no parallel monetary system in place to take up the function of global financial and really exchange payment system. Then, the eurodollar had already been ceded most of the exchange function; all that was left was official acknowledgement. It was a terrible prospect in that economists really had no idea how to control an "offshore" dollar; and indeed, they never have.

This is different in that there is nothing but a yawning void at its end. As I write persistently, the end of the eurodollar would be cause for great and deserved celebration all over the world, bringing up the actual prospects for true prosperity and sustainable growth (debt nowhere near the center) if it were being done with a replacement not just in mind but likely already in place and with parallel function already begun. Instead, I am writing constantly about fifty-year old history that still hasn't been recognized for what it was; policymakers still have no idea about the eurodollar in its full agency, and economists in general still think money is something the Fed does.

Investopedia: What percentage of the global economy is comprised of the oil & gas drilling sector?
According to market research by IBISWorld, a leading business intelligence firm, the total revenues for the oil and gas drilling sector came to $5 trillion in 2014. This sector is composed of companies that explore for, develop and operate oil and gas fields. It is also sometimes referred to as the oil and gas exploration and production industry, or simply as E&P. Since the 2014 estimates for global gross domestic product range between $77 trillion and $107 trillion, the oil and gas drilling sector makes up between 4.6% and 6.5% of the global economy.
On one side is deflation, destruction of leveraged eurodollars. On the other side is a large and continuous demand for foreign currency from mainland China.

White Collar New Year's Bonuses Plummet 30%

New Year's bonuses for white collar workers fell to an average of 10,767 yuan, down 3,000 yuan from 2014. Two-thirds of workers did not receive bonuses.

The financial industry was tops with a 17,039 yuan average bonus, but that was down from 23,152 yuan a year earlier.

iFeng: 从年终奖看中国经济:金融业居首 制造业明显下滑

猴年快乐

2016-02-07

Chinese FX Reserves Fall $100B, Significant Depreciation Inevitable At Current Pace

BBC: China's currency reserves plunged in January
China has been running down its vast foreign currency reserves in an attempt to boost the value of its own currency and stem a flow of funds overseas.

At $3.23 trillion, China still has the world's biggest reserve of foreign currency holdings.

But that has declined by $420bn over six months and stands at the lowest level since May 2012.
The average pace of decline over the past three months is $100 billion.

Back in August, Charlene Chu had the $2.9 billion level as end of liquid reserves. At the current pace, if the PBoC hasn't freed up assets (which one must assume it has over the past 6 months), there's 3 months left before Chu's estimate of liquid reserves is exhausted. It it frees up all of those assets, it can battle for a year at this pace.

At an average pace of $100 billion a month, reserves fall 3% each month. Based on the current relationship, the renminbi will slide about 1% a month as long as this holds up. If the pace held for the whole year, there's a minimum expected depreciation of 10-15%, but this will not unfold in an orderly fashion. Depreciation of 15% to 20% is a conservative estimate based on current outflows. If they wait until late in the year to devalue, a drop of 30% or more is possible.

The longer China props up the yuan, the faster and larger will be the decline. For every $1 in reserves, there was almost 42 RMB in M2 in January. At present exchange rates, 16% of M2 speaks for 100% of reserves. Not a crisis in and of itself, but a problem due to the pace of outflows. At the present pace of reserve and renminbi decline, that percentage will be down to 11% in October, with the renminbi likely down to 7.4 USDCNY or lower. The renminbi would be in a worse position in October, with an even larger expected depreciation than predicted today.

If renminbi falls another $100 billion this month, the renminbi should drop to below 7 in order to balance the move. Of course, if the renminbi devalued that much, depreciation pressure might rise. Hence the need for a one-off depreciation to get ahead of the move and cause foreigners and China to move money back into China. Or float the yuan and completely break the linkage to the U.S. dollar, the same way the U.S. went of gold in the early 1970s.

In the run-up to 2008, the mainstream economic models said debt didn't matter. It did. The corollary for nations is that only foreign debt matters, domestic debt (and by extension money supply growth, since money supply includes credit) does not. China massively inflated its currency throughout the 2000s and is still inflating it today. The only reason the renminbi didn't tumble in 2008 was because the Chinese government re-instituted the hard peg. The yuan starting showing signs of stress in 2011, when the stimulus began to wear off. Emerging markets with similar credit growth have seen their currencies crumble. Any massive inflation that doesn't end in a deflationary event will eventually show up in the exchange rate when the domestic currency begins to bid for foreign currency. Chinese are bidding for dollars now.

2016-02-05

Mizuho Economist Sees Third- and Fourth-Tier Inventory as Key to 2016

From the above perspective, whether third- and fourth-tier cities can reduce inventory is related to whether the 2016 economy can stabilize.

iFeng: 经济学家:今年经济能否企稳取决于一件大事

Beijing Eases Housing Rules on Foreigners

Beijing has cancelled the one-year work requirement for foreigners to purchase a home. Living, studying, or working in Beijing is enough to qualify one to purchase a single home. Foreign companies can purchase an office.

iFeng: 外国人在北京购买自住房取消工作时间限制

Chinese Reserve Needs Higher Than Perceived

Bloomberg: When $3 Trillion Just Isn't Enough
The IMF has developed a suggested framework based upon research into previous currency crises. According to this formula, countries should maintain reserves equivalent to the sum of 30 percent of their short-term foreign-denominated debt, 15 percent of other portfolio liabilities, 10 percent of the M2 or broad money supply and 10 percent of yearly exports.

In China's case, that would add up to approximately $3 trillion.
The piece is by Christopher Balding.

He explains further and gives a deeper breakdown of the needs drawing on Chinese reserves in Follow Up to the Question of Chinese Foreign Exchange Reserves such as:
For 2016, we are already up to say $1.5-2 trillion is needed in 2016 for foreign currency needs. Between just paying bills and having liquidity to engage in international trade, China needs about $1.5-2 trillion in FX reserves. We could move it a little lower by taking on some more risk, but you can’t move it a lot lower without increasing your risk very very fast.

China's credit growth is what doomed the yuan. There are a lot of reserves, but credit growth far outstripped reserves. They should not have studied 1997 or 1989, but 1929.