2018-02-28

PBoC, Banks Expected to Follow Fed Higher

Mortgage interest rates are headed higher in China.
However, the clouds of interest rate hikes have never been dispersed. The Fed will raise interest rates by another 3 to 4 times in 2018, and will raise interest rates for the first time next month.

Market participants believe that as the Fed continued to raise interest rates in March basically no suspense, the PBoC raised the possibility of raising interest rates on the open market operations;

Once the public interest rate is raised, the cost of capital of banks will rise. If banks are to cope with such pressure, they will inevitably find it through real estate credit.

So, in the course of the sharp rise in mortgage interest rates, there is an interesting phenomenon that joint-stock banks and city commercial banks are going up by more than the top four state-owned banks;

In fact, this can be understood, after all, their financial costs and the difficulty of financing are much higher than the four lines.

Since then, another seemingly contradictory phenomenon reported by the media (easy to loan interest rates high), it is easy to understand;

For example, among the 11 banks interviewed by "Securities Daily", staff of 7 banks said that they will make loans within 30 days after the mortgage is made.

A state-owned large bank loans the fastest, loan manager of the bank told reporters: "If successful, face finish the second working day loans, the mortgage the second working day will be able to lend."

The new year begins, the bank does not lack the limit, there may be cost pressures, so, from the bank point of view, it is easy to understand the floating mortgage interest rates.

Mortgage interest rates as a tool to control, under normal circumstances, the decision-making is not free to use, at this juncture of the "straw" out, meaning is self-evident, China's housing prices no longer have much room for growth.
iFeng: 银行“倒戈”房贷利率再上调 2018买房更艰难

2018-02-27

Chinese Manufacturing PMI Slumps in February

New orders fell to 49.0, the second straight month below 50. Imports slowed to a 49.8 reading. Factory prices fell to 49.2 versus 56.3 a year earlier. Orders fell to 44.9.

The Services PMI was stronger at 54.4. New orders slid to 45.9 though, and selling prices fell to 49.9 versus 51.4 a year ago.

The slowdown is underway.

NBS: 2018年2月中国采购经理指数运行情况

2018-02-26

Lack of Affordable Housing Exacerbated by Immigration

Macrobusiness: Memo to Racism Rob, Jess Irvine, Adam Creighton & Greg Jericho
Leith and I will both lose personally if house prices fall. MB has already lost some subscribers. So what? There are bigger issues at hand. We are bashing open the rhetorical space for arguments in favour of lower immigration against the propaganda of the corrupt system. This space is designed to allow commentators to get on board without being singled out and branded by interests. It is singular tragedy that all young(ish) economic commentators have been leading voices in trying to close it again.

MB has already helped win battles on negative gearing and macroprudential using this method. But immigration is the big one. Demand must be lowered to win the house price war. It’s a war against government, class inequality, rent-seekers, generational greed, corrupt ideology, the selling out of the national interest and even a defense of democracy.
Only this morning I caught a report out of California saying the number one issue for Democrats in California is affordable housing. California has its own special problems when it comes to development, but high rates of immigration aren't helping.

2018-02-25

Chinese Home Prices Rise 0.34pc in January

Chinese new home prices rose 0.34 percent nationally in January. Prices are up 5.4 percent year-on-year.

Year-on-year prices fell in 11 cities, many of which were "hot" cities in 2016: Beijing, Tianjin, Shanghai, Nanjing, Hangzhou, Hefei, Fuzhou, Zhenghzhou, Shenzhen, Chengdu and Wuyi.

Only 45 cities saw rising existing home prices mtm in January, with an average increase of 0.19 percent.

NBS: 2018年1月份70个大中城市商品住宅销售价格变动情况

Western Elites Shocked as CCP Acts in Self-Interest

Global Times: Observers say China needs consistent leadership as CPC proposes removing presidential term limit
"Especially in the period from 2020 to 2035, which is a crucial stage for China to basically realize socialist modernization, China and the CPC need a stable, strong and consistent leadership. So removal of the section of the clause about the presidency in the Constitution is serving the most important and fundamental national interest and the Party's historic mission," Su said.

In a two-stage development plan of China, drawn up by President Xi Jinping, who is also general secretary of the CPC Central Committee, the first stage is "from 2020 to 2035" which is "to see that socialist modernization is basically realized"; and the second stage from "2035 to the middle of the 21st century," China will develop "into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful."
Chinese reform efforts were thwarted by various party factions, local governments and the risk of triggering a major financial crisis or recession. All of those risks could generate political risk.

SCMP: China will scrap limit on presidential term, meaning Xi Jinping can stay on
“Trump, Brexit, the rise of the extreme right and left again in polities throughout the democratic world … made domestic Chinese politics even more fixated on stability and on avoiding any kind of uncertainty and risk,” Brown said. “Xi is the symbolic figure at the centre of this, the person whose leadership everything hangs on.”
Xi has the power now. Whether he reforms or uses it to retrench CCP control over the economy is anyone's guess. If the former, then this is part of China's long path of reform. If the latter, then it will eventually cause an economic setback.

China's political decision doesn't look out of place from a historic viewpoint. Mao had no term limits. The reform era was launched by Deng and instituted term limits. But if a party based on equality is to maintain political control, it must eventually devolve into dictatorship, or in the case of China, secure it. The other path is loss of control, eventually leading to a chaotic period and then dictatorship. China chose stability, again.

2018-02-24

Roadmap to Yuan Float

管涛:可择机对外宣布人民币汇率清洁浮动时间表
In his latest book The Game of Exchange Rates, Guan Tao, a senior researcher at the CF40 Forum, pointed out that in order to increase the credibility of the promised market-based reform of the renminbi exchange rate, it is possible to announce a schedule and a road map toward a cleaner floating exchange rate , If it is announced that the RMB exchange rate will float freely (or float cleanly) by 2020, of which there will be a managed float without prior announcement of a floating range, that is, the central parity of the exchange rate will actually become a market-traded fixed exchange rate and be canceled Float interval, and then to free float.

The reason for choosing 2020 is that the Third Plenary Session of the 18th CPC Central Committee proposed in 2020 that decisive results should be achieved in important areas and in the reform of key links. By then, the decisive role of the market in allocating resources may be basically established. However, the exchange rate, as a basic factor price, will inevitably require market-oriented pricing.

The reason for the implementation of a managed floating without the prior announcement of a floating range mainly takes into account: First, it is not of much significance to further expand the floating range of exchange rates. Second, it is necessary to preserve the government's power to smooth the exchange rate fluctuations and to stabilize market expectations while maintaining the transition from free float to free float. Third, it helps the central bank to get rid of the bondage of the floating range of the exchange rate and enhance the autonomy of the exchange rate control. In particular, it is better able to cope with the possible violent shocks that may arise in the initial floating-market. Fourthly, it helps to achieve a seamless connection of the exchange rate system and reduce the market impact of the exchange rate reform.

2018-02-23

Anbang Seized Early in Deleveraging Effort

Anbang down.

Bloomberg: China Regulator Seizes Anbang, Chairman Faces Fraud Prosecution
It’s a remarkable turn for Anbang, which burst onto the global scene in 2014 with the purchase of New York’s Waldorf Astoria hotel and only a year ago was in talks to invest in a company owned by the family of Jared Kushner, U.S. President Donald Trump’s son-in-law and senior adviser. With 2 trillion yuan ($315 billion) of assets, Anbang represents China’s largest-ever takeover of a privately owned company.

...The surprise move furthers President Xi Jinping’s anti-corruption and de-leveraging campaigns while providing a government backstop for the high-yield investment products that Anbang sold to hordes of Chinese citizens.
The cost of the bailout depends on the value of the underlying assets. If those asset prices start sinking, the Chinese central bank will be called on to make up the difference.
The takeover may end in a year if asset disposals are completed, strategic shareholders have injected capital and the company is stable. Government control can be extended by as much as another year if needed, but Anbang will ultimately remain a private company.
Anbang grew by borrowing short and investing long:
Much of Anbang’s growth was tied to sales of short-term, high-yield products that the company used to fund purchases of long-term assets such as real estate -- creating a duration mismatch that worried analysts and regulators. One of its products, called Anbang Longevity Sure Win No. 1, boosted its premiums almost 40-fold in 2014 by offering some of the juiciest yields in the industry.
Maybe this is a coincidence, maybe not:
This isn’t the first time Chinese regulators have had to step in when an insurer ended up in trouble. In 2007, the government tapped an industry protection fund to take control of New China Life Insurance Co. by buying a major stake in the insurer, after its former chairman Guan Guoliang misused funds.
ZH: How An Anbang Default Could Rock The Market: Wall Street Explains
I guess the NYC Landmark signal still works. Anbang goes wobbly just a few short years after its splashy purchase of a trophy Manhattan property, the Waldorf-Astoria Hotel. It brings to mind the Japanese real-estate bubble in the late 80s, and one has to wonder whether China will suffer the same retreat eventually.
When HNA needed a bailout, UBS wrote:
A default scenario would increase funding costs for high-yield issuers, mainly Chinese property companies and LGFVs, and could push out spreads on junk bonds in the region by 160-240 basis points, according to a Feb. 6 equity strategy note
Contagion need not be falling dominoes, rather the rising cost of credit eventually causes widespread defaults.

China managed to contain smaller defaults in prior years, but the numbers keeps getting larger. It has strict capital controls in place because it cannot otherwise stop capital outflows. It is less than a year into deleveraging efforts, efforts that accelerated following the October 2017 National Congress.

There are no free lunches. Losses can be shifted, they can be papered over, they can be hidden, but they cannot be eliminated. As always, the most likely place China's mistakes will compile is on the central bank's balance sheet.

2018-02-21

Italy About to Turn Nationalist at Intermediate Peak in Social Mood

If you think the euro and European Union are out of the woods, that the populist wave has ebbed, think again. We are still part way through a decades long process. European nations are drifting in a nationalist direct despite social mood (measured by the market indexes) hitting new highs or at least multi-year highs. The elites of Europe (and most of the West) dug themselves so deep in the hole by pushing peak social mood policies well after social mood had peaked. They are still pushing in the wrong direction today, 18 years after the peak and 10 years after they should have woken up. I don't think the French Revolution is a good model for what is about to happen, but King Louis XVI actually tried reforming at first.


Update: other European debtor nations have similar charts.

10,000 Car Traffic Jam at Haikou Ferry, No Economy Class Tickets Until March 1

Hainan was a popular destination as usual, but if you didn't make returns plans, you're in trouble.

iFeng: 三亚过万车辆海口堵长龙 有航班3月1日才有经济舱
At the peak of the Spring Festival Golden Week visitors return peak, by the persistent Qiongzhou Strait foggy weather, a large number of people, vehicles stranded in Haikou. On the afternoon of the 21st, a news release was made by Haikou Municipal Government Information Office that a total of 10,556 vehicles were waiting to be ferried in Haikou and Sangong, causing a heavy traffic pressure.

Many travelers reflect the flight ticket prices from Hainan to Beijing, Shanghai and other places over 20,000 yuan. Ctrip found that recently that tickets from Sanya cost an average of 10,000 yuan.

Even so, "10,000 yuan ticket" is still a ticket hard to find. There are flight economy class to wait until March 1, many tourists from Guangzhou, Zhejiang, Harbin and other places "curve home."

Bonds on the Edge of Breakdown

If TLT completes the H&S pattern, a conservative target price is $90. The bottom chart shows the unadjusted price of TLT. A ballpark target for the 30-year bond yield would be around 4.5 percent.

Fed Response on Interbank Loans

The Fed has answered: Fed loans to banks are part of total Fed funds and effectively lost in a sea of data, but a part of it exists in loans to commercial banks.

What's more interesting is the death in interbank lending after the 2008 crisis. And based on the relative size of Fed funds and loans to commercial banks, if there was a drop of interbank lending it was the Fed reducing liquidity rather than a drop in bank-to-bank lending.

2018-02-19

If China Really Deleverages, Expect Recession

In the modern monetary/financial system, money is created by banks. (When the banks run into trouble, the central bank monetizes the debt and the banks start lending again. The central bank is the caboose, not the engine.) Most of this creation took place off-balance sheet and eventually led to the 2008 financial crisis. As Jeffrey Snider of Alhambra has shown, the U.S. financial system "peaked" in 2008 because the large financial institutions began shrinking their balance sheets. The European banks topped out in 2011. If China deleverages, it's banks will top out in 2017 or 2018. On-balance sheet lending will rise, but if China deleverages, it will not offset the slowdown in off-balance sheet lending.

Credit demand spends the same way as real demand. Goldman Sachs estimates total debt increased 13.5 percent in 2017 to 317 percent of GDP.

GDP was 82.7 trillion yuan and credit increased 31.1 trillion yuan, a total of 113.9 trillion nominal demand, up 9.0 percent from 2016.
If total credit growth slows to around 10 percent in 2018, and assume nominal GDP is goalseeked and rises 9 percent, then total nominal demand would be 116.4 trillion, or 2.2 percent growth. Even with a generous forecast for nominal GDP growth, the slowdown in total nominal demand is huge. If you take a more bearish view of GDP, then outright recession is likely even if it is masked by most official stats.

Bloomberg: While Washington Spends, China Moves to Cut Its $30 Trillion Debt Load
Few think China faces a near-term crisis from its debt. The economy is growing at a robust 6.9 percent, and domestic deposits of $27 trillion almost equal outstanding debt. If China were to simply continue the rapid credit growth and wasteful investment of the past, a sharp and wrenching downturn would likely result. At some point the country’s ability to roll over existing debt and fund new projects will wane.
China always faces a near-term crisis from its debt. That's why it must get a handle on debt levels. The longer it takes, the larger the inevitable crisis.
Make no mistake: China’s great deleveraging will be a multiyear undertaking, and the country is just getting started. There also may well be instances of backsliding. Yet China’s debt dynamics are now so pressing that there’s probably no turning back.
China needs a burst of real GDP growth to offset the decline in credit growth required to get credit-fueled, centrally-planned growth below the growth rate of the whole economy. It needs the private economy to overtake the state economy. It's like a race between the tortoise and the hare, the tortoise is private GDP and the hare is credit + state GDP. If China can't wait for the tortoise to catch up, it has to slow the hare. It can slow the hare anytime because it controls the hare, but slowing the hare will also slow the tortoise. Finding the right number isn't easy and the Chinese government can't control global growth or U.S. trade policy.

If China could have grown without credit-fueled centrally-planned growth, it would have done so. Had China implemented reforms in 2008 or 2011 or 2014 it would have needed a smaller bump in real GDP to offset the credit slowdown. A bullish view of a credit slowdown requires China to do what it failed to do for 10 years and do it far better than it would have back when the problem was smaller.

A less optimistic view is China avoids a major crisis, but that depends on how you view the financial markets of early 2016. If you think that wasn't a serious decline that required incredible credit intervention from China, then there's no reason to be worried if global growth slows. Or perhaps U.S. growth picks up thanks to fiscal stimulus, Europe improves too, and the dip in Chinese demand is partially offset by global demand.

And then there's the bearish scenarios that range from a repeat of late 2015 and early 2016, all the way to full blown financial crisis in China, global recession, EM carnage and the DXY at its final nosebleed high.

AfD Now Outpolling SPD

Social mood is still in a long-term downtrend, migration is still far above levels desired by the general public, and this is happening with global asset markets and economies likely near their cyclical peaks.

I will now predict that AfD becomes the largest party in Germany within 5 years, assuming an economic recession/financial market downturn.


I've previously covered the emergence of AfD.

AfD Could Become Largest Opposition Party in Germany; Catalonia Crackdown in Spain - this happened thanks to the grand coalition between the CSU-CDU and SPD, and now is doubly true as AfD pulls ahead of SPD.

AfD Wins Big in German Election, No Competition Yet - still true. Like Trump in the USA, they have a monopoly on the immigration issue.

From 2015: This One Chart Explains the Next 10 Years of Political Change. If you read only one post, that's the one to read. Thanks to the rise of nationalism, identity and immigration, the AfD is the only mainstream right-wing party in Germany. CSU-CDU and Free Democrats, right-wing on economics, are as of 2015 considered left-of-center parties.



2018-02-18

Lending Crackdown Expected After January Loan Surge

iFeng: 多地严控违规资金流入楼市 短贷虚增现象有望缓解
Subsequently, many local CBRC offices, including Beijing and Shanghai, made statements in the near future to prevent all funds from entering the real estate market illegally.

Kerry Real Estate Research Center Director Yang Kewei told the "Securities Daily" reporter, from the position of the China Banking Regulatory Commission and the banking regulatory agencies around the point of view, is expected to 2018 credit policy continues to become tighter will become a high probability event. For buyers, on the one hand speculative demand will be further suppressed, speculators arbitrage possibilities almost disappeared; the other hand, all kinds of illegal loans will be effectively controlled.

It is noteworthy that the People's Bank of China recently released in January 2018 financial statistics show that in January new RMB loans 2.9 trillion yuan, an increase of more than 867 billion yuan, an increase of 2.3156 trillion ring; which short-term loans 6856 An increase of 129.6 billion yuan over the same period of last year and an increase of 765.9 billion yuan more than the previous month.

"Residents of short-term loans increased significantly, does not rule out that there are still some residents to purchase loans in the name of consumer loans." Yang Kewei said that in fact, for some residents to consumer credit purchase behavior, all types of banks have stepped up the credit card and consumer loans Issued audit, is expected to post "inflated" short-term loans will be squeezed out, real estate "deleveraging" effect is expected to further show.

New Normal: The Wealth Gap Only Gets Bigger

Aside from a financial crash or populist revolution (temporary phenomena), the wealth gap only goes in one direction now as talent dwindles thanks to low fertility rates across the developed world.

The fight for young talent between Chinese cities is dubbed the story of 2018 in real estate.

iFeng: 2018年楼市关键词:抢人才
According to CCTV Financial Economic Information Network reported that the opening of the market this year, the key words that must be "grab talent." Recently, many second tier cities including Wuhan in Hubei, Zhengzhou in Henan, Hefei in Anhui and Nanjing in Jiangsu have frequently released policies to settle down in the New Deal, lower their housing threshold and throw an olive branch to all kinds of people. Since last October, there have been nearly 20 cities or regions that have released or upgraded the New Deal with "Talent Settled in."

ECB Governor Detained in Corruption Probe

Bloomberg: ECB's Rimsevics Detained by Latvian Anti-Graft Bureau
Latvian central bank Governor Ilmars Rimsevics, a member of the European Central Bank’s governing council, was detained by the country’s anti-graft bureau, prompting calls for him to step aside to prevent harming the country’s financial sector.

The detention followed a search by authorities of the governor’s office and private property, state-owned LTV reported, without saying how it got the information. Rimsevics’s lawyer, Saulvedis Varpins, said Latvia’s top monetary official considered his detention "clearly illegal," according to the Leta news service. Finance Minister Dana Reizniece-Ozola said Rimsevics’s detention would be explained on Monday and that the situation may hurt Latvia’s credit position.

"Each day that Mr. Rimsevics remains in the central bank’s leadership significantly worsens" the situation, Reizniece-Ozola said at a news conference in Riga on Sunday. "I think that at this moment, it would be wise if Mr. Rimsevics would at least during the course of the investigation step down."

Bitcoin Price Vs Search Volume

The Google search forecast is a bearish indicator.

Banks Have No Money, Chinese Mortgage Rates Rising

An article in iFeng discussed rising interest rates at Chinese banks to as much as 30 percent over benchmark. Banks were willing to take losses on mortgages a year ago, hoping to earn more from follow on services and products to customers. This year, the banks have tightened up because, according to this piece, they're out of lending capacity.

iFeng: 各地银行陆续上调房贷利率 2018年买房成本增加
People concerned about the property market know that from 2018 onwards, many banks across the country began to announce the floating mortgage rates. For example, the four major state banks in Guangzhou recently announced that the first-home mortgage interest rate will go up to 10% over benchmark, while two other banks in Shenzhen will go up by 20%. Even more exaggerated, there are also two banks that are up to 30%.

...It has also been calculated that a 1 million loans, 30-year period, from a 15% discount a year ago and now the floating 10% above benchmark the interest cost is 270,000 higher, this is not a small number, a thorough validation of the truth that time is money.

So you will find, no matter if the price falls, it will take more and more money to buy a house.

...So the question came, at the beginning of 2018, why banks suddenly tighten mortgages all over the country?

Because the bank is really no money!

There are many reasons for this. The most important thing is that the money management business is under scrutiny.

If we compare the Chinese economy to a towering tree, then the current situation is that the tree trunk is full of holes. If the economic growth is also pursued to develop the branches and leaves, the tree will one day fall to the ground.
The main reason for rising costs and tight credit is the crackdown on shadow lending. Instead of shifting credit risk on to unsophisticated buyers of WMPs (who think the bank and government are implicitly guaranteeing these products) the banks are on the hook for on-balance sheet losses. Additionally, they have to follow strict regulations governing mortgage lending:
Make holes, the first is the local debt, in fact, is the bank. For banks, the loans belong to the table, and wealth management belongs to the off-balance sheet. On the table, the loan examination was strict, plainly, the loans that went out were not good, the leaders should bear the responsibility, the large sum of bad loans, and the resignations from the top to the bottom would not work. They all went in by accident.

However, financial management is not the same, when you buy money management is signed a risk notice, made it clear in extreme cases, the principal and interest will be all losses. Therefore, many companies that are not qualified for loans tap off balance sheet lending. And beyond the imagination, capital flows, brokers, trusts, intermediaries, everyone earns a share of the capital flow.
The article closes by telling buyers the market is rational thanks to tighter credit. Do not to follow the crowd, but make an independent decision.

The past 20 years of Chinese mortgage rates:

2018-02-16

Russia Collusion Narrative Dead, Long Live Chinese Collusion!

ZH: Mueller Indicts 13 Russians, 3 Companies For Interfering In US Election
ZH: DOJ Complaint: The Russians Organized A Rally Called "Trump Is NOT My President"
ZH: Russia Responds To "Absurd" Election Meddling Allegations
The indictment of 13 Russian nationals and three entities over allegations by the DOJ that Russians interfered in US elections - but "did not alter the outcome of the 2016 election" nor that any American was a knowing participant in this activity - are absurd, Russian Foreign Ministry spokeswoman Maria Zakharova said on Friday.

"13 people interfered in the US elections?! 13 against an intelligence services budget of billions? Against intelligence and counterintelligence, against the latest developments and technologies? Absurd? Yes," Zakharova wrote in a post on Facebook.

Then again, what else could she say.

Furthermore, as noted in the DOJ complaint, the funding for the Russian operation came from catering and management companies controlled by defendant Yevgeniy Viktorovich Prigozhin, a Russian businessman often referred to as "Putin's chef" in the media because his organizations had hosted dinners for Russian President Vladimir Putin and foreign leaders, the AP reported.
The Russians sowed discord mainly by being present, allowing the creation of a false Trump-Russia collusion narrative. Basically, they got America to shoot itself in the face. The return on investment is incredible, particularly if FBI and DOJ officials eventually get indicted for turning government agencies against a political opponent and sitting president.

Now with Russia collusion out of the way, make way for Chinese collusion and trade war. Instead of an intrapolitical battle, Chinese collusion will be a bipartisan effort.

A Look Back at 2015

Back in late 2014, early 2015 everyone was optimistic on the U.S. economy.

I wrote in June 2015, two months before China pulled the rug out: What Are the Odds The U.S. Economy Pulls A Crazy Ivan?
What are the odds that an interest rate hike by the Federal Reserve causes confidence to increase such that higher interest rates cause higher inflation? In this scenario, rate hikes signal greater confidence and increase inflation expectations. An inflationary spiral ensues, with the Fed unable to hike fast enough.

I don't think the odds are good because it requires credit growth at a pace closer to pre-2007 levels and we're not there yet. However, zero percent interest rates causes great psychological damage to many savers and investors who are responsible for the bulk of economic activity. The people who really set inflation expectations are worried because rates are zero (they might worry about inflation, deflation, or just feel that zero percent interest signals something deep and fundamentally wrong with the economy) and they are worried rising rates will be bad for the economy. If they're wrong, those millions of people controlling trillions in wealth are going to switch from fear to greed, from risk aversion to risk taking. Credit growth will be the first sign. Inflation will quickly follow.
I think to some extent this scenario played out in the equity markets, but not in credit growth. Trump winning increased business optimism, passing tax cuts and increasing deficit spending lifted optimism further in early 2018, but all we got was a blow-off rally in stocks and interest rates, not (yet) a rise in credit growht.

I also linked to this story from Yahoo Finance: IT'S OFFICIAL: America is back! Sound familiar?

There are differences today: the dollar is falling, interest rates are higher (although is the 10-year at 2.9 instead of 2.5 percent that big a difference?), oil is a little cheaper, taxes fell and deficits will rise. I posted yesterday that a good reason for expecting inflation is the federal debt. I don't see a lot of projections based on what ifs though, rather the market strikes me as overly optimistic and assumes inflation increases that haven't materialized.

I finished the 2015 post with:
We have seen false dawns several times since 2008, but never with a Federal Reserve hiking rates. President Obama is leaving office in 18 months. No serious candidate from either party will be worse than Obama on the economy, so even if people complain about "uncertainty" with the election, it will make sense to bet on saner economic policies.
It was a false dawn in 2015. We got better economic policies and where they're worse ($1 trillion deficits for a decade), they're at least pointed in an inflationary direction. But how much is already priced into interest rates and equity prices? What happens if Chinese growth slows again?

Finally, is this news below inflationary for the U.S. more than it is deflationary for the rest of the world?

ZH: Global Trade Wars Begin: Ross Recommends Major Tariffs On Steel, Aluminum Focusing On China, Russia
Secretary Ross has recommended to the President that he consider the following alternative remedies to address the problem of steel imports:

1. A global tariff of at least 24% on all steel imports from all countries, or
2. A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States, or
3. A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.

Saipan's #1 Export: Capital Control Evasion

From an in-depth Bloomberg article on Saipan's casino: A Chinese Casino Has Conquered a Piece of America
Per capita, there’s almost certainly more Chinese money moving through Saipan than anywhere else in the world. The unprecedented flow of capital has allowed Imperial Pacific to operate in ways that would be unthinkable within the 50 states. When laws have become inconvenient to the company, they’ve been flouted; when the requirements of its contract with the government have become onerous, they’ve been removed; when legislators have tried to interfere, they’ve been ignored. Imperial Pacific has made millions of dollars in payments to family members of the territory’s governor, Ralph Deleon Guerrero Torres. Remarkably, the company has also enjoyed the support of a gold-plated roster of American politicos. Its advisers and board of directors have included former directors of the CIA and FBI and former governors of Mississippi, New York, and Pennsylvania.
Theranos had lots of elites on its board and it was a scam. It's possible all of these clowns are collecting checks and covering for corruption. It's also possible the U.S. is keeping an eye on the money flows.

ChiNext Analog Hoilday edition

2018-02-15

春节快乐!Happy Year of the Dog!

One Reason to Expect Inflation

Trump will run $1 trillion deficits for the entirety of his administration if forecasts are correct. His administration recently predicted $30 trillion in debt in 2028, an annualized increase of $1 trillion per year.
If the economy doesn't grow as fast as Trump is promising, additional Pentagon spending is needed for military reasons and interest rates rise more than anticipated because of the increased federal borrowing, consecutive deficits between $1.2 trillion and $1.5 trillion are not out of the question
Forbes: The Trump Budget Legacy: A Permanent $1 Trillion Federal Deficit

The largest deficit under Reagan was 5.7 percent of GDP in 1983. If Trump "achieves" a $1 trillion deficit this year it will be roughly 4.9 percent of GDP assuming 3 percent growth. The U.S. ran similar deficits from 1984 through 1986. Assuming 4 percent nominal growth (the post-2008 trend), a $1 trillion deficit falls to about 3.6 percent of GDP when Trump leaves office. Economic forecasts are close to worthless, but if this holds up, the U.S. will inject more fiscal stimulus as a percentage of GDP under Trump than it did under Reagan. Should growth pick up this overestimates the deficit as a percent of GDP. However, 5 percent deficits as a percentage of GDP didn't achieve much in 2012. If China slows again, it's possible massive deficit spending will only bump growth up to the post-2008 highs rather than break trend.

The initial impact of the Trump tax cuts was rising revenue as companies pay taxes on repatriated overseas earnings. As this wears off, money printing will begin in earnest. Then, and only then, is a sustained rise in inflation possible under current economic conditions.

There is no crowding out effect from government debt. Rising treasury issuance expands the money supply. The federal government is doing what the Federal Reserve could not do: print money.

U.S. Debt Clock

Where's the Inflation?


The Economist has gone insane:

2018-02-14

Update on Interbank Lending

Mish has some additional information here: Interbank Loan Series Update: Message From "Fred"

Spread Between Sentiment and Reality Peaking

Yahoo Finance: Inflation heats up, stocks tumble

But, the 10y and 30y yields are below their recent highs in early trading.

ZH: USDJPY Plunges To Lowest Since Nov 2016 After Weakest Japanese GDP In 2 Years
ZH: Stagflation: Retail Sales Tumble Just As Inflation Spikes

It's not stagflation, it's the end of a growth rally fueled by Chinese flooding their economy with cheap money.

Now Chinese money, at least for real estate developers, is as tighter than at any time since 1997.

The lastest thrice-monthly inflation report from China's NBS looks disinflationary: 流通领域重要生产资料市场价格变动情况(2018年2月1日-10日)

Today the PBoC says leverage is still too high in the economy. iFeng: 央行:总杠杆水平仍然偏高 国企债务压力较大
February 14, the central bank released its fourth quarter monetary policy report. The central bank mentioned in the report the macroeconomic outlook for China. The report pointed out that from a domestic perspective, the current economy is stable to a certain extent, due to the global economic recovery in the context of the recovery of foreign demand to promote the non-governmental investment vitality is still relatively inadequate, some short areas have not yet broken the bottleneck, the overall level of leverage is still high, especially businesses It is still the debt pressure of state-owned enterprises is still large.

Jeffrey Snider helpfully puts this all in context.

The charts matter because markets are not tied entirely to fundamentals. Psychology matters and markets are reflexive. On this point, Trump's cheerleading on the economy is one of the most important pillars of his economic policy because people are literally depressed, hence the economic depression (from trend growth).

Right now, however, the fundamentals are turning away from inflationary towards disinflation and deflation.

2018-02-13

FRED Corrects Interbank Lending Chart

I posted this on Sunday. Fed Nixes Internbank Lending Records. I sent an email to the Federal Reserve asking about it. I didn't get a response, but they've deleted the drop in lending. As I showed in that post, the data set was eliminated so the drop was likely a statistical artifact or perhaps FRED pulling from the same line in the database, but now a different data point.

I asked the Fed if it is possible to reconstitute the number or if it is included in another figure. Let's see if they respond! The BEA always got back to me quickly.

Chinese RE Market Shudders as Lending Quotes Exhausted, Land Auctions Fail

The first warning signs were failed land auctions in Beijing at the end of 2017. Then signs of a collapse in shadow bank funding that. And now we know why at least one developer likened the credit market to the 1997 Asian Crisis: according to a report originally posted by 政商参阅, some listed banks have already exhausted their real estate lending quotas.

iFeng: 别了房奴!国家紧急出手楼市再响惊雷
Recently, a number of banks across the country have issued relevant documents, suspended development loans and tightened or suspended financing of real estate.

Now many branches of the four major banks, as well as some listed bank new real estate credit business credit is quite tense, some quotas have run out. Housing business credit stock business also depends on interest rates, low interest rates will not necessarily be sequel.

Even with the amount of the bank, the audit of the real estate prices are also very strict. At present, Shanghai supervision has issued a document requiring further regulation of M & A loans or soon to be opened across the country.

...Do not you see, the formerly unstoppable land kings immediately vanished without a trace. The land market turned cold, ferocious. Is the most prosperous Beijing, also began to land the phenomenon of empty auctions.
That's referencing land sales in Beijing. Although total land sales were up in January, there were several failed auctions.

Chinanews: 北京土地遇“寒冬” 五天内三宗宅地流拍
According to the data of Zhongyuan Real Estate, there are two cases of failed auctions in Beijing in 2017, one in 2015, four in 2014, one in 2013, 6 in 2012.

According to Beijing Municipal Planning Commission Commission data show that last year's failed auctions occurred in November and December, that is, the Beijing land market has seen three consecutive months of failed auctions.
SCMP covered the first failure in November: Beijing first failed land sale in two years shows developers’ woes
The failed sale of the 3.6 hectares (36,000 square metres) mix-use site that includes a residential parcel in the Pinggu district in the outskirts of Beijing marks a stark contrast to the successful sale of a similar but bigger site in the district that sold in August at the highest price level allowed by the government.

It is the first failed residential land sale since September 2015 after the central and local governments rolled out a slew of measures across Chinese cities to dampen land and property prices, which have hurt developers’ expansion and sales income.

“Failed land auction, especially for residential land, is very rare in Beijing,” said Zhang Dawei, a senior analyst with Centaline Property.

“Distant location is one factor, but another important reason is after a year of land acquisition race, most developers have run out of the firepower.”
For those who haven't been following along, China's 2016 liquidity injection flowed straight into land. Many developers bought land at high prices. A developer earns the title of "Land King" when they pay the highest recorded price for land in a city, when "land kings" were coming one after the other in 2016 it signaled a credit-fueled bubble in land acquisition. In some cases, the land cost exceeded the price of homes in the area. Add in construction costs and a profit margin, and developers require substantially higher home prices (such as a luxury development) to break even.

May 2016: Chinese Developers Bet Life of Land Purchases, Govt Ready For Crackdown - it took more than year for the crackdown to happen.
June 2016: 3 Days 12 Land Kings; Home Prices Will Explode
July 2016: Land Kings Everywhere in First Half of 2016
End of July 2016: Banks Cut Funding to Land Kings - shadow banking picked up the slack until the end of 2017. Now the funding is really gone.

It wasn't only private developers getting in on the act. SOEs and Financial Companies Push Private Developers Out With Insane Land Grab

June 2016: Ministry of Finance Owned Cinda Real Estate Becomes Land King
August: Cinda Spends 35 B Yuan for 6 Land King Buys
By late August Cinda needed cash: Land King Fallout Begins, MOF Owned Cinda Swings to Loss

There were many warnings of trouble in late 2016 as analysts considered the prices paid for land and the home prices required to justify them. Home prices didn't rise enough in 2017 and now credit to developers is "like 1997". Prices will take some time to decline, but the first-tier is already cooling. In Beijing, 我爱我家(515j.com) recorded the 8th straight month of falling existing home prices in February. Prices fell 2 percent from December 2018. Transactions were down 18.1 percent year-on-year.

Caijing: 北京二手房价格连跌8个月 1月份环比跌2%

2018-02-12

Supply Side Push Signals Real Estate Market Already Turning

Bloomberg: The Big Risk in China Isn't Stocks
Third, there's the more immediate threat to real estate prices of a supply-side push by Beijing.

The government is starting to shift from tamping down demand to promoting new housing. Among measures the government is promoting, according to BNP Paribas SA economist Chen Xingdong, is encouraging homes where the government and buyers share property rights, and even allowing state-owned firms to sell apartments to their employees.

The government is also encouraging the growth of a rental market. While much of the current stock of rental housing is of poor quality, that's likely to change.
According to at least one person involved in real estate financing, it's already "like 1997" thanks to deleveraging efforts. Barring an extreme policy response, credit is the horse pulling the cart.

The Chinese government's housing supply strategy can help us understand where we are in the cycle. Socionomics posits that governments act too late. Legislation such as Sarbanes-Oxley and Dodd-Frank comes well after the crisis has passed. New rules address the prior market excess and aren't needed once the excess is wiped out by depression, recession and financial crises. By the time the next cycle is peaking, legislators remove old regulations. there's bipartisan support for easing Dodd-Frank rules in the USA, a sign the economic/stock market cycle is peaking there.

China acts more quickly because it has an authoritarian system, but even though there's no risk of being tossed out by voters, officials don't snuff out a bull market in its infancy. Rule changes such as buying restrictions cause temporary blips in credit-driven moves in home prices. Regulations tighten all the way up and branch out into other sectors, such as banking, as regulators chase the source of rising prices: credit growth. When the government announces a policy that looks like the bull slayer, the cyclical peak has already passed. The supply side housing effort is China throwing the kitchen sink at a problem that's already on its way to resolving through a slowdown in credit growth. The buying restrictions that some cities said would last for 5 years could be gone later this year or next if history is any guide.

China Presses CTRL-P in January; Headline Data Understates Growth

Last month I posted Did China Revise Data or Did Growth Collapse? FAI, PFAI Contracts 2.3pc in December because calculations based off NBS data showed a divergence from the headline reported number.

The same thing has happened with money supply in January.

Reuters: China Jan new loans surge to record 2.9 trln yuan, blow past forecasts
Jan M2 money supply up 8.6 pct y/y, vs f‘cast 8.4 pct
Nope.

Here's money supply from 2017:
The PBoC says January M2 was 172.08 trillion. That's up 9.2 percent from January 2017. The 3-month growth rate in M2 is 17.1 percent.

Great Leader Xi and God Emperor Trump

The Internet propagandists defeat the state propagandists again.

China Media Project: Views & Analysis
DECLARATIONS FOR XI JINPING

Qianxinan Daily refers to Xi Jinping as “Great Leader” in a caption in November 2017.

God Emperor Trump

2018-02-11

Real Estate Financing "Like 1997," Mortgage Lending Could Fall 1 Trillion Yuan

Real estate developers are ground zero for the government's "deleveraging" efforts (for the moment it is mostly a shift from off to on balance sheet lending) because they benefited from shadow banking and trust financing.
iFeng: 2018年房贷或减万亿 房企面临资金严冬
Since 2018, as regulators strictly controlling credit and trust funds from banks into the real estate market, housing prices and financing more and more difficult, and even banks have suspended the real estate industry acceptance of additional credit, or suspend real estate development loan business.

"In past years the previous regulation, even if banks have tightened, but other sources are smooth, housing prices may still find a lot of money to stay afloat in the community, but this time the regulators continue to file out, a lot of broken posterior housing prices, housing enterprises are forced to go abroad for financing. "Shanghai, a broker told the China Times reporter, "this time deleveraging efforts are like traveling back to 1997."

...Trust loans will become an area of ​​focus in 2018

Chongqing, a trust company told reporters that the current housing prices before the top fifty average cost of financing through trust in the 9% -10%, about 50-100 strong at 12%. "Trust is now an average of one month to raise less than 300 million, will go passed nearly 20 billion project, there will be 20 billion waiting to cross, mainly money market." According to the reporter, there are large housing prices make internal requirements, to maximize their smooth cash flow, financial record sales in many cities require the full amount to buy a house, to return the funds as soon as possible. But most of the housing enterprises can not do counter-cyclical to take, even if the regulation has been going on for over a year, but housing prices get enthusiastic.

Centaline Property Research Center statistics show that the year 2017, the 50 most active land buyers bought 2.3927 trillion yuan of land, up 75% from 2016.

...The above-mentioned Trust said that housing prices in the capital chain is very tight, although good sales last year, but also get to many huge development costs would have been real estate business is highly leveraged, once the bank size is limited, audit bonds is limited, it the main funding sources will be a problem.

"Two years ago, mostly in real estate debt issuance costs around 6%, from the second half of last year, simply unable to pay, only abs, and this point will have good cash flows of the asset finance." A large brokerage sources said.
Banks are also reporting slower mortgage lending. Both a cyclical shift in the market and government crackdowns on disguised property lending are playing a role.
2018 Mortgage Lending Could Fall 1 trillion Yuan

In addition to other sources of funding, capital chain housing prices affect the most important thing Days sales outstanding, but the bank also continued to tighten on the loan.

Everbright Bank, a credit manager, told reporters this year compared with last year's amount of the mortgage is quite different. "I do not know the specific figures, but we had a good start to the year, 90% was non-mortgage loans, such as business loans, consumer loans, commercial property mortgages, car loans and other personal loans."

This year, the central repeatedly and strictly control the release of funds from the real estate industry of the incoming signal. January 13, China Banking Regulatory Commission issued "on the further deepening of banking regulation market chaos", the focus of regulation include the issue of non-compliance down payment of individual housing loans; to act as sources of financing or lending channel, etc., directly or indirectly, for all types institutions issuing loans down payment and other acts to facilitate; comprehensive consumer loans, personal business loans, credit cards, overdrafts and other funds for the purchase and so on.

January 25 - - 26, 2018, the national banking supervision and management work conference held in the Chinese Banking Regulatory Commission also raised this year will continue the prevention and control financial risk, will reduce corporate debt ratio, and strictly control high debt corporate finance at the same time, control excessive growth of leverage residents continue to curb real estate bubble.
Bank of Communications thinks mortgage lending could drop between 800 and 1,000 billion yuan, with the effects likely felt later in the year as end of 2017 approved mortgages haven't dispersed funds yet.
Lian Ping, chief economist at Bank of Communications, said that the current growth rate of real estate sales and personal home purchase loans have dropped from a high point. With reference to past experience, it is expected that both will reach the bottom by 2018. Simply assume that the bottom of this round of real estate cycle value and the previous round is about estimated 2018 new personal housing loans of about 3.3 trillion yuan, representing a decrease of 800 billion -10000 billion yuan in 2017. However, since a lot of personal mortgages in 2017 may have been approved but not lent, it is expected that personal mortgages will still be available on a certain scale in the first quarter of 2018 and will not be immediately reduced.

Cooling: Buyers Take Penalty on Shandong Ocean View Property

During the real estate boom people were eager to buy seaside properties. Developers in Haiyang, Shangdong (between Qingdao and Yantai) cashed in ahead of the Asian Beach Games in 2012. But as the real estate market cools and investors realize what they own, many are taking a penalty rather than purchase homes. The developer offered a deal where the home would be leased to a property manager with guaranteed returns, but the manager went bust in 2015. The buildings are dark at night, the beach is empty, there are few private cars on the road. Many buyers reneged on their purchase agreements and paid the penalty of 50,000 to 200,000 yuan instead.

iFeng: 山东海阳海景房退潮:大量业主宁愿交违约金也不收房
Buy a sea view room, but I want to eat regret medicine

On the beach, no one there.

Under the blue sky, the golden sands of the sea wrapped in a winding, long hold white shiny buildings. Blue sea, sparkling.

Zhang Yun Heart. Of He of Shanghai Resident, Gradually dislike Noisy, Noise and AIR Pollution. By The End of, 2013, of He bought A Sea View Room ON The Publicity Plan, His Paradise. Subscription, Shou Fang, Stay, in a Nearly Three years in The Past . of He Discovered Soon all jobs. Indeed in that there IS at The "Outside world", But not "Taoyuan."

After the winter, the color of the sea like the blue-black ink is lighter, floating offshore areas tracts like black slug duckweed plant is Enteromorpha. They are to the sea shore, the coastal beach, rock, exposed at low tide the sea bed is also painted dark gray dark brown.

On the beach, no one there.

After Tian, ​​Zhang Yun sometimes in the balcony or the window, looking out at the lights, which light is to distinguish people living in the house lights. One, two, no more. Even the outline of buildings from Tibet into absolute darkness.

...Today, Zhang Yun Zen of "Xanadu" has become a kind of self-cultivation is about to endure tactic of Dharma. Shou Fang after a year, beginning in May 2017, he was resident in Ocean View.

Opened the door, shoes and blankets are fine shoe hairy gray colonies, use the scrub brush. Long fluffy white layer on the wall, saying it was "back to base", to be re-painted. Zhang Yun months to engage in these crafts, but also to put impermanence is doomed without water, electricity, natural gas off.

Passion for the sea view room is cooling. Zhang Yun said the district where he has a large number of owners would prefer not to pay liquidated damages Shou Fang, now his floor with only two other people. Even in the summer, many of them are also tenants, Bedroom receive monthly 500 yuan, "In recent years house prices rose to 6880 from 4500, a little stronger than bank deposits, also could not find at home."

According to China's ruling documents 18 case online (Total 2015 10, 2016 2, 2017 15), the sea view rooms where residential property owners refused to pay the balance due, be sued to terminate the contract, payment of liquidated damages in 50000 to 20 million.

Since October 2017, Zhang Yun began to study law and collect evidence, many owners like to prepare the same district as by court misery.

Fed Nixes Internbank Lending Records

I saw some references to a drop in interbank lending and tried to find the source data. This looks like a statistical error because the category has been eliminated. IF there was such a drop in lending, there would be some evidence of it elsewhere.
Federal Reserve: January 12, 2018: Changes to Items Reported on the H.8 Release as of January 3, 2018
1. Previous line item 26, Fed funds and reverse RPs with nonbanks, and previous line item 32, Fed funds and reverse RPs with banks, have been combined as new line item 30, Total federal funds sold and reverse RPs. Note that line item 1, Bank credit, and line item 9, Loans and leases in bank credit, no longer include Fed funds and reverse RPs with nonbanks and the category Interbank loans (former line item 31) has been eliminated.

Real Estate Sales Still Declining in First, Second, Third Tier

On the basis of stabilizing fever prices in major cities in 2017, the property market continued to show a slightly steady downward trend in January 2018, with the volume of first-tier and second-tier cities declining.

According to a report released by China Index Research Institute, in January 2018, the transaction volume of new houses in the 28 major cities monitored decreased by 18.09% MoM, of which, the volume of transactions in more than 80% of cities dropped on a month-on-month basis. Among the 28 cities, the volume of first-tier, second-tier and third-tier cities showed a downward trend in varying degrees and the effect of regulatory policies continued to show.

Turnover area of ​​first-tier cities dropped 27.92% MoM, of which, Beijing and Guangzhou dropped significantly, both over 30%. Turnover of second-tier cities represented a decrease of 18.97% compared with that of the previous year. Among them, transaction volume in Changsha, Nanning, Chengdu and Jinan dropped significantly. Transaction volume of the third-tier cities dropped 6.25% from the previous month, of which transactions in Dongguan, Huizhou and Shaoguan declined more.
iFeng: 调控政策效果持续显现 一二线城市楼市继续下降

2018-02-10

Exporters Shutting Down Early Amid Nightmare Yuan Rally

The dollar is starting to cause real pain in the Chinese economy.
"Exchange rate changes from day to day, did not dare offer a quote, did not dare take a single order, many workers are quitting, might as well close early for the holiday." Peng Bo said.

iFeng: 人民币创30月新高外贸企业人去楼空 接单不接单都是死
One new yuan high after another, for enterprises that have not yet settled in USD foreign exchange, and those preparing to ship goods overseas, it's like a nightmare. "After Spting Festival, again discuss risk sharing with customers. If things continue of this way, both taking orders and not taking orders are dead ends." Peng Bo said.

Early holiday

Tongxiang, Zhejiang Province, famous for woolen products, intensive factories, many have closed doors.

"What to do, you know how much money I lose from every single order?" Peng Bo asked. When the exchange rate was 6.8 take orders, at settlement it is 6.5, settlement loss of tens of thousands of yuan, such scenes continue to occur in 2017, a large number of dollars lying in the account, afraid to settle, only watched the exchange rate From 6.5 all the way to 6.2.

Intense competition in the foreign trade market, many foreign trade enterprises profit is 3 to 5 percents, high value-added businesses can not help but shrink the profits, not to mention where Peng Bo's textile industry.

Take an order, risk a loss; not taking orders is a dead end, in the context of the strong growth of foreign trade, small and medium foreign trade enterprises have plunged into an unprecedented confusion.
It's not only small firms running into trouble. Electronics manufacturer Guangdong Goworld (000823) is a 4.5 billion yuan market cap company.
On the evening of February 1, Guangdong Goworld released the voluntary information disclosure announcement on the Company's exchange loss in January 2018: Since the beginning of 2018, due to the continued decline of the U.S. dollar and the relative appreciation of the Renminbi, it is expected that in January 2018, the Company and its subsidiaries ss a result of RMB appreciation, the exchange loss is about RMB45 million.
For those keeping score, Guangdong Goworld suffered a loss equivalent to 1 percent of its market capitalization in January alone, solely due to changes in the exchange rate. That's about 20 percent of its profits in 2017, based on a current P/E of 23.

Two-third of exporters will reduce business/expect a slowdown should the yuan rally 3 percent back to its old high:
Looking back on January, the RMB exchange rate has risen by nearly 3.5%, which is more than half of the 6.72% increase for the full year last year and the largest one-month gain since the exchange rate was merged in 1994. A survey of Chinese exporters shows that over 60% of exporters believe that a 2% or more appreciation of the renminbi against the U.S. dollar will have a negative impact on its exports. 8% of respondents also point out that a stronger renminbi will seriously affect their exports business. More than one-third of surveyed companies said their exports will start to decrease if the renminbi appreciates by 2% or more, while 32% of respondents said a 3% appreciation would cause a decline in exports.
Exporters are hoping and praying for a reversal, but they may be exacerbating the uptrend in the yuan because many delayed exchanging USD for CNY. With Spring Festival approaching, many have liquidity needs:
According to Li Liuyang, chief foreign exchange analyst at China Merchants Bank, there is still a chance of the exchange rate rising because of the demand for foreign exchange settlement. During the current round of RMB appreciation, shorts are not effectively cleared and the renminbi still has a strong probability of rising. In the past 4 months, due to the rapid appreciation of the renminbi, the export enterprises caught off guard and brought the phenomenon of "reluctant dollar sales." Exporters want to wait for better settlement points, but close the year, companies generally need funds, which exacerbated the recent market panic.

..."If companies do not hedge, they will suffer miserably, not because of the magnitude of the appreciation, but because the appreciation is too fast," the trader said. It is understood that after the rise of 6.30, the customer's settlement stop loss significantly increased, the rhythm of settlement also significantly accelerated.
China is also getting squeezed as mid- and low-cost manufacture leaves China, but developed nations move to keep more high-end manufacturing in their countries (or factors such as automation and cheap energy in the U.S. make domestic production more attractive):
"Earlier, we relied on the low factor cost to seize the opportunities of global industrial transfer and depend on the internal and external forces to hold the position of China's trading nation, but the 19th Congress also proposed to build a trading power. The internal environment for the development of China's foreign trade, Conditions have undergone profound changes. Developed countries have returned to the industry and returned to manufacturing. We are now in a slowdown in undertaking the global industrial transfer. At the same time, the outward transfer of our middle and low end is accelerating again. Therefore, Called double extrusion .If you continue to use the past, it is obviously unsustainable. "Deputy Secretary for Foreign Trade, Department of Commerce, said Lu Suixun.

According to Guan Tao, a senior fellow at the 40th China Financial Forum, after the RMB is added to the SDR, the process of marketization of the RMB exchange rate is accelerating. The exchange rate of RMB to clean and float is the trend of the times. Domestic enterprises should seize the time and gradually cultivate and improve their adaptability to exchange rate fluctuations Ability, establish a correct awareness of financial risks, focus on the main industry, manage the risk of currency exposure.

However, foreign trade enterprises, the first need to survive this exchange rate pressure. In the short term RMB settlement can not be widely populated in the context of how to use the hedge, has become a common problem for many businesses.
Finally, expect central bank intervention if the yuan approaches its 2014 high of USDCNY 6.05:
Peking University Guanghua School of Management professor color indicates the current exchange rate of RMB against a basket of currencies did not show unilateral remain volatile, although rapid appreciation against the US dollar, but the euro and the British pound and other currencies has depreciated relative terms as a whole is still on It is stable. However, the RMB against the US dollar has broken through 6.3, taking into account the import and export and other factors, on this basis, if the RMB against the US unilateral reassert appreciation, breaking height of 8.11 before the reform, the central bank will conduct certain high probability intervention. Specific interventions might include measures to cancel the pre-stringent regulatory capital flows, as well as counter-regulatory factor in the central parity pricing mechanism Shangni cycle, and may also include the restart process of RMB internationalization.
The yuan is tracking the euro since its "surprise" devaluation in August 2015 and CNYUSD rose less than EURUSD over the past year.

At USDCNY 6.9 China is worried about capital outflows and an "uncontrolled" depreciation in the renminbi. When USDCNY hits 6.3, small and medium exporters are "plunged into an unprecedented confusion." From the midpoint of this range, USDCNY 6.6, the yuan can only fluctuate about 5 percent. Expand the bottom of the range to USDCNY 6.0 and it's still a total range of only 7.5 percent in either direction, outside of which warrants central bank intervention. In other words, normal currency market volatility is a problem for China. And if its a problem for China, it's a problem for everyone.

Related: Cash, Dollar Crunch Returns: Bankers Begging Friends for Deposits on WeChat.

Mainland Investors Bearish

A few comments:

1. 56% as of midday Saturday (63,528 respondants at this moment) think there will be no bounce next week.

2. 78% did not buy the dip

3. 83% are down for the year

4. 66% think the bottom is below 3000 on the Shanghai Composite

5. A plurality of investors think margin calls drove the decline, followed by high valuations and the U.S. market drop

6. 65% think A-shares will crash again (no timing given)

7. 41% think small caps will bounce first

iFeng: 调查:A股跟随美股暴跌 股灾重现?底在哪里?

iFeng also reports Fed officials see no need to intervene yet: 面对暴跌这些关注度最高的官员发话:别指望我们救市

2018-02-08

Chinese PPI Topped in September

The National Congress marks a turning point for China in many ways, including a number of economic data points. Another dip in the PPI along with the action in the financial markets the past week could cement the September reading as the peak in PPI for this cycle.

NBS: 2018年1月份工业生产者出厂价格同比上涨4.3%

CPI dipped as well, but Spring Festival plays a role. It is more than two weeks later this year, pushing the holiday spending into February. The yoy comparison will be against a 0.2 percent decline in February; the headline should come in over 2 percent.
NBS: 2018年1月份居民消费价格同比上涨1.5%

Chinese Reserves Tick Up as Dollar Weakens in January

China Breakout Reverses

Timing Is Everything

ZH: Kolanovic: "The Current Crisis Is Playing Out Exactly The Same As The Aug 2015 Crisis"
From the aspect of systematic flow and electronic liquidity, the current crisis has played exactly the same as the Aug 2015 crisis. It started with the de-risking of trend followers, short volatility positions, and strategies sensitive to bond-equity correlation. Similar to Aug 24th, by far the largest and quickest punch came from hedging flows for the trillion dollar+ S&P 500 index put option complex (gamma hedging) on Monday, and was compounded this time with liquidations in the VIX complex. As this was unfolding, electronic liquidity, in the once most liquid product, S&P 500 e-mini futures, evaporated.

As measured by market depth in futures, liquidity on 2/6 dropped by ~90% (compared to the first few weeks of the year). Once volatility was out of the bottle (~5% move on Monday), various forms of volatility targeting strategies (with AUM in excess of $300bn) were set in motion and added outflows that will keep investors on edge for several days.
He sees one difference:
"while for equities this looks like a 2015 type of crisis, other asset classes disagree. This is because there is a big macro/fundamental difference between now and the Aug 2015 market crisis. In 2015, we dealt with an EM crisis (e.g. China), crisis of credit spreads, collapse in commodity prices, and weak global growth. There were legitimate fears of a global recession. Now, the situation is exactly the opposite: global growth is very strong, US corporate earnings are at record highs (and continue to be revised higher), commodities have stabilized, and the USD is weak."
The 2015 event wasn't the start of something, it was the middle of something. The difference this time is the timing of a liquidity squeeze within a larger downturn. Commodities will fall, credit spreads will widen, global growth will weaken, there will be fears of recession and an EM crisis (China).

Social Mood Affects Congress Too

CBS: House Intel Republicans plan to wall off their aides from Democratic staffers
Rooney said one reason for the tension is an erosion of trust, exacerbated by an ongoing ethics investigation into the "entire Republican staff," including "the woman up front that answers the phone" for alleged leaks. He later added that the matter was being handled by the Office of Congressional Ethics.

Bipartisanship, he said, "is gone. It's gone from that committee."

...While other House committees commonly have some divide between their majority and minority staff, for a committee whose history, broadly, and whose burden, arguably, is to be functionally bipartisan, the plan for the wall – in all its unfortunate symbolism – is a troubling sign of things to come.
This is with stocks recently hitting all-time highs. What happens when social mood really deteriorates?

Will Fed Balance Sheet Reduction Be QE in Reverse?

HNA Can't Roll Over 1 Billion Yuan in Ultra Short-Term Borrowing

HNA subsidiary Tianjin Airlines planned a short-term borrowing of 1 billion yuan to pay maturing debt in three weeks. The offering has been canceled.
JRJ.com: 海航旗下天津航空兑付10亿超短融 借新还旧套路或中止
According to media reports, the Hainan Airlines Group Holdings Tianjin Aviation payment of a total size of 1 billion within three weeks of the ultra- short-term financing bills . Tianjin Airlines had previously planned to issue new ultra-short-term financing bonds to pay off old debt above, but the "market volatility" and canceled.
This follows the delayed payment on a P2P lending product:
It reported net loan House, Hainan Airlines Co., loan project finance in Phoenix "Phoenix overflow surplus -HHSY" failed to timely payment. Phoenix Finance said that since the beginning of 2016 for the Phoenix series overflow surplus -HHSY financing projects provide information intermediary services, the total balance of 514 million yuan. Among them, 6 February 2018, should repay the total amount of 298 million yuan, the borrower has repaid 60 million yuan, follow-up payment still in process.
HNA will have multiple products coming due all year long. Another 1.7 billion is coming due on Spring Festival, February 16. More here: Chinese Biggest Credit Risk Is Blowing Up, Fireworks Set for Spring Festival

2018-02-07

Chinese Biggest Credit Risk Is Blowing Up, Fireworks Set for Spring Festival

HNA Group was best know for its main business, Hainan Airlines, until it went on a credit-fueled buying spree. Tapping the nation's insatiable appetite for wealth management products, it walked in the same footsteps as Anbang, Evergrande and others who effectively got first in line to drink the firehouse of liquidity being blasted into the Chinese economy. Shadow banking, the weakening real estate sector in 2014, the low profit margins of Chinese business, the popularity of trust products and the Chinese government's decision to flood the economy with liquidity in 2016 combined into a perfect storm, a tsunami of credit hunting for high returns and willing borrowers offering to take on the risk and put that capital to work. They used the cash for a global spending spree that eventually worried the Chinese government as U.S. dollar outflows accelerated and extreme leverage presented a systemic risk to the financial system. With the government cracking down first on trust borrowing, foreign acquisitions and now a full press on shadow banking, HNA Group ran out of willing lenders. It has pledged most of its credit-backed purchases to keep funding alive.

As with this week's blow-up in the short volatility trade, investors have been patiently waiting for this debt bomb to go off. This week HNA failed to repay on a peer-to-peer lending product issue on an online platform (JRJ.com: 重磅!海航未按时兑付连累凤凰金融项目逾期), signaling the music may have finally stopped...at least until the government steps in and bails out investors, because if there's one thing China learned from the United States is: don't pull a Lehman.

ZH: China's Largest Conglomerate Is On The Verge Of Bankruptcy
On December 8, we lamented how every few days we return to the subject of systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda. We also noted how our chief source of concern had become HNA, after it issued a bond with less than one year to maturity with the extortionately high coupon of 9%, not longer after S&P downgraded HNA’s credit rating from B+ to B, five levels below investment grade. The reason for our continuing focus on HNA is its $28bn of short-term debt which matures before the end of next June, much of it accumulated during a $40 billion binge of acquisition-driven growth which saw it become a major shareholder in Deutsche Bank, Hilton Worldwide and others.

We have repeatedly discussed how despite being one of China’s largest conglomerates, HNA has been shut out of stock and bond markets as lenders worry about its outsized debt load, forcing the company to pledge some of its core holdings as collateral for short-term loans, as the Wall Street Journal reported last month. And yet, even as the company resorted to loaning out shares and entering into arcane derivative financing agreements to finance its debt-service payments, it quickly found out that traditional avenues of financing are disappearing or becoming too costly.

...Which brings us to the bottom line: HNA has about 65 billion yuan in debt coming due during the first quarter, and it is facing a 15 billion yuan shortfall to cover just this quarter's obligations.

In other words, if HNA fails - and the government does not bail it out - the Chinese dominos will start falling. HNA’s overall debt totals about 1 trillion yuan, with China Development Bank being the group’s biggest creditor, according to the people. That’s 56% higher than the 637.5 billion yuan in short- and long-term debt the company disclosed as having as of November.
The delayed repayment mentioned above is only one slice of a much larger set of products sold between April 2016 and January 2017:
According to net loan home to incomplete statistics, the cumulative number of project called Phoenix overflow surplus -HHSY of 1563, project release time from April 12, 2016 began, until February 11, 2017, the amount of each item of 100 million yuan, the cumulative amount of 15.63 billion yuan, an annual yield of 7.3% for each project are for a period of about 12 months. After which the sale of the product in January 2017 (ie, due to start in January this year) of the project is 777, the cumulative amount of 777 million yuan.
Only a week ago I wrote in Cash, Dollar Crunch Returns: Bankers Begging Friends for Deposits on WeChat:
If history rhymes, there's going to be some significant negative news out of China in March.
HNA could be it.

Huxiu: 17亿信托即将到期,投资人等着海航大年初一兑现
Sustainable debt cancellation issue people more worried about the debt burden of Hainan Airlines. Data show that in the first half of 2017, HNA Group's interest payments reached a record 15.6 billion yuan, an increase of more than doubled. Its short-term debt amounted to 185.2 billion yuan, exceeding its cash reserves.

Hainan Airlines in response to negative news debt in December 2017 that the Group's gearing ratio to achieve even seven drop, from 82% seven years ago, fell to 59.5%. Shortly after, Hainan Airlines announced its overall debt is currently about 250 billion yuan. But Standard & Poor's data show that as of the end of June 2017, HNA Group's long-term debt reached 382.8 billion yuan, net debt amounted to 6.5 times interest, taxes, depreciation and amortization profit.

In addition, according to the information disclosure of listed companies legal material shows that as of last year, Hainan Airlines Group's 13 domestic and Hong Kong-listed total liabilities of more than 580 billion yuan.
Another product worth 1.7 billion yuan is set to mature on Spring Festival, February 16, 2018. These products will keep maturing in waves until November 2018.

HNA isn't the only firm that loaded up with debt. Dalian Wanda is selling assets.

Caixin: Dalian Wanda Sells $1.24 Billion Stake in Film Unit
Dalian Wanda Group will sell a 7.8 billion yuan ($1.24 billion) stake in its Shenzhen-listed film unit to e-commerce giant Alibaba Group Holding and state-backed Cultural Investment Holdings Ltd., as the property-to-entertainment conglomerate shifts to an asset-light strategy.

The transaction involves 150 million shares—or a 12.77% stake—of Wanda Film Holding Co., according to a late Monday filing by the company. Hangzhou Zhenxi Investment Management Co., a subsidiary of Alibaba, will acquire a 7.66% stake for 4.68 billion yuan, while CIH is taking 5.11% at 3.12 billion, according to the statement.

...The stake sales came as Wanda Group steps up efforts to offload assets after its billionaire chairman, Wang Jianlin, vowed to transform the company into an “asset-light” business and reduce the company’s debt overhang that followed years of massive spending.

Wanda was one of China’s most aggressive overseas dealmakers, spending around $20 billion on foreign assets over the past five years. It bought film producer Legendary, theater chains AMC Entertainment Holdings, Odeon & UCI Cinemas, and a U.K. luxury yacht maker.

But the company, along with several other dealmakers, including HNA Group and Fosun International Ltd., came under closer scrutiny last summer as regulators tightened their grip on companies’ spending over concerns about capital flight and buildup of corporate debt.

Bloomberg: HNA-Like Debt Pileups Raise Risk of Forced Asset Sales in China
Indebted conglomerate HNA Group Co., which has already announced sales of an Australian office building and a stake in a U.S. shipping company, is said to be trying to sell about 100 billion yuan ($16 billion) in assets by the middle of the year.

Meanwhile, Dalian Wanda Group Co. has agreed to sell two Australian real-estate projects and is said to be seeking buyers for properties in Chicago and Beverly Hills. And China’s government is said to be seeking to orchestrate the sale of a stake in Anbang Insurance Group, a conglomerate that agreed to pay $1.95 billion for the Waldorf Astoria hotel in 2014.

...That is putting would-be sellers at a big disadvantage. The more cases there are of high-profile Chinese companies unloading assets, the more difficult it becomes for others that need to sell too, according to Rajiv Biswas, chief economist for Asia-Pacific with IHS Markit in Singapore.

“Normally with these transactions you need time,” said Biswas. “If you suddenly have to do it because the government told you to, everyone will jump on it and push down your price.”

...“We expect SOEs to deleverage over the next two to three years,” said Lee. “Everybody has to do it.”
The yuan will ultimately pick up the tab.