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”


  1. Unrelated to this post. Congratulations with the baby!! My son is also 7 weeks old, tough work. Keep up the good job with the articles though. Your regular fellow Chinese reader.

  2. Best for the future for both you and your son.
    Kindest regards New Zealand reader.