2015-12-13

China Reckoning Day Approaches

Either this is the bottom or the edge of the cliff. The markets are looking a lot like 2011 and many assets haven't triggered a bear signal, though they're very close. In 2011, many bear market signals fired and then quickly reversed. All I can with certainty right now is a lot of things are lining up on the negative side. I discussed some of the U.S. side of this in 1937 Redux: Deflationary Wave Has Returned.

First some good news.

Bloomberg, from September: Chinese Automakers Surge After Government Cuts Purchase Tax
Chinese automaker stocks soared after the central government cut a tax on passenger-vehicle purchases and said it will support the adoption of electric vehicles following a slump in industrywide sales.

...The intervention suggests the auto industry is “too big to fail,” as it contributes more than 10 percent of China’s gross domestic product, tax income and employment, according to Sanford C. Bernstein & Co.
I remember this model:
In summary, we think that real estate investment growth will continue to trend lower, likely to the level of 5% yoy (from 12.5% in June), a level last seen during the 2009 downturn. The IMF once estimated that a 1% decline in China’s real estate investment would shave about 0.1% off China’s real GDP within the first year. And so a 7.5ppt deceleration in real estate investment growth would drag down GDP growth by about 0.75ppt.
Turns out real estate investment isn't important at all, if you believe GDP.

The auto tax change did boost sales: China auto sales hit monthly record high
China's automobile sales jumped 20 percent year on year to 2.51 million vehicles in November, while output rose 17.7 percent from a year earlier to 2.54 million, the China Association of Automobile Manufacturers (CAAM) said in a statement.
You'd think China would simply slash taxes across the board to spur consumer spending, since the government has enacted high barriers to consumer spending, but if capital were to flow too rapidly into consumption, it reveal all the malinvestments. Capital was artificially cheap for the capital goods/industrial sectors because consumption was restricted. Slashing taxes is the best policy in terms of speed and effectiveness, but the debts are loaded in the sectors that don't benefit from tax cuts.

Next year there will be funding for the direct purchase of homes by governments. More than 400 billion yuan, who knows how much. Will it be enough?

A developer in the ghost city of Ordos is about to default, possibly on Thursday of this coming week: 来自“鬼城”的警钟:鄂尔多斯开发商下周面临违约风险. It isn't a large sum, about 100 million yuan, but this debt was issued in 2012, the year when the Ordos economy imploded. Ordos' economy was destroyed by the credit and housing bubble, which burst when commodity prices started falling in 2012...does this sound familiar? The Ordos developer default comes on the heels of a government related default in Ordos: Govt Credit Guarantee Not Worth Much When Govt Can't Pay Bills.

Shengda defaulted as expect last week: China's Sichuan Shengda Defaults on Onshore Bond as Growth Slows. The bonds are 300 million yuan, but there's already 170 million in other defaults at subsidiaries, so the total is 470 million. Creditors have moved to freeze 1 billion shares of Great Wall International (000835) held by the company, in addition to hydro power assets. Shengda was brought down by a 2 billion yuan investment in a titanium project. 四川圣达3亿债券违约 20亿豪赌钒钛项目致资金紧张

Nine Beijing private investment firm CEOs have disappeared. Half of the firms have revealed they cannot repay investors. Sina: 私募失联者半数违约 踩雷者可三方面维权

Financial CEOs are being jailed like crazy: The Case of China’s Missing Brokers. The latest is the Fosun Founder & Chairman Guo Guangchang: Fosun founder Guo assisting authorities with probe. The social mood implications are highly negative.

Prior bearish China news posted in Hope Died In China This Week and Market Shocked: Govt Accepts RMB Depreciation.

In the U.S., credit blowups continued. After Third Avenue Focused Credit, Stone Lion went bust. The Eerie Echo Of 2007: It Really Is Bear Stearns, All Over Again.

ZH: Glencore CDS Are Soaring Again As Default Risk Rises Above 50%

No comments:

Post a Comment