2012-08-31

Oh boy, here we go

Japan plans to cut state spending, could run out of money in a month
The impasse in Japan's parliament has raised fears among investors that the world's third largest economy is being driven towards a "fiscal cliff", Reuters reported.

"The government running out of money is not a story made up. It's a real threat," Finance Minister Jun Azumi told a news conference, making a last-ditch appeal for cooperation by opposition parties to pass the bill.

"Failing to pass the bill will give markets the impression that Japan's fiscal management rests on shaky ground," he said.
The bug may have found its windshield.

Indonesia turns protectionist

And their economy is only now slipping into trade deficit due to weakness in the Chinese economy. The net result may be even more protectionism down the road.

Chinese Firms to Invest $8.6b in Indonesian Smelters Ahead of Export Ban
The investment comes after a string of similar deals as China deepens its presence in Indonesia before the resource-rich nation implements a blanket ban on ore exports, slated for 2014.

Indonesia has in the past year tightened protectionist policies in the mining sector, obliging foreigners with new mining permits to divest a controlling stake in assets after 10 years of production.

It also imposed a 20 percent tax on raw mineral exports, and obliged ore exporters to invest in Indonesian smelters. Hidayat said the $8.6 billion investment would create 46,000 new jobs for Indonesians.

Indonesia isn't alone in their ban on exports (nor do they limit it to iron ore). India has similar laws:

India's moves to curb iron ore exports, mining
A two-year old ban on iron ore exports from Karnataka which has halved shipments from the world's No. 3 supplier will take centre stage at an industry gathering in Bangalore this week as pressure mounts to lift the restriction.

Notably, India imports a lot of Indonesia coal, as does China. Due to China's economic weakness, exports from Indonesia have dropped and the country has slipped into trade deficit. If China weakens considerably, by the time the hard ban takes effect in 2014, the government may have already changed the law to help support the industry.

2012-08-30

Mish talks sense on hyperinflation

Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?
Mish correctly describes hyperinflation as the loss of faith in the currency. He goes on to say that:
It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.
I once pissed off a University of Chicago economics grad by making a similar statement, although I describe it as a cultural event.

Mish lists a chart of many hyperinflations:
I would take Mish's argument one step further. In the worst hyperinflations, such as Wiemar, post-WWII Hungary and Zimbabwe, the entire cultural fell apart. In Wiemar, there were nationalists and communists engaged in civil warfare, executing political leaders, while parts of Germany were occupied by foreign powers. In Hungary, after being destroyed in WWII, saw the coming of the Red Army. In Zimbabwe, a policy of white genocide against farmers systematically destroyed the country's economy. If someone predicts this level of hyperinflation, they are predicting civil war or foreign invasion.

Moving up a bit on the list are cases such as Chile. Allende was feared to be installing a Marxist dictatorship and was subsequently overthrown by the military, led by General Pinochet. Others are post-Soviet collapse or during war.

Simply put, there's not going to be hyperinflation in the absence of a war, and that war must be one in which the United States is feared to lose, and not Vietnam lose, but more like Russian invading and taking Alaska or the entire Navy sunk and the U.S. forced to give Hawaii to China.

In reality, when you look back at what has taken place over the past 30 years, the inflation is in the past. It would take an extraordinary political act to spark inflation, let alone hyperinflation.

Earlier this week in How much money does the Federal Reserve need to print in order to end the the threat of deflation?, I used one method (the chart below) to estimate the Fed needs to monetize $8 trillion in order to stop the deflation. That's one estimate, using one simple method, but based on the debt problem facing the United States, it's in the ballpark.

Rats!

Disease outbreaks rise during negative social mood and other negative social issues also manifest. Here's a story from New York City, where rats are running wild.

Frustrated UWS Resident Hangs "Rat Crossing" Signs

Ghost city of Ordos borrowing from private investors to fund expansion

Even though the city has seen business drop 70-90%, it is still expanding!

Caixin looks at the city in Tall Order in Ordos: Giving a Ghost City Life. The main problem for the city today is falling coal prices, not the real estate bubble. Were energy prices to pick up, the city could at least start digesting the inventory, but instead business has ground to a halt.
One property developer said 70 percent of all downtown construction projects have been halted. "Capital chains are broken," he said. "There's no money."

A city construction bureau official said small property developers "have suspended almost all work" on apartment buildings. "Those that are still working are either government companies or subsidiaries of large energy groups."

First-quarter, new apartment sales in one district fell 93 percent from the same period 2011, the government said, to the equivalent of a few dozen apartments of average size.

...Delivering a separate but more serious blow to the government's treasury has been a recent slowdown for the coal industry. Coal sales accounted for more than 60 percent of the city's GDP and 50 percent of government revenues in 2008.

Coal prices have been falling since April, and hundreds of area mines have been affected.
Government is funding real estate development through state owned companies, including the energy firms. This gets to what Michael Pettis describes in his book The Volatility Machine: Emerging Economics and the Threat of Financial Collapse. These firms are all pro-cyclical: their profits come directly from energy prices, the government revenue comes from the energy sector, and they are investing their capital in real estate whose value is tied to the health of the economy. It is going totally bust now as coal prices tumble, joining the real estate sector in deep recession. The entire economy will collapse because instead of investing in counter-cyclical assets, they have bet everything on pro-cyclical investments. They are the exact opposite of diversified.

It gets better though. Since the city is running out of cash, they've started borrowing from private investors:
Banks have dramatically scaled back property lending. The Ordos branch of China Construction Bank, for example, has stopped lending money to property developers, a bank employee said. And only major enterprises qualify for local loans from the Industrial and Commercial Bank of China, a source said.

A source at another state-owned bank said there is little room left for new lending in Ordos. So far this year, the Big Four state banks have issued more than 10 billion yuan in local loans, mainly to coal and power companies.

"There were almost no loans to property companies and for local infrastructure projects," the source said, adding that his bank "seldom cooperates with urban development companies," which function as financing platforms run by the local government.

Urban development companies in Ordos have raised billions of yuan through bonds and trust products in recent years. Since 2009, for example, the Dongsheng City Development Group has lined up some 10 billion yuan.

But debts are rising. The Dongsheng group's liabilities grew to 14 billion yuan late last year from 634 million yuan in late 2008.

And credit has tightened since the central government started strengthening its oversight of government financing platforms in 2011. "There are fewer new loans this year and no plans for new bond issues," said a city government official.

...To get around the lack of bank credit, the city has borrowed money from private firms. The Dongsheng group, for example, borrowed about 2.7 billion yuan from several private companies in the region last year, according to the group's financial report.

Revenues are still officially rising for the Ordos city government, which reported taking in 23.6 billion yuan in the first half, up 8.9 percent year-on-year.

City officials have launched aggressive plans to build another 600 kilometers of expressways, 14 industrial parks and 18 power transformer substations. They budgeted 150 billion yuan worth of private and government investment this year, up from 107 billion yuan last year and 80 billion yuan in 2010.
This is pyramid finance at its finest. The entire Ordos economy and financial system could collapse like house of cards if coal prices sink.

鄂尔多斯寓言

Nervous tension in China's real estate market

In Chinese developers betting it all on Gold September and Silver October, I mentioned one developer is looking to increase prices during the busy season. A pair of articles out today take the opposite view, one says developers will slash prices to move inventory and the other looks to the weakening market for existing homes.

It seems as though September and October should be volatile, with the U.S. fiscal cliff, simmering problems in Europe and the slowdown in China. The real estate market doesn't have to collapse for some developers to collapse: stable prices with falling sales volume would be enough to put more firms at risk of bankruptcy. That said, if homebuyers smell blood in the water, they will take home prices down, so the market remains precariously balanced on the edge of a cliff.

抢收楼市“金九银十” 开发商酝酿大降价
楼市陷入双向观望 “金九银十”前景堪忧

2012-08-29

Another Chinese village pays out golden dividends. plus a free house

Back in March I covered a village in Jiangsu that paid out gold and silver dividends (see:
Chinese villagers demand gold; 100g of gold and 100g of silver in dividends delivered to every resident
). Now a village in Hubei is doing the same to celebrate their 20-year anniversary.

Villagers reap gold bar, apartments as shareholders
It is learned that the village spent 34 million yuan to order custom-made gold bars from Shanghai before the Yujiatou Group marks 20th anniversary on Monday.

The 1,001 villagers each received a gold bar engraved with their names and they will also get new apartments from the village because each adult villager is a shareholder in the firm.

Chinese banks end mortgage discounts

This could be big news. It was the PBOC rate cuts earlier this summer that sparked a rebound in the housing market, but mortgage rates are set to increase again.

Some China Banks Cut Discounts on Home Loans
Despite the central government's support for such buyers, some mid-size banks are reining in the offers as they face pressure from an increasing number of overdue loans and deteriorating asset quality amid the slowdown in the broader economy.

China Everbright Bank Co. (601818.SH) has stopped giving discounts to first-time home buyers in Shanghai and in some cities of Jiangsu province since the start of August, while China Merchants Bank Co. (3968.HK) will reduce its discounts to 10% from 15% at the end of the month, the newspaper said, citing unnamed staff from the banks.

Meanwhile, China Minsheng Banking Corp (1988.HK) has stopped extending loans to first-time home buyers altogether, it said, though Ping An Bank Co. (000001.SZ) is still offering a 15% discount on mortgage rates.

Baosteel plans to buyback 20 percent of outstanding shares

Share buyback plan to cost Baosteel 5b yuan
Baoshan Iron and Steel Co Ltd, the country's biggest steelmaker, plans to spend 5 billion yuan ($786.88 million) to buy back its own shares for no more than 5 yuan a share.

The decision comes after the company's stock value declined to a new low and will make the Shanghai-based steelmaker, commonly known as Baosteel, the country's first blue-chip company to buy back its own shares this year. Analysts have said they expect other companies in the same league to soon conduct similar transactions.
The steel industry has trouble ahead due to overcapacity, but Baosteel's shares are trading around their lows of the past 12 years.

2012-08-28

How much money does the Federal Reserve need to print in order to end the the threat of deflation?

This chart shows the ratio of total credit in the U.S. to M2. A rising line means total credit is expanding faster than M2, or that M2 is falling faster than total credit. As can be seen, the massive money creation against a stagnant credit market has sent the ratio tumbling. In order to return to the ratio of 3:1 seen at the beginning of the 1980s, the Federal Reserve would need to print about $8 trillion or the credit market would need to deleverage by about $25 trillion. The latter number is about 30 times the size of the deleveraging that caused the 2008/9 financial panic and only the private market and local governments have deleveraged. The federal government has increased debt to offset the decline and total credit outstanding has remained steady.

Cash crunch for local governments in China: Dongguan is Greece

Fiscal Crunch Time in the Nation's Capitals
The Ministry of Finance reported all the nation's local governments took in 3.7 trillion yuan combined between January and July up 13.8 percent from the same period 2011, but the report also said combined spending increased 23 percent to 6.3 trillion yuan.

Year-on-year spending increases for central and local governments were 13.4 percent and 25.6 percent, respectively.

For the first half, national tax revenue increased 9.8 percent to 5.5 trillion yuan. The growth rate was 19.8 percentage points lower than the same period the year before.
How are things in the center of the manufacturing export economy?
The city of Dongguan may have run out of money altogether, according to business executives working for longtime government contractors and suppliers. Some of these companies have stopped taking orders from City Hall for fear the customer may not pay its bills.

Unofficial word on the street is that the Dongguan government may be billions of yuan in the hole. Executives whose companies have yet to be paid for past government orders have talked among themselves and estimate the city government's debt to be "more than 3 billion yuan," said Xiao Gongjun, a local printing plant executive.

Dongguan's 2012 budget plan called for 10 percent revenue growth to 29.2 billion yuan, down from 11 percent last year. But the annualized rate of revenue growth was only 2.5 percent through the second quarter.
What are local governments doing besides holding the line or cutting spending?
Meanwhile, the Hangzhou finance official said local government officials will continue working toward alleviating fiscal problems to keep the cash flowing.

At the same time, he said, local officials "hope the central government will relax its policies and that land prices will turn for the better. Then, the difficulties will pass."
One line untranslated from the Chinese version of the article: "In theory, the city is already broke; Dongguan has become Greece."


地方政府有多缺钱

Update on China market reforms: short-selling delayed

China is going to delay the expansion of short-selling.
China Signals Imminent Launch of Margin Trade Trial
China has signaled the imminent launch of a trial in which brokerages can borrow cash via a centralized intermediary to relend to their clients for margin trading, a widely expected move to inject funds into a sluggish domestic stock market.

But China has put on hold a plan to allow short selling--bets that stocks will fall in value--via the intermediary at a time when the markets have been under selling pressure, people familiar with the situation told Dow Jones Newswires on Tuesday.
Instead they will only allow buying pressure for now, which is bearish for the market. After an initial pop, should one even materialize, the subsequent decline will be even larger.

Good economic news from China

at least for the long-term. Almost all headlines are focused on the falling industrial profits, but ignoring the state-owned/private split that shows the private economy doing well.

Profits slide at China’s industrial firms, fuelling fears of wider slow-down
Profits for government-owned industrial enterprises fell 12.2 per cent in the first seven months of the year compared with the same period last year, while private sector profits rose 15.5 per cent, according to the National Bureau of Statistics.

The figures cover companies in fields such as steel and chemical production, manufacturing of autos, electronics and machinery, oil and natural gas and power generation.
China's state-owned companies dominate the industrial sector and most firms were losing money until the mid-2000s, when the tide of rising commodity prices finally lifted all boats. Due to the cyclical nature of the industrial sector, Chinese state-owned firms should once again head into a long slump, but this time it will lead to a larger debt crisis than the one seen at the end of the 1990s, thanks to real estate ventures and other wasted capital projects.

Andy Xie: China has 20 million empty apartments

Google translation of an Andy Xie interview: Andy Xie: China now has 20 million sets of the empty house (谢国忠:中国现在有2千万套空房子)
21CBR : Recently you called "Do not buy a house, free house quickly sell". Well, you sell a no ?

  Andy Xie: I no vacant room, I only live a house. My opinion, for investment purposes, the best way to protect themselves is to sell the first hands empty houses. I have estimated that China now has 2 million sets of the empty house. Empty house did not produce income, you are holding what ? Could also add value ?

  21CBR warmer months the property market : Why is the illusion ?

  Andy Xie: Although the property market bubble began to burst, or there will be a rebound, the market adjustment are the waves. In this process, the decline of the property market trajectory very similar to the A shares continued to fall . In my opinion, this decline is at least three years, and now is the beginning of the first year.


  21CBR : media reported that eight years each sing empty property market, but are often frustrated - eight years, house prices are still in the twists and turns rose. How do you think of this argument ?


  Andy Xie: I said the property market bubble, but did not say immediately ringing off the hook. The foam does not mean that will be ringing off the hook. Even in the presence of foam, sometimes also rose.

  21CBR : You said that the Chinese economy is in a linear downward trend, which are attributed to the weak real estate ?

  Andy Xie: I think a large part is. To adjust the foam after the macroeconomic slowdown is inevitable, this is a simple truth. This time can not be immediately panacea, continue unless the foam blowing.

  21CBR : Do you think how to solve the problems of the property market it ?

  Andy Xie: I think the most important thing now is to see the problems of the real economy, the past five years had failed to resolve. If we still want better place, hope to get better or the government what is the trick, this naive. People want to protect themselves, and sell the empty house. Spanish original real estate is also very popular, and that 20% of the house is empty after the bubble burst . The future, looking back today will be the same.

  21CBR : It looks like China has cut into the channel, and how much to cut interest rates to stimulate macroeconomic ?

  Andy Xie: America's bubble burst quickly to cut interest rates, the the European bubble burst quickly to cut interest rates, which are not used. In addition, the European rate cut pressure on the euro, also appeared devaluation pressure. If China or using foreign exchange reserves to support, continue to put money in, will only increase the pressure for devaluation.

  21CBR : for you previously forecast pessimistic about the Australian economy, Australian Treasurer, Wayne Swan, (Wayne Swan) countered that Australia's economic growth is expected in the next two years will be more than any other developed country. How do you see ?

  Andy Xie: I think he's thinking is: the low price of Australian iron ore sales volume is large enough, you can withstand the risk of decline in iron ore prices. But in my opinion, the Australian economy over the past few years is very dependent on external capital, these investments are very large impact on the Australian economy, investment in mineral foam. Mineral investment is growing increasingly difficult to finance the construction of the mine. Once the funds have broken the very large economic impact on Australia. I think this is the key, not only is the problem of mineral exports.

  21CBR : how to avoid the risk of currency devaluation ?

  Andy Xie: first and foremost thing is the exchange rate liberalization, and let it float to ensure that China's foreign exchange reserves will not drag into economic decline, which is China's economic self-protection is very important thing. Or of the fight with the market, the foreign exchange reserves are smashed into China's economic future risk.

  21CBR : Do you think the effect of tax cuts now ?

  Andy Xie: I think the real effect is very small, even if the tax cuts many projects, but the amount is still small. This is why I had proposed to tax cuts must be quantitative, quantitative in order to guarantee results.

  21CBR : you are not optimistic about the overall prospects of VC / PE ?

  Andy Xie: There are several one thousand investment banking, private equity, and each year add up to thousands of items put into a project, but China's stock market listing of each year up to hundreds of projects, and how to cash it ? bubble finally to break.

2012-08-27

Expansion of short-selling comes to mainland Chinese market

No date yet, but most of the preliminary work has been completed. Here's a mention in the WSJ from last week:
China's shares ended higher Tuesday, buoyed by bargain hunting in manufacturers and alcohol companies in the wake of recent losses and growing expectations the country will soon introduce a new system for margin trading and short selling.

Local media reports said earlier this month that China will launch a trial program to expand margin trading and short-selling activities via a centralized intermediary, and reports Tuesday said the launch could come as soon as later this month. The program is aimed at giving investors access to a pool of cash and securities offered by the central intermediary--China Securities Finance Corp., which was established in October.

Brokerage firms must use their own securities and cash reserves when they participate in margin trading and short selling now.
Socionomics predicts that politicians and regulators will pass reforms well after the need is passed. New financial regulations are passed after the disaster they aimed to prevent (and often do little or nothing to prevent another crisis). Or in the case of China, they almost allowed investors to buy Hong Kong stocks right near the peak of the stock market bubble, and now they are expanding short-selling with the A-share market less than 20% away from its 2008 lows.

2012-08-26

Chinese developers betting it all on Gold September and Silver October

Gold September and Silver October are going to make or break the developers in Beijing this year. Price increases are coming, having been held back in anticipation of the busy season for real estate.

Some new developments were held off the market in the wake of the July rainstorm and others were held back waiting for the September/October selling season. About 80% are outside of the 5th ring road and a similar percentage are below 140 square meters, meaning the bulk will be aimed at the middle class.

One developer said they'd sound out the market and expected price increases of 5% to 8%, but if the pick-up in volume holds through September and October, price increases up to 10% are the historic norm.

Source: 北京开发商豪赌金九银十 推迟开盘酝酿提价

Euro shorts still slowly decreasing


2012-08-25

Again with the mystery booms

Source Of Loud Boom In Foothills A Mystery
People from all over El Dorado County say they’re hearing loud booms several times a week, but there are many theories on what is causing them.

...According to USGS, there aren’t enough seismic stations to pinpoint the exact location. Meanwhile, some say the booms have been around so long and happen so often they barely notice them anymore. Still, others want to solve the mystery.

“I would like to know what it is, yeah. And I’d like to know when it’s going to stop too,” said O’Grady.

Mystery booms were previously covered here, here, and here.

Global Warming Roundtable

A good discussion of global warming science and predictions for cold weather.

Global Warming: Fact, Fiction or Conspiracy?

2012-08-24

Deeply negative social mood in Chinese protests over Diaoyu islands

Diaoyu in Our Heart: The Revealing Contradictions of Chinese Nationalism
A web user named oncebookstore posted a question on Weibo, China's twitter-style social network: "If your child were born on the Diaoyu Islands, what nationality would you pick for him/her: Japan, Taiwan, Hong Kong or the mainland?" (The islands, also known as the Senkakus in Japan, are claimed by China, Taiwan, and Japan.) It went viral on Sunday, retweeted over 20,000 times in nine hours before censors took it down around midnight. The surprising results would seem to contradict the popular anti-Japanese protests, undercut the government's efforts to stoke patriotism, and may well baffle outside observers: Chinese respondents overwhelmingly picked places other than mainland China. Around 40 percent answered Taiwan, followed by Hong Kong with about 25 percent, followed by Japan. Mainland China was the least popular option. A formal poll, set up on Weibo after the original post was pulled, returned similar results, with Japan at 20 percent and the mainland at 15.

More on shifting capital flows

The great benefit of Elliot Wave Theory and socionomics is in spotting the trend changes. If you know the larger trend, it's much easier to invest, especially for long-term, buy-and-hold investors. However, what's also important is the wide shift that takes place. It's not one trend that changes, everything could potentially change direction and also change in amplitude. With regards to China's massive forex holdings, the change will not be from steady inflows to relative balance, and the the change in the renminbi will not be from steady appreciation to fair valuation. Instead, the shift is likely to be from steady inflows to volatile outflows, from steady appreciation to rapid depreciation, because negative mood (bear markets) is more volatile.

This article is from May 2011. See how fast things have changed.
Settling in Yuan, Unsettling Forex Reserves
China added US$ 197.3 billion to its foreign exchange reserves in the first quarter – the second-biggest quarterly boost ever for the cash pile, which had grown at a record pace between October and December 31.

At the same time, the nation's international balance of trade slipped into negative territory as China posted a quarterly US$ 1.02 billion trade deficit, according to the government's customs agency.

A key factor behind what appeared to be clashing currency statistics was China's push for the yuan's use in cross-border trade settlements, a source familiar with the government's foreign exchange reserve agencies told Caixin.
Moreover, the expert said, net outflow of yuan could be expected at this early stage of the yuan trade settlement system. But in the long run, he said, those yuan will probably return to China through trade settlements or via direct foreign investments.

When that happens, yuan will begin replacing some of the dollars coming into the country and thus reduce the foreign exchange reserve's growth.

The tipping point, however, remains in the future. And no one has set a date for a new monetary climate marked by yuan inflow.

What's Next?

For now, the ever-rising nature of the foreign exchange reserves is stirring concern. Some in the government are looking for ways to invest the reserves and make more money. Others have raised red flags over soaring liquidity in China stemming from central bank's purchases of foreign exchange from exporters and banks, which puts pressure on monetary policy constraints and encourages hedging.
Usually, when something becomes a big problem that everyone notices, it's about to reverse. Everyone was getting worried about rapidly rising foreign exchange reserves, and less than one year later, the tipping point arrived. However, it wasn't marked by yuan inflow from abroad, it was marked by U.S. dollar outflow as investors and Chinese citizens take their assets out of China.
Indeed, Citibank's China analyst Peng Cheng thinks appreciation of the yuan is at the root of the foreign exchange growth problem. And since the currency is expected to continue appreciating against the dollar, he said, the reserves will likely grow.
In November of last year, the yuan stopped appreciating. Problem solved!

Now here's an article from the past week.
Revamping the Landscape of Forex Flows
In the first six months of the year, China's capital account saw a deficit of US$ 20.3 billion, and its accumulated forex reserves grew to US$ 3.24 trillion, up only US$ 63.6 billion -- 77 percent less than the amount added in the first half 2011, data from the State Administration of Foreign Exchange (SAFE) shows.

But this does not indicate capital flight, the regulator said. Instead, it primarily reflects shifting foreign exchange activity from the central bank to domestic institutions and individuals, it says.
It represents capital flight from the renminbi and the central bank, what those individuals do with the money is another story.
However, with the inflow of foreign capital slowing and the funds outstanding for foreign exchange declining as a result, concerns are rising that there might be a liquidity shortage in the domestic market.
When a Chinese exporter sells $1 to the central bank, the central bank issues ¥6 in new currency. When a Chinese investor or currency speculator buys $1 from the central bank, the PBOC buys back the ¥6 and takes it out of circulation.
Reducing banks' reserve-requirement ratio (RRR) is another effective method to bump up liquidity, Wang said. Based on his calculation, lowering the RRR to the level of a decade ago, 6 percent, could offset the impact of 1.9 trillion yuan flowing out of China. Yet "it's almost impossible for such a massive capital flight to occur, unless there is an economic or political crisis that completely shatters the confidence of the middle class," he added.
It can't offset the impact because without the foreign currency backing the renminbi, the value will plunge. The liquidity crunch is deflation and the "solution" is inflation.

Confidence doesn't need to plunge to have a crisis, it only requires the herd to change direction, something that happens in cycles throughout history. That said, there are some things that add to the shifting trend, confidence destroying problems that could speed up the process.

A Vital Problem (心腹之患)
However, none of these compares to the threat of vested interests that are infecting the vitals of China's economic development.

This is a true story I've heard recently: in the province of A, an entrepreneur whom I shall name B, had accumulated some capital after twenty years. He invested in a local financial company, whose majority shareholder is the government.

Since becoming a shareholder of a government-backed firm, bank financing had become much easier for B. Though one may doubt if the loans were obtained under complete compliance with regulations, the premium and interest payments had been regular.

Then a company with a deeper background, which I shall call C, became interested in this financial company, and became the second-largest shareholder through capital increase. The process, at least on the table, was open, just and fair. C gained de facto control over the management of the financial company.

And that was when B's trouble began. As C started to clear out loans to shareholders, B initially tried to resist. Only when C leveraged government power, did B relent and agree to repay everything. But C wanted more.

As it turned out, the initial objective of C was to also buy out B's shares at a discount price. The end of this part of the story is not yet clear.

B appeared rather weary-looking the last time I saw him. During our private conversation, he mentioned the idea of selling off his assets, close shop and move far away.
How many private investors and business owners in China are waiting for the day when someone with more powerful government connections will make them an offer they can't refuse? In preparing for that day, one strategy is to take as many assets as possible out of the business and move them overseas, far out of the reach of corrupt hands.

Mood in China is definitely negative, but the Shanghai Composite has not breached its 2008 lows. Whether it moves up or down, I expect it will continue to fall in terms of gold—the Shanghai Composite/gold ratio hit a new low on Friday.

PBOC can't buy a buck; talk of depleted reserves is not alarmist

China's central bank sees dwindling U.S. dollar purchases as foreign investors stay home, domestic investors go abroad, and exporters hoard their greenbacks. This is slowing the rate of money supply growth, since the PBOC pegs the currency to a basket of foreign currencies.

Mainland slows down forex buying
Foreign exchange accumulation on the mainland decelerated drastically this year, limiting the central bank's alternatives in boosting money supply.

The People's Bank of China's purchases of foreign exchange totalled 298.8 billion yuan (HK$365.79 billion) in the first seven months of the year, a year-on-year slump of 87 per cent, it said.
The currency is a long-way from a crisis, but if the central bank fights deflation now, it will certainly weaken the renminbi in real terms. But while there's continued talk of easing and stimulus in the press, there's still no sign of it.

Here is a Chinese commentary on it, echoing Western opinion, and essentially saying "nothing to see here, move along." 如何看待外币存款较快增长

Were the currency flows reversing during a growth phase for the global economy, this attitude would be correct, but these flows are reversing as the global economy enters a sharp slowdown. The global economy is headed into another recession, and that raises the risk that China's currency inflows, already down 87%, fall more than 100%, i.e. China starts exporting foreign currency. China will experience a major bout of deflation and their policy response at that point could trigger depreciation in the renminbi and exchange rate driven inflation.

Also Sprach Analyst has a post The policy tool PBOC has when China’s economy gets really bad
A large-scale asset purchase programme (a.k.a. quantitative easing) is not without problem for China, and there are many reasons not to expect that to happen any time soon. Despite deleveraging and overcapacity, potential inflation and the resilience of the real estate market remains a concern for many Chinese, including the leaders. Indeed, as the experience in the US shows, despite lack of threat of (hyper)inflation, many people continue to believe that such risk exists. Not to mention that the Chinese central bank has been a champion of “printing money”, and everyone knows and loathes it. As the expectation of Chinese Yuan depreciation is building up, QE-ish operation will only increase that further. In today’s environment, the PBOC can’t possibly do this.

However, given the on-going trend of very weak economic activities and the liquidity tightening arises from outflow and possibly rising bad loans, we suspect there will come a point when even cutting RRR aggressively will not be enough to maintain liquidity condition, and that will necessitate some asset purchases programme in one form or another. The timing of the possible asset purchases in unclear, but we think the probability of such occurrence is increasing, and the market, particularly the bulls, have not been paying enough attention to the existence of such a tool.
It will come in the depths of deflation, as predicted previously by Liu Junluo, see Liu Jun Luo: Six to ten months until Chinese hyperinflation. He wanted the government to create wage inflation (whether it was possible is another question), but things are proceeding as he expected: deflation, to be followed by a currency crisis.

Here's an opinion that one doesn't see much in any press: Chinese are actively discussing the possibility of their forex reserves being depleted. 外汇会耗尽不是危言耸听 (Depleted reserves is not alarmist talk)

This piece is by Tan Yaling, head of the China Research Institute of Foreign Exchange.

She says there was a recent article stating that if the only way China can stimulate the economy is through investment, then China's $3 trillion in foreign exchange reserves will be exhausted within 5 years.

She says speculation is the greatest threat to China's development and this speculation could exhaust China's reserves. Although China has $3.2 trillion in reserves, it isn't enough to protect it from hot money, not when the global forex market trades $5-6 trillion each day. If there is no long-term strategy to defend the reserves, they could be rapidly exhausted.

There's a definite shift in the trend in China and this is a big one that will affect global investors, not only those focused solely on China.

Bank run in Vietnam

Nguyen Duc Kien's arrest in Vietnam prompts ACB fears
Depositors in Vietnam have withdrawn hundreds of millions of dollars from one of the country's largest banks after the arrest of one of its founders.

Nguyen Duc Kien, one of Vietnam's richest businessmen, was arrested in Hanoi on Monday on suspicion of "economic violations".

Second tycoon arrested amid bank run in Vietnam
Vietnam arrested another top banker Thursday, state media said, widening a police probe into the communist country's banking sector which has rattled markets and triggered a run on deposits.

The arrest of Ly Xuan Hai for "deliberate wrongdoing causing serious consequences" came just hours after the Asia Commercial Bank announced he had resigned from the position of director general, Thanh Nien online reported.

Market Vectors Vietnam (VNM) fell 10% in the past three trading days, but the Vietnamese stock market is rebounding today.

2012-08-23

Chinese overproduction hits the wall

If you travel to China and visit a market filled with individual vendor stalls, the one thing that stands out is the inventory. Many stalls are packed to the brim with supply and there's clearly a solid chunk of working capital tied up in it. I've heard that this inventory is financed on credit—good news for the individual vendors, but bad news for the financial system and economy.

China Confronts Mounting Piles Of Unsold Goods
“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”

Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.
That is not the worst case scenario, not by a long-shot. That is the most likely scenario.

Manufacturing leads the economy because it is a higher stage of production. Unlike the Keynesian model, recessions do not begin with a fall in consumption, they begin with a fall in manufacturing that is more severe than the economy-wide recession. (Think of how industrial commodities behave during a recession, demand can plummet even when the economy only slows a few percentage points.) Therefore, the increasingly sharp slowdown in China is a sign of a major global recession, likely worse than the recession in 2008 because governments have already fired most of their bullets and the debt situation in most countries is worse, not better.

“Sales are down 50 percent from last year, and inventory is piled high,” said To Liangjian, the owner of a wholesale company distributing picture frames and cups, as he paused while playing online poker in his deserted storefront here in southeastern China.

Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.

“My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back,” he said.
In the face of collapsing wholesale demand, manufacturers are still pumping out supply. This is why the economic data looks strong. Since recessions begin with manufacturing, gunning the engines can work if there's enough government support for the sector. The distortions in the economy build up though, and when the policy reaches the point where it doesn't work, what follows isn't a recession, but a depression.

China is cutting red tape

There are two economic trends in China. The short-term trend is bearish and the government may choose the absolute worst policies to deal with the economic slowdown. The long-term trend, however, remains bullish as the country continues to reform.

Guangdong gets pioneering role in cutting red tape
The State Council also announced a decision to cut or streamline 314 types of government approvals, mostly related to non-financial sectors, small business and private investments, following a meeting yesterday chaired by Premier Wen Jiabao. The latest clean-up is part of the central government's attempt to address over-regulation, which some economists have criticised.

...Hu Xingdou, a Beijing-based political commentator and professor, said the central government's support for Wang would increase the likelihood of him being given a seat on the Politburo's all-powerful Standing Committee in the top leadership reshuffle just weeks away.

"Wang is the most reform-minded senior official in the Communist Party, and the nod for Guangdong ahead of the party's national congress shows that he is likely to have won support from top leaders," Hu said.
I mentioned Wang Yang in Liberals aim to unleash new wave of reform. He was quoted as saying, "We must hasten the development of small government and a great society." Long-term investors should stay focused on the long-term trends and use short-term crises to open or add to positions.

2012-08-22

Social mood sets another disease record

Add this to the list:

West Nile outbreak largest ever in U.S.
The number of cases so far this year is the highest recorded through August since the disease was first detected in the United States in 1999. As of Tuesday, 38 states had reported human infections.
The cases reported to the CDC as of Tuesday total 1,118, including 41 deaths. That number rose to 42 on Wednesday when a death was reported in Arkansas.

"The peak of West Nile virus epidemics usually occurs in mid-August, but it takes a couple of weeks for people to get sick, go to the doctor and get reported," said Dr. Lyle Petersen, the director of the CDC's Vector-Borne Infectious Disease Division. "Thus we expect many more cases to occur."

Petersen said that the reason for the high number of cases this year is unclear, but that unusually warm weather could have fostered favorable conditions for the disease's transfer to humans.
There have been warm summers for the past 10 years, what is different now is negative social mood.

Chinese steel prices continue to slide as trade deficits hit Japan and Indonesia

Japan trade deficit shows world economy 'serious'
Japan's trade with the rest of the world in July showed a shortfall of 517.4 billion yen ($6.5 billion), the largest ever deficit for the month and nearly double the 275 billion yen deficit that had been forecast.
The figure also marked a drastic reversal of June's numbers, when Japan recorded a small but respectable surplus of 60.3 billion yen.

The data showed "the recent trend in which weakness in China and Europe has been putting major downward pressure on Japan's trade is getting even more serious", said Takahiro Sekido, Japan strategist of Global Markets Research at Bank of Tokyo-Mitsubishi UFJ.

...By region, exports to the European Union plunged 25.1 percent year-on-year amid the debt crisis. Imports from the EU rose 10.6 percent, leaving Japan with a deficit of 95.2 billion yen with the embattled economic zone.
Exports to China fell 11.9 percent against a 3.3 percent rise in imports, making Japan's deficit with its biggest trading partner nearly double that in June at 250.1 billion yen.
Japan's combined exports to other leading economies in Asia -- South Korea, Hong Kong, Taiwan and Singapore -- also fell a sharp 14.2 percent.

Indonesia central bank raises deposit facility rate as trade deficit swells
Bank Indonesia hiked the deposit facility rate -- which is the bottom range for the central bank's monetary operations -- by 25 basis points to 4 percent, aiming to absorb liquidity from the financial system.

It also cut the duration for forward transactions for foreign investors to a minimum of one week, from three months previously, to help stabilise the rupiah.

The rules are aimed at managing the current account deficit to "reach a sustainable level", the bank said in a statement after meeting with government officials.

The move came a day after the bank held its policy rate at a record low of 5.75 percent as it aims to keep economic growth sturdy while stabilising the rupiah, one of the worst performers among emerging Asian currencies this year.

Trade deficits are rising all over Asia as Chinese demand slackens and overcapacity spills into the global market. On that note, after a brief breather, Chinese steel prices are again moving lower.


2012-08-21

Bitcoin prices moving higher again

Here's a long-term chart from bitcoin charts.

There's a similar rise in Google Trends for bitcoin.

What's really interesting is what's underlying the move. Blockchain has a whole host of stats and charts on bitcoin, including transaction data:

Bitcoin did a classic 5-wave Elliot Wave structure last year, covered here and here. If that move was the first of a larger wave pattern, it appears wave 2 has completed and we may be in the midst of a larger wave 3. Either way, interest in bitcoins is picking up.

Social mood benefits bearish bloggers

The 25 Best Financial Blogs. Number 9 is Zero Hedge.
Here is how I can tell when I've been reading Zero Hedge too much. I find myself rolling my eyes at CNBC or the Wall Street Journal while saying things like "There's more to it than that!" or "Suuuure, it may seem that way." I know Canadian equity strategist David Rosenberg's latest perma-bearish musings, and the same from the preternaturally gloomy Albert Edwards of Société Générale.

After prolonged exposure, I have to turn off my wi-fi not to sell all my U.S. dollars for physical gold, start an anti–Goldman Sachs blog and buy a Kansas soybean farm protected by a moat.

But here is the crazy thing: Zero Hedge — a morning zoo of pessimistic financial blogging — is fun. Granted, you (O.K., I) can't read it for long without the aforementioned soybean-farmer effect, but the downbeat site has found an entertaining niche at the intersection of The X-Files, finance and tireless anti–Goldman Sachs–ishness.
People are in the mood for pessimism and negative opinion.

2012-08-19

Anti-Japan protests in China

The government has successfully deflected attention from the economy.

Anti-Japan protests erupt in China following island demonstration
The most serious protests appeared to be in Chengdu, where the mob overturned a Japanese-made police car, and in the southern city of Shenzhen, where rioters smashed the windows of Japanese restaurants and businesses.
In one image posted on Sina Weibo, China's version of Twitter, the crowd in Chengdu appeared to be tens of thousands strong. One banner said: "Even if China is covered with graves, we must kill all Japanese."

What happens to Chinese exports if there's a limited military engagement with Japan?

2012-08-17

Russian judge sentences blasphemers to two years in prison

Russian punk protesters sentenced to two years jail
A judge sentenced three members of Russian feminist punk band Pussy Riot to two years jail on Friday for staging a protest against President Vladimir Putin in a church, an act the judge called "blasphemous".

...The women have support abroad, where their case has been taken up by a long list of celebrities including Madonna, Paul McCartney and Sting, but polls show few Russians sympathize with them.

..."Tolokonnikova, Samutsevich and Alyokhina committed an act of hooliganism, a gross violation of public order showing obvious disrespect for society," the judge said.

"The girls' actions were sacrilegious, blasphemous and broke the church's rules."

Though few Russians have much sympathy for the women, Putin's opponents portray the trial as part of a wider crackdown by the former KGB spy to crush their protest movement.

...But Valentina Ivanova, 60, a retired doctor, said outside the courtroom before the verdict was delivered: "What they did showed disrespect towards everything, and towards believers first of all."

"Let them get three years in jail; they need to wise up."

...An opinion poll of Russians released by the independent Levada research group on Friday showed only 6 percent had sympathy with the women, 51 percent said they found nothing good about them or felt irritation or hostility, and the rest were unable to say or were indifferent.
It can not be overstated that much of the hype surrounding this case came from Western media outlets, and I'd wager the girls may have even received lighter sentences if it wasn't for all the foreign attention.

Chinese home prices will start another leg down as banks squeeze developers

In Chongqing home prices plunge, Wenzhou speculators blamed, we saw that home prices are slumping as speculators dump homes. Now, the banks might get in on the action by forcing developers to move properties before its too late.

China Said To Order Action By Banks As Developer Loans Sour
The China Banking Regulatory Commission told lenders they should also demand more collateral, or tell developers to sell projects or stakes, if the banks predict they’ll have difficulty repaying loans due within 12 months, the person said, asking not to be identified because the instructions aren’t public.
Western investors are looking for a China stimulus, but Chinese regulators are pushing for another wave of deflation.

中文:银监会要求银行采取行动应对开发商贷款质量恶化

Chinese shares delisting

IPOs peak at the top and delistings peak near the bottom of market cycles. In Mainland China, tighter rules are forcing some B-shares to delist or switch to the Hong Kong market. A wave of delistings has also started in the United States.

Delisting of Focus Media just the start
The delisting plan started as a reaction to an attack on Focus Media by short-seller Muddy Waters, which accused the company of fraudulently overstating by about 50 per cent the number of screens in its digital display advertising network across the mainland.

Focus Media chief executive, Shanghai-born Jason Nanchun Jiang, "was very angry. At one point, he was seriously thinking of suing Muddy Waters", said a person close to Jiang. But he gave up on that idea, figuring the chances of winning were slim, and embraced a buyout.

..."You cannot always look at things from a very American perspective and I think this has been a problem for US investors, not just in the case of Focus Media but also for many other Chinese companies listed in the US," the person added.

For example, some US investors and analysts believe American investors can't see Focus Media's attraction because they aren't familiar with the kind of captive audience that the company's display ads -located in office buildings, often near lifts - play to.
I think the bigger issue is that it is very difficult to obtain information from China, so stock prices are much more a reflection of social mood: when times are good, people are optimistic and believe the hype. When times are bad, they are pessimistic and assume the worst. That's not to say investors don't behave similarly when they have information, but in the case of companies accused of fraud, it's very hard to find the type of value investors who will put a floor on the stock (as is happening now with Greek shipping companies). Chinese shares are also performing poorly in Hong Kong and Mainland China, thus the excuse of an American perspective is bogus. This is 70% social mood and 30% CCP-run China's lack of information.

2012-08-16

Is East Asia headed for war?

Why are South Korea, China and Japan fighting over rocks? The articles will tell you there are resources below these rocks, but why aren't they at the negotiating table working out deals? It'll take tens of billions of dollars, manpower and time to develop these resources and they aren't going anywhere. Developing them will require partnerships. Meanwhile, in China (and I suspect Korea and Japan as well), the discussion is entirely about sovereignty, not resources. What can explain the sudden desire to fight over rocks in the Pacific? Social mood.

Shots fired - at least in print
China's state media issued a stark warning to Japan yesterday over interfering in the Diaoyus, with a Communist Party mouthpiece saying Beijing is prepared to take action to defend its sovereignty over the disputed islands.

The rhetoric came as about 30 mainland activists protested at the Japanese embassy in Beijing, demanding China declare war against Japan to claim the islands, known as the Senkakus in Japan.
China has the most to gain from war, domestically speaking. The CCP pumps out a relentless stream of anti-Japanese propaganda, whipping up a whirlwind of hate. Economically, the Japanese appear content despite their troubles, but the CCP is worried that a real slowdown could knock them from power. A limited war against Japan is the perfect policy if the economy tank, assuming they don't lose.

South Korea and Japan at Odds Again
Tensions between Japan and South Korea have escalated in recent days to a level that threatens the always fragile relations between the two key US allies in the Pacific. Much of the latest situation results from a disagreement between Seoul and Tokyo regarding the long-term dispute over territorial claims to Takeshima Island, as it is known in Japan, or if you prefer Dokdo Island, as it’s referred to in South Korea.

The “island” is little more than two desolate chunks of rock surrounded by some ninety smaller rocky outcroppings far away in an isolated little corner of the Sea of Japan. Also known as the Liancourt Rocks, this insignificant collection of largely barren clumps of stone have caused quite a stir among Pacific neighbor, not because of any intrinsic value attributed to such minute specks of land in a vast expanse of water, but because of what is believed to lie beneath the surface of the adjacent waters – rich deposits of highly-prized natural resources.
South Korea is much less likely to go to war with Japan, especially since both countries have a large U.S. military presence. That said, South Korea is showing a more expansionist mindset of late: United Korea 'Could Rank Among Top 10 Powerhouses'
If the two Koreas were to reunite next year, the nation would become one of the world's top 10 powers by the year 2050, according to a report released on Sunday by Hyundai Research Institute.

Using analysis that combines the GDPs, populations and military powers of both nations, the report speculates that the GDP of a united Korea in the year 2050 could reach US$6.56 trillion, placing it eighth in the world.

It also estimates that North Korea's wealth of natural resources, such as magnesium and gold, would be worth more than $3.9 trillion.

2012-08-15

Money flowing out of China and copper piling up

Two blog posts from FT Alphaville.

The less-popular yuan
The reversal of currency flows in and out of China is continuing. The PBoC published data on Tuesday showing that the country’s banks were net sellers of yuan in July, selling Rmb3.8bn or $587m. As the WSJ’s Tom Orlik explains, this means that the banks’ foreign exchange purchases are lower than the monthly inflows from trade and investment, and it suggests some “hot money” is leaving — possibly in part because exporters and importers no longer want to settle in yuan.

Of course this is only a change in the direction of flows — and a small one when viewed in context. The chart below from Chinascope Financial demonstrates how, while the trend has been negative since September 2010 and particularly since September 2011, the banks’ overall forex position hasn’t changed that much in the past year:

China’s literally ground-breaking copper inventories
Quoting a Standard Charter report:
We are surprised by three things: (1) the ability of warehouse operators to pack in more copper, (2) the speed at which inventory has reversed the downtrend seen in July (On the Ground 12 July 2012, ‘Copper – On neutral ground’), and (3) the fact that slanting copper bundles, which are perched at the top (Figure 7)and weigh c.3 tonnes each, have not been deemed a safety hazard.

Chongqing home prices plunge, Wenzhou speculators blamed

It's unclear whether this will be a trend or one bad week for home prices in Chongqing, but it's grabbing the headlines. The media is placing the blame on Wenzhou speculators who are deep in debt and raising cash. (Covered earlier this week in Wenzhou group home specualtors totally defeated, lost their life savings, have no choice but to run.

Today's news:
重庆房价半月下跌超千元 温州炒房客急抛售 (Chongqing home prices fall more than 1000 yuan in two weeks, Wenzhou speculators dumping homes)

One reporter says transaction data from the government website shows a decline of more than 1000 yuan per square meter. With average prices of around 7000 yuan per sqm, this translates into a 10-15% drop in home prices since the end of July.

2012 Election Forecast


Make your own map at: YOU DECIDE THE 2012 ELECTION

2012-08-14

Chinese debts come due

Shining a Light on Too Big to Fail in China
On July 12, the Xinyu city congress said it approved a proposal to incorporate 500 million yuan worth of loans LDK Solar borrowed from Huarong International Trust Co. into its annual budget. Xinyu also sent officials to LDK Solar to get involved in daily operations, and the officials have remained there.

Meanwhile, the government of Hefei, in eastern China's Anhui Province, where LDK Solar has a production facility, has started to mull bailout measures, a bank source in Jiangxi said.

This is not the first time the government has had to help the company. At the end of 2009, LDK Solar sold stakes in a subsidiary to a provincial government company for 1.5 billion yuan. This was intended to relieve a cash crunch brought on by the global financial crisis.

Jiangxi LDK Solar Seeks Help from Energy SOE
Debt-ridden Jiangxi LDK Solar, led by the local government, has approached China Energy Conservation and Environmental Protection Group (CECEP) as a potential buyer.
Previous coverage here.

Beijing Loan Guarantee Firm Teeters on the Edge
A prominent loan guarantee firm in Beijing will go bankrupt if no restructuring plan can be agreed upon by August 20.

Zhongdan Investment Credit Guarantee Co. Ltd., established in 2003, has been caught in a liquidity crisis since January, when its capital chains reportedly started falling apart. This prompted banks and clients allegedly tricked into depositing their borrowed money with the firm to demand immediate repayment.

Investigations led by Beijing's municipal finance work bureau found that the firm has guaranteed more than 3 billion yuan in outstanding loans. This involved 22 banks and 294 enterprises in Beijing.
Previous coverage here and here.

Chinese online retailers launch price wars

E-commerce price wars escalate in China
Started by Suning in April, the first round of price wars involved major business-to-customer (B2C) retailers including Guomei, Dangdang, TMall, and Jingdong Mall. The second round of wars was waged by Jingdong Mall in June on its founding anniversary.

The third round of price wars is quick on the trigger after Suning announced recently to allocate one billion yuan RMB in August on the occasion of its third anniversary to further compete on price.

The average price cut will be around 30 percent during the sales promotion period, said Li Bin, executive vice-president of Suning.

An employee with Suning Branch in eastern China's Zhejiang Province said the discounts are so attractive that Suning's workers are awaiting to cash in on the opportunity.
Late today, Dangdang announced it was joining the war, which starts tomorrow:

当当李国庆:手机电脑家电全面迎战 (Mobile phones, computers, home appliances, we will meet the enemy everywhere head on)

Another view on Chinese social mood

Note the shifting tone in society that this author, a foreigner, notices. Also keep in mind that his negative mood is itself a symptom of the overall negative social mood.

You'll Never Be Chinese
If I had to choose one word to describe China in the mid-1980s it would be optimistic. A free market of sorts was in its early stages. With it came the first inflation China had experienced in 35 years. People were actually excited by that. It was a sign of progress, and a promise of more to come. Underscoring the optimism was a sense of social obligation for which communism was at least in part responsible, generating either the fantasy that one really could be a selfless socialist, or unity in the face of the reality that there was no such thing.

...I must stress that this indictment has nothing to do with the trajectory of my own China career, which went from metal trading to building a multi-million dollar magazine publishing business that was seized by the government in 2004, followed by retreat to this mountain hideaway of Moganshan where my Chinese wife and I have built a small business centred on a coffee shop and three guesthouses, which in turn has given me enough anecdotes and gossip to fill half a page of Prospect every month for several years. That our current business could suffer the same fate as my magazines if the local government decides not to renew our short-term leases (for which we have to beg every three years) does, however, contribute to my decision not to remain in China.

Social mood in China: protests becoming more effective

Cracks in China's stability drive
First, the people are getting sick of government corruption. They have become thoroughly disappointed with their leaders and have resolved to fight back. Lessons learnt from the environmental protests in Xiamen , Panyu and Dalian have built up people's experience and courage. The fire disaster in Shanghai and the train crash in Wenzhou also pushed the people to take meaningful action in new ways, and they mourned the victims in memorials despite government disapproval.

The Wukan unrest was a turning point. Like the child who bluntly pointed out the lie of the emperor's new clothes, the protest exposed the rot in the government's "stability maintenance" system.

Second, the country's economy has shown signs of a slowdown and this will put a strain on society. For a while, even after many people saw through the lies of the government's corrupt ideology, rapid economic growth was able to divert attention from questions about the legitimacy of the regime. With a slowdown, the questions will resurface.

At the same time, local governments which are highly dependent on land revenues have become increasingly desperate. In the face of the protests and funding shortfalls, they are in a fix.

Third, there are signs of an internal split on the use of violence to maintain stability. In Wukan, officials let slip that the local government had to pay armed police a daily rate to keep them at their post. And it was clear in the Shifang and Qidong protests that the armed police were less than enthusiastic. Apart from the lack of funds, these internal conflicts appear to be plaguing the government from the bottom to the top.
More details on various protests at the link.

On the subject of corruption, the papers talk about it non-stop and they are almost all controlled by the party. The party tries to be seen as doing something about it, but it's all very slow, with small measures that end up getting circumvented by local politicians.

2012-08-13

Wenzhou group home specualtors totally defeated, lost their life savings, have no choice but to run

As I said last week, news of a steel magnate hitting the road was just the beginning. Today there's a report about Wenzhou group home speculators fleeing their debts. See: 温州炒房团或全军覆没:血本无归 不得不跑路 (Wenzhou group homebuyers totally defeated, lost their life savings, have no choice but to run)

Wenzhou is the "center" of China's private economy (many private businesses are here and there's an entrepreneurial spirit among the people) and in recent years, they formed real estate investment groups. The media dubs this "group buying" since instead of investing in a fund, they negotiate with developers directly for deals on home purchases.

Wenzhou buyers were believed to be overheating markets as far-flung as Shanghai and Chengdu, and some laws restricting non-residents from buying homes were aimed in part at these "group buyers" who would soak up investment properties.

Their activities drove up prices on the way up and now they are helping them collapse on the way down. One property has seen prices come down 30-40%, leaving the buyers underwater and unable to repay debt. (As an aside, many real estate bulls like to point out that Chinese do not borrow to buy homes. However, they do tap the equity in their home to purchase investment properties or help a child buy a home.)

One investor (Zhang Ming)is quoted as saying, "To sell or no to sell? I am riding the tiger, if I sell my loss is enormous, if I don't sell I bleed incessantly." He has investor friends who had their holdings split up among creditors and they had no choice but to flee their remaining debts.

80% of home speculators cannot repay their debs

In 2010, Zhang Ming paid a¥5 million down payment on a ¥38 million, 14-story apartment building, costing about ¥80,000 per square meter. When it became clear that real estate restrictions would cool the market, he rushed to get his down payment back, but the developer refused. Here we see another risk: investors cannot repay their debts because their cash is locked into down payments.

Zhang refused to pay the rest of the bill and the developer took him to court, where the judge ruled he must pay ¥31 million for the building. He borrowed this money at 1-2% monthly interest from friends and family. Currently, he would be lucky to get ¥20 million for the building and even then, his total cost is about ¥40 million after interest costs.

The word on the street is that about 20% of Wenzhou speculators escaped the collapse, with another 80% trapped like Mr. Zhang.

According to a PBOC study last July, 20% of private loans were to real estate ventures. Real estate is estimated to have taken one-third of Wenzhou direct and indirect private market loans—and half of those loans and properties were used as collateral to finance other loans!

In 2010, 40 of Wenzhou's top 100 businesses, including footwear and apparel companies, were speculating in real estate.

The article concludes with the weak real estate market and a pessimistic view of the next 3 to 5 years for the industry in Wenzhou. The government real estate controls will prevent a re-inflation of the bubble, but also prevent a price collapse that could reinvigorate the sector.


2012-08-12

Forget the breakup of the eurozone, the entire EU project is at risk

Many pundits said a eurozone breakup was impossible in 2010, but socionomics forecasts predicted it and even the CIA agreed: CIA gives grim warning on European prospects.

Now these forecasts are coming true:
And Then There Is Disaster C
And Europe was again acting out this week. First, Italian Prime Minister Mario Monti gave an interview to Der Spiegel, in which he warned of the disintegration of Europe if the European Union allows the euro to fail: “The tension which sprang up in the eurozone in recent years is beginning to look like Europe’s psychological disintegration.”

2012-08-11

Feminism peaked with the stock market in 2000

The backlash against feminism is spreading all over Western societies. On the surface are demographic trends: feminists don't replace themselves. Increasingly, traditionalists are shunning public education and home schooling children. The Amish population is booming (Amish Boom Could Reshape the Rust Belt):
This type of growth is not being seen from many other religions in the U.S. The U.S. census shows that the number of Americans not specifying themselves as religious is growing at a faster rate than all other U.S. religions combined, but that some smaller religious congregations are gaining ground. Donnermeyer estimates that Holmes County, Ohio, the U.S. county with the current highest population of Amish by percentage, will be majority Amish within 15 years.

The study suggests that the growth of the Amish community is largely driven by population growth from within. In short, members have large families and children raised within Amish communities tend to stay.
In the U.S., while overall religiosity is declining, the more religious are growing the fastest. In Europe, the shift is even starker, where traditionalist Muslims are replacing native Europeans.

As Spengler wrote, "In the long term, secular modernity will liquidate itself through infertility."

Under the surface is the growth of the "manosphere." This is most popularly known through "game" blogs written by PUAs (pick-up artists). Game is, most simply, male traits that turn women on. At the most practical level, it teaches relationship skills that men in previous generations would have been taught by their father/brothers/friends or picked up by watching them. Modern men often lack them either due to an absence of fathers or social conditioning in feminist dominated public institutions. The one thing that all these men agree on, whether they be a Bible-thumping Christian or an unrepentant man-whore, is that feminism is very bad.

Here is one well known game blogger, Roosh, on Peak Feminism:

Peak Feminism Has Arrived
Here’s a brief timeline summarizing how we got here:

1919
-Women granted right to vote in United States by 19th Amendment.

1960′s
-Rapid rise of feminism followed by female entry into the workforce, a coup for the elite since it kept wages down.

1970′s
-Women drastically ramped up use of their vaginas as sex game weapons, slowly creating demand for counterattack methods.

1980
-How To Pick Up Girls by Eric Weber released.

1990′s
-How to Get the Women You Desire Into Bed by Ross Jeffries released.
-The newsgroup alt.seduction.fast is created.
-Feminized men fight back by participating in the game community in order to better fuck feminists. It remains underground for many years.

Early 2000′s
-Other feminized men complained loudly about feminists and the court system set up to demolish them. These are your men’s rights guys.

2005
-The Game by Neil Strauss released

2010
-Most Western men completely reject feminist notions and have at least a partial understanding of game concepts.
I highlighted the portion about the court system. Currently in the United States, law discriminates against men in family court decisions, which is why many men are making the conscious decision not to marry. (This feeds into the religious trends mentioned above.)

Much longer and detailed articles such as The Misandry Bubble are well known in the manosphere. (Also a must read for anyone wondering about this growing movement.)

However, as one blogger accurate points out, feminism (or the misandry bubble) peaked in the 1990s—which coincides with the grand supercycle peak. Many effects continue to carry over into the 2000s, but the
The Feminist Bull Run is Over; The Anti-Feminist Bull Market is Already Underway
.

How is this all interacting with the current downturn in social mood? From the Socionomics Institute:

“No Girls Allowed” on a $25 Billion Playground?
“In Virtual Play, Sex Harassment Is All Too Real” was The New York Times headline. The story described several individual cases of male gamers mistreating their female counterparts, not as exceptions but examples of what is often the rule:

“…sexual threats, taunts and come-ons are common, as is criticism that women’s presence is ‘distracting’ or that they are simply trying to seek attention. Some have been offered money or virtual ‘gold’ for online sex. Some have been stalked online and in person.”

Some women learn to cope with the bad behavior, while others leave; but in recent months some female gamers have begun to organize and push back, with support from game designers and male gamers of goodwill.
This is the last gasp of feminism as society transitions during negative mood. Feminists broke down "male only" clubs and groups, but young men are immune to the feminist attacks and want to have their own space. Male-only spaces are a natural part of traditional society, but they were nearly eradicated on the march to the grand supercycle peak. At the peak, people even believed that men and women were exactly the same in every way, that a male baby could be made to be like a girl if it was raised as a girl. A Norweigan documentary on the subject shows how science has proved these ideas false, but they remain a part of political ideology—leftist ideology that is on the decline. During periods of declining social mood, magical thinking is more popular, which is why these ideas are still hanging on, but when the turn to rising social mood comes, we will see a major shift in culture. Whereas the "men are men, women are women" type of trends were seen in media during the rising social mood of the 1980s, what will occur in the next phase is a fundamental societal shift in this direction.

The Norweigan documentary mentioned above is a private video, but you can access it with this password: hjernevask

Brainwash 1:7 - The Gender Equality Paradox.

New pandemic: gonorrhea?

Gonorrhea Needs To Be Treated By More-Potent Injections
Treatment options have shrunk as every medicine starting with penicillin loses effectiveness against gonorrhea, the second-most commonly reported infectious disease in the U.S. with about 700,000 new cases a year. The cefixime pill and the more-potent ceftriaxone injection belong to the only class of effective drugs left to use, the agency said in a report today.

“Action is urgently needed to prevent untreatable gonorrhea from becoming a reality,” said Gail Bolan, director of the Atlanta-based CDC’s division of sexually-transmitted disease prevention, in a telephone interview.
The CDC guidelines were last updated in 2007, when the bacteria demonstrated resistance to the fluoroquinolone class of medicines, and the agency recommended discontinuing their use. Cefixime and ceftriaxone are members of a family of drugs known as cephalosporins.

The increases in strains with less responsiveness to the cephalosporins were most prominent in samples from the western U.S. and from gay and bisexual men across the country. The same pattern existed when resistance to fluoroquinolones increased.
An STD pandemic is a two-fer for socionomics due to the changes it can induce in the culture. Rising STD resistance can lead to changes in sexual behavior that we are already likely to see as the culture moves farther from the grand supercycle peak.

2012-08-10

Euro shorts slowly exit as euro holds steady


Tax reform coming to Beijing; central planning running amok in auto sector

The switch from a revenue tax to a value-added tax (VAT) will lower tax rates for firms who are eligible for the pilot program. Beijing follows Shanghai in this reform, with the goal to spread it nationwide.

138,000 companies are eligible for this first stage (based on their industry sector), about 53% of the firms operating in Beijing. It will save firms a total of about ¥16.5 billion, with ¥7.2 billion coming out of Beijing local government revenues. The change to a VAT will eliminate double taxation and small businesses will see their tax rates fall from about 5% to 3% under the VAT, but larger firms will see an increase in the tax rate from 5% to 6%. Deductions will mean that even large firms will see their taxes reduced.

北京13.8万户企业下月改征增值税

While tax cuts are good news for China's economy, we still see cases of central planning running amok. The latest two examples come from the auto sector. First up, Beijing's lottery system to restrict auto ownership. Background info: Beijing has a lottery to distribute new license plates. If you do not have a Beijing license plate, you are restricted in your driving and you cannot buy a car in Beijing. The number of people participating in the lottery peaked at about 800,000-900,000 people, but it surged in the latest round to more than 1,070,000. With only 17,600 licenses available, the odds are more than 50:1 against. See: 购车摇号申请超百万

Car lottery scheme aids non-local buyers
Beijing auto dealers are colluding with local car plate lottery winners to charge non-local car buyers who are barred from purchasing a vehicle in the city without winning the lottery.

The scheme has become popular as certain car models can be bought at cheaper prices in Beijing than in other provinces and cities.

A manager, surnamed Yang, from Beijing Hengyi Zhongbao Automobile Company in Fengtai district, said that out-of-town buyers will pay around 30,000 yuan ($4,710) to "rent" a person's registration, usually a Beijinger who already owns a car and does not need another.

"Without winning the car plate lottery, non-local car buyers are not allowed to buy Volkswagen vehicles here, which are much cheaper than in other cities," said Yang.

For example, certain models sell in Beijing for around 58,000 yuan less, he said.

But after purchasing the car, buyers will then give back the registration, and re-register the vehicle in their hometown.

Half of the payment goes to the original holder of the registration, and the other half is to pay for all the fees and paperwork. Once the registration has been handed back, it can be re-used multiple times, said Yang, but only within six months, at which point the registration expires.

Beijing started issuing car license plates via a lottery system from January 2011, aiming to ease traffic congestion.

Finally there is Xian: Xi’an puts draft policy to control number of new car sales on hold
According to the draft, the Xi'an government would control the number of cars in the city and take measures to reduce traffic flow on the roads in order to ease the city's congestion.

If the order is carried out, Xi'an would become the fifth city in China to control the number of new cars, following Shanghai, Beijing, Guiyang and Guangzhou.

Guangzhou announced a quota system for new car ownership in June. Beijing adopted a lottery system last year to allocate license plates for new cars. Shanghai began an auction system for new license plates in 1994, and the lowest bid for a plate reached 64,000 ($10,074) yuan by 2012.

However, these policies have failed to make an obvious improvement in Xi'an despite a significant drop in car sales, Jia Xinguang, an independent automobile analyst in China, told the Global Times Thursday.

Guangzhou saw car sales of 330,000 in 2011, which will be cut to 120,000 in 2012 based on its quota system. Beijing added 174,000 new vehicles in 2011, much lower than the 810,000 sold in 2010.

"If many other cities follow such policies, the whole automobile industry would be impacted," Jia said.
All of these cities follow the same path. They encourage auto sales to boost the economy. Then they have congestion problems and pass restrictions on car purchases. With the economy slowing, however, there's fear that restrictions will severely impact the economy.

This is a typical policy cycle for central planning. Do something, it causes massive unintended consequences, then enact a counter-policy, itself causing massive unintended consequences. Repeat. In this way, the government is always seen to be doing something, even if it mostly consists of cleaning up its own messes.

How to get inflation?

One way is for the U.S. government to run much larger deficits, on the order of $3 to $4 trillion. Here's one way to make it happen.
H/T: Obama's Master Plan: Bailout Everyone

2012-08-09

Stock trading collapsing globally

Share trading should collapse and then flat-line at the end of a major bear market because the public reaches peak negativity with regards to stocks. This sentiment hardens and it takes years for interest in stocks to return.
Stock Market Self-Cannibalization To Continue As Volume Implosion Accelerates
As Securities Technology reports, the NYSE Euronext reports daily volume of trading stocks down 16.9% from a year ago (and down 17.8% YTD compared to last year) and down 9.9% from June alone. Trading in stocks on its exchanges in Europe were also down 12.3%. This plunge in stock trading has knocked into the derivative markets which have seen a massive 15.8% cliff-dive worldwide from June to July.

One more nail statistic in the coffin of CNBC's audience is a 29.7% drop in ETF transactions year-over-year and NYSE/Arca/MKT's share of trading in NYSE-listed stocks is down 34.3% from a year ago as the dark pools rise.

With volumes collapsing it is only likely that we will see far more 'incidents' such as Knight - where companies whose top-line explicitly stems from flow trading - increasingly find themselves redundant; whether or not this is due to a self-inflicted algo, or other, potentially more sinister, reasons.

Only 4.12% of A-shares accounts were active last week, a new low this year. (交易账户仅占4.12%开户数由升转降 A股账户活跃度创新低)