2015-08-28

Deflation Fallout: East Asia's Largest Textile Company Goes Bust; 80% of Companies Face Bankruptcy

The firm in question: Jiangsu Baolijia Textile Co., Ltd.
Baolijia Textile Co., Ltd. is a new large-scale private enterprise, which was established from 2002 with total investment of RMB 800 million. It covers an area of 500mu and 140,000 sq.m. as building area, with totaled 4000 employees. Its design production scale is 300,000 spindles, and its annual sales amount is RMB 1.3 billion. The company is divided into Suzhou Baolijia Textile Co., Ltd. and Jiangsu Baolijia Textile Co., Ltd.

From the iFeng headline summary:
East China's largest textile large - Baolijia group discontinued message, causing the industry in an uproar, marvel!

Today, according to Hongze promote media message: Because Baolijia of bankruptcy, to the government and the general staff Baolijia brought great losses, now the county government will be to sell stock Baolijia way to pay compensation Employees loss!

Because Baolijia of bankruptcy, to the government and the majority of employees Baolijia brought great losses, the county government will now stock products to sell Baolijia way to pay damages of staff! June wages plans issued before August 10!

Text of Chairman's letter:
Baolijia of their staff and the community of friends:

Today Baolijia encountered unprecedented disaster, let us suffer, frightened. There are some staff wages and benefits did not get our hands on, there are no friends in the community loan is also clear, here I express my sincere apology. The following is the basic situation caused by these reasons and my views:

1, since last year, Baolijia Group are various financial institutions intensive pressure recovering loans of 207 million, equipment rental fee of 100 million yuan, cash flow of only 300 million yuan.

2, significant amounts Lu'an, Chuzhou Development Zone two investment agreements did not materialize, which Lu'an Economic and Technological Development Zone Investment Agreement commitments Lu'an Baolijia 420 million yuan project to solve the credit funds, has invested its seventh year, credit companies to get only 20 million yuan Lu'an agricultural businesses, is just a fraction of protocol commitments. Therefore reasons, resulting in insufficient Baolijia Lu'an company operating rates, resulting in annual losses, it can not honor the agreement of the Zone tax convention. Chuzhou Development Zone is also committed to addressing the credit for each completed a vehicle between 60 million yuan last year, four workshops have been completed and put into production, should be for enterprises to solve the credit funds 240 million yuan, the actual row in Chuzhou now only 10 million yuan loans, originally Chuzhou 20 million yuan loans ICBC also by 18 June this year, all the income loans.

3, in order to maintain business livelihood, strive to borrow from private social network circle 73 million yuan, and now the resources are all withered, but also saddled one debt.

4, received loans of financial institutions uncontrolled pressure loans, resulting in a serious shortage of companies operating rate, losses, until inability dimension count today.

5, the current storage materials company Lu'an enough wages and benefits paid to its employees, Chuzhou too few stocks, need to rely on government to solve problems. Hongze, Taicang government also needs to solve part of the problem, thus to trouble the employees and the community to bring a lot of understanding with me.

6, I also hope that all financial institutions to understand the sufferings of the enterprise, the overall situation, do not receive the loan uncontrolled pressure loans, hurt people hurt themselves also equal, and finally lose-lose. Also we hope that the integrity of the investment over the zone can not be invested in companies on what is the matter, all of the responsibility on the corporate body. A Baolijia go down is not terrible, if many companies have experienced the same fate Baolijia, will social stability will have a tremendous impact.

7, because I am the reason we lost confidence in harm Baolijia, I hope the employees and the community do not be discouraged, do not worry, even if I have not the ability to run this business, and I believe that the future will be Baolijia the ability to better boss to run well this business, because I lack the ability to control the business, resulting in Baolijia misfortune to all sectors of society friends and employees the hassle and confusion expressed deep regret!

I hope everyone in the hot summer, eliminate cool down, take a break, waiting for good news. If you have the opportunity to also, and everyone together, I will redouble our efforts to work, but also hope that we can continue to support me.

I believe the government can coordinate and deal with these issues in front, and finally I wish you peace, proceeds smoothly!

Baolijia Ge Fuchun

2015-7-31
What's perhaps even more amazing that this letter, published in a Zhejiang newspaper, is the two paragraph commentary that follows it, which includes a claim that 80% of private businesses are at the edge of bankruptcy.
Every employee should thank your boss, especially the last two years of poor industry as a whole. You may never know, when you are playing phone desertion, your boss is battered; you may never know how much you plan to take the salary that when your boss is down on an IOU signed. China's private bosses, to solve the employment of more than 80% of the Chinese population. But China's private bosses, more than 80 percent of enterprises facing collapse risk, legal risk. Typhoon cover when the ship, the captain must be the most unlucky own - crew can escape, but the captain could not bear his boat!

Please take good care of your boss, he really doesn't have it easy!

iFeng: 华东最大的纺织企业破产 董事长叹民企老板不容易

ChiNext Bounce Right on Schedule

At the start of the week I said a bounce would arrive in a few days; it came on Wednesday by close and Thursday by intraday.

This is a truly amazing analog when you consider China's massive intervention compared to the U.S.'s relatively hands off approach in the early 2000s. Two very different approaches to bursting bubbles and yet very similar performance in the first two months post peak. According to socionomic theory, the Chinese authorities are as much prone mood as the average investor. In other words, they intervene at the same moments that the mood in a free market would also "intervene" with contrarian, value and short-covering buying. Chinese authorities and average investors think "now is a good time to buy" because both are being affected by mood in a highly emotional market.

Yuan Depreciation Spiral Good for Treasuries

ZeroHedge lays out the "Chinese reserve depletion is bad for the U.S., QE4 is inevitable" argument.

ZH: Why QE4 Is Inevitable
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.

In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
Right here is my main beef with the argument. This line of thought assumes China will sell U.S. treasuries into a weak market, that there will be a mismatch of buyers and sellers, in this case way more selling by China and EM central banks.

An alternative model is as follows. Chinese (and other EM citizens) want to hold U.S. dollars and will exchange RMB for USD. This RMB is dumped back onto the market, resulting in more exchanges for USD. A depreciating spiral.

From the currency side, it's easy to see the U.S. dollar rally.

The treasury side is a matter of what to do with those U.S. dollars? Where are greenbacks going to flow in the middle of an emerging market currency crisis?

On the other side of the crisis, things look ugly for treasuries and the U.S. dollar, but both are very likely to peak at the most panicked phase of the crisis.



China Opens Real Estate Market to Foreigners

Buying financial assets and property is now easier than ever, right at the moment most people want nothing to do with China, including wealthy Chinese. A great moment for contrarian investors is coming.

WSJ: The Verdict on China’s Easing of Foreign Property Rules? A Resounding ‘Meh’
While some countries are starting to put the brakes on the onslaught of foreign property investors, China is doing the opposite.

Beijing’s latest move to loosen restrictions for foreign investors and homebuyers in the Chinese property market could draw some attention to the lackluster sector, but it’s unlikely to help the country regain its crown as an investors’ darling.
The key factor driving both policies is Chinese home buyers.
China is easing foreign-exchange restrictions placed on foreign companies and individuals when they apply for loans and when they need to change yuan proceeds gained from the sale of a property, said a circular jointly issued by six government bodies, including the housing ministry, the trade ministry, the central bank and the foreign-exchange regulator.

It is also providing foreigners the same rights as locals on purchases of multiple homes, depending on each city’s purchase policies, according to the circular, which is dated Aug. 19 but was published Thursday.

The earlier rules on restricting foreign participation in the domestic property market are no longer relevant in the current environment, as China struggles to cope with its worst economic slowdown in decades. Concerns about capital flight, given the surprise yuan devaluation earlier this month, have also compelled policymakers to make policy U-turns.
The bottom isn't in for Chinese property and yields are still terrible in many cities (witness the implosion of SOHO China's stock), but there may soon be the chance to purchase currency depreciated property at great prices.

Economists React to China's Shifting Capital Flows

These two videos describe 80% of mainstream coverage on China.

Economists react to China capital inflows: yay!


Economists react to China capital outflows: WTF is that?

China Pumps Up the Local Government Debt Swap

Bloomberg: China Expands Debt Swap Quota to 3.2 Trillion Yuan, Xinhua Says
China is raising the quota for regional authorities to swap high-yielding debt for municipal bonds to 3.2 trillion yuan ($500 billion), China’s Finance Minister Lou Jiwei said Thursday, as cited by Xinhua News Agency.

The change will help ease pressure on local governments to pay debt, the official news service said. Regional authorities had sold 1.4 trillion yuan of the bonds as of the end of July, Lou said. The nation announced a first batch of 1 trillion yuan in March and a second allotment of the same amount in June. Xinhua didn’t specifically give the size of the third increase.

“The plan will improve local governments’ fiscal strength and accelerate the implementation of investment projects, but it won’t reverse the downward trend of China’s economy in near-term,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co. Expansion of investment may worsen China’s industrial overcapacity and external demand will continue to weaken, Liu said.

...“This move will add supply in the bond market, and may cause the yield to increase,” Merchant Bank’s Liu said. “The PBOC needs to continue to cut reserve-requirement ratio or supply cash in targeted ways.”
Yuan negative at the moment.

2015-08-27

Industrial Profits Slump in July

Reuters: China July industrial profits slip 2.9 percent year on year
Profits earned by Chinese industrial companies declined 2.9 percent in July from a year ago, official data showed on Friday, underlining the weakness in the world's second-largest economy.

It was the second biggest drop in industrial profits since a total 4.2 percent decrease in January-February. Profits were down 1 percent in the first seven months of the year compared with the year-ago period.

National Bureau of Statistics official explanation: 国家统计局工业司何平博士解读1-7月份工业企业利润数据

1. Industrial production and sales growth slowed
2. Producer prices and raw materials prices fell 5.4% yoy in July; raw materials fell 6.1%.
3. Investment income fell from 110.4 billion yuan in June to 73.1 billion yuan in July (no mention of stock market...)

The positive spin:
Although the 7 month overall industrial profits fell to expand, but high-tech manufacturing and consumer goods manufacturing profits remained relatively rapid growth. 7 months, high-tech manufacturing profits rose 8.4% , consumer goods manufacturing industry increased by 7.5% . At the same time, interest rate cuts reduce costs, improve efficiency of the policy is to play a role, 7 months, corporate interest expense fell 3.1% , financial expenses decreased by 3% .

Land Sales Tumble 32% YTD in Top 10 Cities; First-Tier Drops Too On Supply Constraints

iFeng: 一线城市领跌 十大城市土地出让金大跌32%
Centaline real estate market research shows that as of August 25, a total of ten typical urban land transfer payments during the year was 395.3 billion yuan, while the same period in 2014, this value up to 580.26 billion yuan, year on year decline of 32%. Led by first-tier cities where there has been a situation, but the price of the land supply rose significantly, the introduction of an average floor price of land has increased by 9%.
Recall that land sales also plummeted in the second half of 2014. See: Deutsche Bank Says Land Sales Slowdown Only Started Hitting in Q4. First tier cities held up relatively well, while third- and fourth-tier cities saw land sales collapse in late spring of 2014.

To be clear, the real estate market in many of the top 10 cities is doing well. Land finance is coming to an end in cities such as Beijing and Shanghai not because of a bad market, but because the land is already extensively developed.
"2015 annual top ten cities, Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Tianjin, Hangzhou, Dalian, Chongqing, Jilin land transfer will be about 500 billion yuan, the transfer may be the recent six years lowest point fell more than 40 percent year on year. "Centaline Dawei, chief analyst, said the sharp drop in area and the amount of land transactions, mainly due to the supply of land continued to decline.

According to statistics, this year as of July 30, Beijing-Shanghai-Guangzhou-Shenzhen four cities total land supply of 309 plots, while in 2014, the annual supply of up to 849 plots of land. As of this year July 26, four first-tier cities, the total land transfer is only 206 billion yuan, down 26.4 percent year on year.
Indeed, the drop in Beijing land supply lines up with the decline in revenue:
And in 2014, the total for the program to 5150 hectares of land in Beijing, plans to supply 1,650 hectares of residential land, of which 650 hectares of affordable housing projects, commercial housing 1,000 hectares. Compared with last year's plan, residential land supply plans to reduce by 27%. Including from the housing, including housing supply area is also reduced by 25%.
I didn't come across an article discussing the situation in fourth-tier cities, but I did come across an article that says fourth-tier developers and speculators may begin fire sales to unload properties ahead of the property tax taking effect.

iFeng: 房地产税纳入立法规划 三四线城市或现甩卖潮
Lu Wenxi said that by lowering prices, will be home to share part of the cost of the next few decades to keep the room above, you can make a family to get rid of the depletion stage consumption situation, buyers while maintaining stable social spending power, can drive the development of other sectors consumption spillover effects should not be overlooked, to big to say, would help the balanced development of the national economy.

There is support, there will be dissenting voices. At present, the situation on the market generally reflects the limitations of thinking on the market for real estate taxes cause some concern, fearing the property this decline. In particular, some investors and housing prices are more objections. Lu Wenxi view, for investors, as long as timely exit, there will be no loss. Real estate tax is expected for at least another two or three years will really fall, but the last two years significantly reduced the proportion of investors a few years ago into the property market investors, income had doubled. Even if housing prices decline, is also the most profit on impairment will not "lose to the flesh."

Say It Ain't So: China Intervenes In Stock Market for Parade

If true, this is proof the political hacks are back in charge.

Bloomberg: China Intervened Today to Shore Up Stocks Ahead of Military Parade
China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter.

Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter.

2015-08-26

Is PBOC Financing the RMB Shorts?

Balding: Is the PBOC helping traders short the RMB?
This morning it was announced that the Hong Kong Monetary Authority, Hong Kong’s cental bank, had injected RMB liquidity into Hong Kong’s banking system to stem the increase in RMB deposit rates. This may seem pretty innocuous news as it only amounted to about $1.6 billion USD, a pretty paltry amount in today money markets. However, this is very important news given the context.

...Now here is where it really gets interesting.

1. The HKMA injecting RMB liquidity into the Hong Kong banking market is having the perverse impact of helping traders short the RMB in the offshore market putting more pressure on the PBOC to intervene.

Now here is where it gets really, REALLY interesting.

1. There is a high degree of probability the HKMA got its RMB liquidity from the PBOC itself via a standing swap agreement.

China's Austrian Moment; Crackdown Intensifies as Stock Plunge Continues; Headlines Roundup


A bit of light posting in the next few days; my wife had a baby yesterday.

There's a lot happening in the markets, but some of the scary headlines out of China are rumors or incomplete information.

Bloomberg: China Authorities Escalate Blame Game as Stock Slide Worsens
Police are investigating people connected to the China Securities Regulatory Commission, Citic Securities Co. and Caijing magazine on suspicion of offenses including illegal securities trading and spreading false information, Xinhua reported.

‘Hidden Crimes’

They’re probing suspects linked to the CSRC, including a former employee, over insider trading and forging official document stamps, Xinhua said. Eight people at Citic Securities are suspected of illegal securities trading and the Caijing employees are under investigation for allegedly fabricating and spreading fake stock and futures trading information.
The former probably goes on all the time, but now authorities are cracking down. The latter is more suspect; I'm interested to know what stories are involved.

This blog post is making the rounds: 中国年底将爆发远超08年的经济危机 (End of Year China Economic Will Have Crisis Surpassing 2008). One reason is, as I believe, China will run into protectionism if it devalues or tries to export its way out of the slump.
Foreign aggression, the national currency devaluation along the way to the region to deal with crazy devaluation, countries raise tariffs on Chinese imports, mainly steel. Trade war already broke out, along the way can not promote anything, the contrary, exports will further slump.
Another theory, due to the Tianjin explosion, many projects dealing with dangerous materials will be halted.
Internal troubles, Tianjin big bang people reflect the cost of economic development, a large number of dangerous project will be launched to stop, some dangerous project shut down, the economy worse.

Consumer, automotive abnormal downturn, smart phones fell for the first time, TV sales slump, the panel of serious excess capacity.

Economic downturn led to shrinking demand for commodities, devaluation to stimulate further decline in commodity prices, the result is a vicious deflation, which in turn continue to suppress economic, so a vicious cycle.
Taiwan is experiencing a major slowdown with China, but U.S. demand is robust:
Taiwan's Ministry of Economic Affairs to the latest statistics show that in July from the mainland amounted to 8.73 billion US dollars of orders, significant reduction of 14.1% compared with July last year , the main because of poor order panel, DRAM wafer, machinery and other goods, the financial tsunami hit, the Republic 98 years June, that is, in June 2009 to its biggest decline rate.

However, exports to the US jumped 24.7%, showing strong US demand.
Finally, the author looks at the mood and common wisdom on the state of the economy:
However, all is not important, important is the vast majority of people are still in extreme optimism, when the reality comes, the perma-bulls will quickly become dead short, the economy will fall of a cliff quickly, and into turmoil and unrest.
If nothing else, take that a sign of the growing shift in mood.

Hong Kong media:


Beijing Times, August 26, 2015 cover. Since red is lucky in China, it denotes rising prices. Falling prices are colored green.

Away from stocks, Beijing cut the interest rate on public housing funds to 3.25%. iFeng: 北京公积金贷款利率下调 五年以上降至3.25%

14 cities hoping for a housing price rebound after the PBOC's two-fer-Tuesday cuts. All are either already rebounding or are popular cities with low inventory. iFeng: 央行双降楼市最受益 14个城市房价有望反弹
According to reports, some analysts believe that the central bank "rescue" the rebound is most likely the following cities: Beijing, Shanghai, Guangzhou, Shenzhen, Xiamen, Nanjing; in addition, some of the larger population attraction, smaller coastal inventory pressure Center City and the Midwest populous capital city house prices are also likely to usher in a rebound, for example: Fuzhou, Suzhou, Qingdao, Dalian, Wuhan, Zhengzhou, Hefei, Chengdu.

ZH: China Stunner: Real GDP Is Now A Negative -1.1%, Evercore ISI Calculates. Official stats also show there were 5 Provinces in Recession in the second quarter.

Steve Keen has another post on China: Why China Had To Crash Part 1. His post explains how debt creation works and why the end of the credit cycle doomed China. A good into to the argument and a good prep from what I assume will be a follow on China.

At the end of 2014 I wrote: Global Deflationary Wave Round 2 or Why Did China's Government Create a Equity Bull Rally?
The modern global financial system is a credit based system, not a fiat currency system. Banks (and shadow banks) create most of the money in an economy; in the case of the United States, outstanding credit is about 60 times the amount of currency and 5 times the amount of M2 money supply. At the peak of a credit cycle, the money creation mechanism breaks down. In the developed economies, the crisis is huge because the credit cycle in question is measured in generations. It is not a business cycle measured in years, but a major credit cycle measured in decades or even generations, with major, immovable factors such as demographics playing a crucial role.

...In China, as in the United States, mortgage and real estate finance forms the base of the financial system. If peak real estate is reached, then peak debt demand is reached, and peak money creation is reached. Slower credit creation leads to slower economic growth, which isn't a major issue for countries with low debt levels. For those up to their eyeballs in debt, such as China, Japan, the US and EU, a slowdown in credit growth threatens the financial system because growth is not enough to repay existing debts, let alone finance the new debt that is needed to create faster rates of growth/inflation (either real growth or nominal growth via inflation will satisfy the financial system).

In a world where the credit creation mechanism is broken, inflation is nearly impossible. There must be a lender and a borrower in order to create credit, but if even one party is impaired, credit growth will evaporate. The only way central banks have been able to generate inflation has been via asset purchases and central government borrowing. The central banks are monetizing the debt by taking it onto their balance sheets. If the economy doesn't grow, all they will achieve is the collapse of the central bank and a sovereign debt crisis. China is in a better position than developed economies and probably could create inflation if it let the credit system run wild, but China doesn't want the crisis that would follow. China will try everything before it resorts to inflation, and one of the last ways to boost growth is for a bull market in stocks to ignite risk taking, equity finance and wealth creation.
The heart of the problem is credit growth. Read up on Keen's arguments on debt as well as the Austrians.

Bank of England: Money creation in the modern economy
Steve Keen: “The Roving Cavaliers of Credit”

That 70s Show

History repeats in music too, as predicted by socionomics. How better to explain the popularity of dance music at the tail end of a bear market rally?
"The rise of dance music has been astronomical... I happened to be in the right place at the right time," Harris told Forbes.
DJ Calvin Harris outdoes Jennifer Lawrence with $66 million earnings

2015-08-25

Is China About to Abandon the Reform Effort?


FT: Questions over Li Keqiang’s future amid China market turmoil
Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.

“Premier Li’s position has certainly become more precarious as a result of the current crisis,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “If the situation worsens and if there comes a point where [President Xi Jinping] really needs a scapegoat, then Li fits the bill.”

Mr Li and Ma Kai, vice-premier, were the architects of a now discredited plan to rescue China’s stock markets in early July, when the government rolled out a series of unprecedented measures to prop up plunging stock prices, according to people familiar with the matter.

“There are constant rumours that Premier Li is about to be booted out but that is partly because he is given all the toughest jobs to do,” said Kerry Brown, director of the China Studies Centre at the University of Sydney. “It would be incredibly risky to replace him at this point but it is possible they will find a face-saving way to move him aside at the next party Congress in 2017.”
There is precedent here. Zhu Rongji was sacked for pushing a similar package of reforms as Li, and served only one term as premier due to displeasing the party insiders. Much of Li's reform effort was a restart of Zhu's earlier efforts, not always literally, but often in spirit.

If there is merit to the rumors, at some point in the near future (ahead of a 2017 switch), power will begin shifting away from Li and possibly also the PBOC.

Chinese Govt Agencies Expect USDCNY to Fall to 7 in 2015; 8 in 2015

Bloomberg: Chinese Agencies Have Begun to Assume Yuan at 7 to Dollar in Research
Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.

The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. Those projections -- which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 -- were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
A week ago I posted Putting A Price on Yuan Depreciation; Analyst Reserve Forecasts Imply Depreciation of 2% to 10%
If this pace were to keep up and the relationship between the drop in reserves and the drop in the yuan to remain roughly proportional, a year end target for the yuan would be 6.8 per dollar, but financial markets aren't linear. A further drop in reserves will eventually trigger a bigger drop in the yuan. I'd expect markets to push it much closer to, or beyond, 7 yuan per dollar if reserves end the year closer to $3 trillion.
The government targets are reasonable, but you have to wonder where the financial markets might take the yuan given their predilection for overshooting the target.

ChiNext Gives Up 2000, Shanghai Comp 3000