2017-11-16

Dual Citizenship Crisis in Australia

Coming soon to an Anglosphere nation near you.

Sunday Times: Eighth Australian lawmaker resigns over dual citizenship
A constitutional crisis roiling Australian politics claimed a new victim Tuesday with the resignation of the eighth lawmaker to be felled by a once-obscure rule barring dual citizens from federal office.

The departure of Jacqui Lambie, a colourful independent senator from the island state of Tasmania, comes after Prime Minister Malcolm Turnbull's centre-right government lost its grip on parliament as MPs were toppled by the citizenship issue.

Lambie announced her resignation in a tearful speech, telling MPs she had just learned she held British nationality from her Scottish grandfather and father.
The Australian situation was a result of existing law. The lawmakers in question are also citizens of New Zealand, Canada, Britain, Scotland and Canada.

If the law in other Anglosphere countries doesn't already proscribe dual citizenship, there will likely be laws passed in the coming decade or two, or at the very least, those with dual loyalties will be hounded from public office, lose security clearance and high ranking positions in government. Once the ball gets rolling on this issue, it creates its own incentives since political allies can benefit from having those above them kicked out of office. The United States won't be spared, if anything it is likely to have the most intense scrutiny because its status as empire provides real opportunities for foreigners to manipulate government policy.

2017-11-15

If China's Economy Goes, Australia's Goes With It

A very long and in-depth article on Australia's economy. If roughly one-third of Australian exports go to China and roughly 19 percent of the economy is exports, that's roughly 6 percent of GDP that is highly sensitive to Chinese economic conditions. Layer on the housing investment from China and overseas students, the housing bubble built on growth in those exports to China, there is a lot at stake if China slows meaningfully.

Steve Keen's Debtwatch: Australia’s Econ­omy is a House of Cards

NBS Shocker: Mortgage Growth Contracts 19pc in October, Goes Negative YTD

Caijing: 楼市数据继续下挫:个人按揭贷款增速首现负增长
National Bureau of Statistics released November 14 data show that the first 10 months of this year, the growth rate of the national real estate development and investment, sales, and other indicators of the funds in place to continue to decline. Among them, in September and October in a single month, real estate sales volume fell for two consecutive months. Affected by this, housing prices in the source of funds in place, the accumulated growth rate of individual mortgage loans for the first time negative growth.

The NBS report on real estate investment shows a YTD decline of 1 percent in individual mortgages.

For comparison, last year at this time the cumulative YTD growth was 51.5 percent.

I haven't tracked this data out of NBS, preferring the PBoC data, but I calculated the one-month October growth figure for this past month: negative 18.8 percent.

Put on the Pain Trades: China FAI Begins Slowdown Near Prior Cycle Lows

Here's the quick summary of the data:

1. Real estate investment is strongest relative to prior cycles
2. Fixed asset investment over the past three months is slower than it has ever been, and the downturn hasn't officially begun
3. Private fixed asset investment is near the prior cycle lows (set in spring 2016)

Implication: if the credit cycle isn't aborted earlier than before, it looks like nearly all measures of FAI could fall into full blown recession (at least mid-single digit declines in some categories) before growth bottoms out. That's assuming another bailout later next year.

As for the data:

China real estate investment growth was 5.6 percent in October, second slowest month in 2017 (after July's 4.8 percent). YTD growth fell from 8.1 to 7.8 percent.

Fixed asset investment (FAI) slowed to 3.2 percent, YTD slowed from 7.5 to 7.3 percent. Unlike real estate investment growth (not pictured), you can see FAI is potentially breaking down to an unprecedented pace.

Private FAI slowed to 1.2 percent growth in October; slowed from 6.0 to 5.8 percent growth YTD. The last time growth was this slow, there was a panic over private money pulling out of FAI. One post of the subject was Depression: State Council Investigates Drop in Private Investment

Private investment growth in the industrial sectors was negative for the second consecutive month.

All data from NBS.

Impulse Rally in Commodities Running on Fumes

At the start of 2016 it was deflation all over again. Then suddenly commodities take off and the global economy heats up. Three possible explanations are:

1. The depression is finally ending
2. The smart money knew Trump would win
3. China flooded its economy with cheap money

With respect to 1, Jeffrey Snider keeps pointing out nothing has changed. As for 2, that's just coincidence. The evidence for 3 is strong. The history of the post-2008 economy is slow credit creation, slow economic growth. Dollars are in high demand. China can break out for a time, but then devaluation pressure and inflation become a problem. It tightens. The global economy sinks back towards a deflationary crisis. China pumps.

Here's Chinese PPI through December 2016. Notice the PPI didn't start rising consistently until July 2016, many months after the initial credit surge and several months after commodity prices started soaring.
I thought this impulse would lose steam in the middle of 2017, but it moved into what looks like a blow-off top this autumn. Chinese PPI growth will cool substantially into 2018 and should turn negative again month-to-month assuming the current credit trends persist.

I'm not sure the rally is totally over in the sense of top ticking the price, but today's action in China suggests the smart money knows the party is over. Credit growth indicates the end of the party.

ZH: China Commodities, Stocks Are Tumbling
ZH: China's Credit Growth Is Freezing Up At The Worst Possible Time

Why does it matter?

Because much of the boost in GDP growth over the past 18 months can be sourced to China's credit boom.

ZH: UBS Makes A Striking Discovery: Ex-Energy, US GDP Growth Is The Slowest Since 2010
Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out 'underlying' growth is only 1% or so (ex inventories) - the slowest since 2010 - and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace.

The slowdown cometh.

2017-11-10

7 Hot Words for China's Real Estate Market

Hot word 1: Volume down
Hot word 2: Tighter controls
Hot word 3: Rental era
Hot word 4: Moderating land prices
Hot word 5: Financial de-leveraging
Hot word 6: Developers break siege
Hot word 7: Property market inflection point

iFeng: 七大热点词汇 解读2017年房地产市场

2017-11-07

Xi Jinping Has the Power to Reform

Back in 2014: Michael Pettis Said China Has 2 Years to Adjust; Xi Must Consolidate Power.
What is most important for China in the near future?
What really matters is whether President Xi can consolidate power quickly enough. If he can consolidate power, he can force the adjustments in spite of the opposition of the elites. That is the most important question. The Soviet Union had similar problems and they had to make their adjustments in the Seventies. But the Soviet Union’s power was much more dispersed and the adjustments failed. This is something China absolutely does not want. Their interpretation, which I think is correct, is that they have to consolidate power much more so they can force through the adjustments.
Xi needed 3 years, until the 2017 National Congress.

Reuters: China's president consolidates power with 'Xi Jinping Thought'
Xi's Thoughts are expected to further consolidate his power and putting him on a par with the founder of the Communist party, Mao Zedong.
Brookings: The rise and rise of Xi Jinping: At 19th Party Congress, he consolidates power to a degree unseen since Mao and Deng.Zhou Xiaochuan's warning of a "Minsky moment" and Xi Jinping's consolidation of political power is a interesting combination. China avoided deleveraging before the National Congress because it would have harmed Xi's efforts if it was a failure. Now he has the power to force through reforms and he's more insulated if it turns into an economic crisis.

The last 18 months was relatively low volatility as China headed into its National Congress. We are at or have passed the low in volatility.

Reserves Flat in October

Chinese forex reserves increased in October, but it was a rounding error of $700 million. The turn is at hand.

Reuters: China's Oct FX reserves rise slightly in ninth month of gains

2017-11-01

China Real Estate Pain Begins as Credit Growth Slows

Financing is tightening for the real estate sector.

iFeng: 楼市资金面趋紧 全国房价涨幅或继续下行
"Real estate as a capital-intensive industry, with a strong dependence on capital, changes in the financial side will directly affect the real estate market." Yesterday, Lai Yi Ju researcher Qin said in an interview with reporters this year , with the deepening of the pace of adjustment of the property market, the property market funds face is clearly showing a tight situation.

From the point of view of buyers lever residents, according to 2017 third quarter financial institutions to invest in the central bank recently released statistics report shows that, as of the end of September, individual housing loans 21.1 trillion yuan, an increase of 26.2%, respectively, from the previous quarter and the same period last year down 4.6 and 7.20 percentage points. In fact, since this year, year on year growth rate of individual housing loans have been introduced to the downstream channel.
Credit bubbles are unsustainable because they require an ever rising rate of credit growth. In order to grow a credit bubble, you need to grow the amount of credit. As the credit bubble inflates, credit is an increasing share of growth. It's like pushing up a ball with a stream of water. The end is always a collapse in asset values or hyperinflation.

Say the economy is 100 and outstanding credit is 200. The economy grows 10 percent, credit 30 percent.
At the end of year 1, the economy is 110 and credit is 260. Total demand is 110 + 60 (new credit) = 170
At the end of year 2, the economy is 121 and credit is 338. Total demand is 121 + 78 = 199, up 17.1 percent.
At the end of year 3, the economy is 133 and credit is 439. Total demand is 133 + 101 = 234, up 17.5 percent.
At the end of year 4, the economy is 146 and credit is 571. Total demand is 146 + 132 = 278, up 18.8 percent.

Credit growth slows to 15 percent in year 5.
At the end of year 5, the economy is 161 and credit is 657. Total demand is 161 + 86 = 247, down 11.3 percent.

Even without assuming any negative effects from credit growth, a slowdown in credit growth will trigger a significant slowdown in economic growth or asset values in the target market. It's math. If you assume rising credit levels requires rising debt service costs, rising credit growth is needed to finance interest payments (Ponzi finance).

Rising interest rates don't help.

Bloomberg: China Corporate Bond Investors' Luck May Be About to Run Out
“It’s very likely we will see a significant increase in corporate yields in the coming year,” said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “The trigger could be tougher regulations or a default. A majority of non-bank financial institutions’ debt holdings are corporate bonds, so their selloff can lead to severe consequences. Banks are underestimating authorities’ intentions to tighten regulations.”

Signs of a turnaround are already beginning to show, with the yield on three-year AAA notes -- the most common grading for Chinese corporate debt -- rising 8 basis points, the most since May, to 4.90 percent on Monday. That extends the cost’s increase this month to 29 basis points to the highest level in five months. The spread between those notes and government debt has climbed in October and was last at 117 basis points, though it’s still a long way from this year’s peak of 150 basis points in April.
FT: China bond yields down from 3-year high after PBoC cash injection
Contributing to expectations of tighter policy are signs of inflationary pressure and resilient economic growth in China as well as rising global rates on the Fed’s more hawkish outlook. In China, both consumer and producer prices rose faster than expectations in October, underpinned by rising coal and steel prices.

“We expect the reflation trend to continue. Along with a moderately higher global rate environment, this means that domestic interest rates will also trend higher,” wrote Li Cui, head of macro research at CCB International in Hong Kong.
Reflation is going to crater the housing market.

iFeng: 调控之下楼市降温明显 房子1.8万跌到1.2万无人买
Under the regulation, the most severe real estate Central Beijing property market has finally dropped! Institute research found that the chain of home in Central Beijing area: Compared with the March 2017 high of September Yanjiao chain of second-hand housing turnover fell 90%, the average price fell 26.9%. Homelink has revealed the above information, the display area Central Beijing property market slump.

Yanjiao down a little deal, Xianghe from the end of May to the chain of home on a deal now 5 sets, there is no market price! A netizen said that there is room in Central Beijing, before a lot of friends in Central Beijing basically a suite, house prices rose last year results were in a turmoil, plus a variety of levers, all kinds of various loans to buy! In April this year after the results, all the quilt, Xianghe has dropped to 12,000 from 18,000, not sell!
In a speculative market, the supply and demand curve slopes upward. The higher the price, the higher the demand. The lower the price, the lower the demand. Back to the credit example above, a slowdown in credit growth leads to a drop in home prices, thus reducing demand. Every slowdown in credit becomes a crisis. Each time the can is kicked, more credit is needed to restart growth. The system must scale up. The next crisis will be larger. On and on, until the music stops. Or the system is "bailed out" by a massive debasement in the currency.

Beijing New Home Sales Hit 10 Year Low

Only 20,550 new homes were sold in Beijing last month, down 50.6 percent from October 2016.

Caijing: 北京新房成交创10年历史新低 10个月仅成交2万套