2018-08-31

Potential Dollar Target Rises as China Refuses New Plaza Accord

Thanks to ZeroHedge for picking this up: Dollar Poised To Soar As China Refuses New Plaza Accord

China Properties Group (1838.HK) doesn't like the current macro environment.
Leaving aside the bit about trade war, the first part explains the conspiracy theory of history and shows that 10 years into a failed monetary expansion, there are still people who think the United States Federal Reserve printed money.

The Federal Reserve monetized debt. It took existing debt and swapped it for Federal Reserve notes. The effect was not a resumption of credit growth to pre-crisis levels because banks create new money when they create new credit. Even with massive federal deficits in the wake of the 2008 crisis, deflation in the financial and household sector overwhelmed credit growth. As the federal government eased its credit growth, the economy barely picked up the slack. Credit growth remains at levels associated with recessions prior to 2008.
The Federal Reserve did achieve a transformation of debt into equity. Instead of making new loans, money flowed into stocks. The wealthy effect caused by rising stock prices is a fraction of the wealth generated by productive credit creation. How much money flowed into stocks? Until the 2016 presidential election, the U.S. stock market moved in lock-step with the Federal Reserve's balance sheet, so much so that the chart below only has one axis. The percentage changes in the Fed balance sheet and S&P 500 Index are too close to be a coincidence.
How did market participants behave in response to Fed policies? First they expected hyperinflation. Commodities ran up into the first inflation hysteria of 2011. Then it all fell apart. Inflation was forecast again in 2014. Then it all fell apart. Inflation was forecast again in 2017/8 and we don't have the full results yet, but the gold market is telling me it's all falling apart again.

Aside from betting on inflation, hot money poured into emerging markets. Money flowed into China. The Chinese growth story fell apart in 2011, 2014 and again in 2018. Resource exporter Brazil saw its currency tumble and it may be headed lower still as another EM crisis forms.

Most importantly, emerging markets inflated like crazy and in countries such as China, if the private economy wasn't willing to lend and borrow, the government forced state-owned banks and companies to do it. China's M2 money supply growth matches that of Turkey. The first chart shows GDP + CPI growth in Turkey along with M2. The second shows the same for China. Economic growth makes up substantially more of China's nominal GDP increase and that is reflected in a stronger economy, but the growth of credit relative to nominal GDP is similar in both countries. The relative strength in China is wholly dependent on the quality of that GDP though. If you believe GDP is overstated or of low quality (ghost cities), the strength starts fading.
Nobody in the world wants to pay the price of their errors. The solution everywhere is trying to add more debt to overly indebted nations, economies, corporations and consumers. For various reasons including demographics and absolute debt levels, the U.S. (in aggregate) refused. American banks retreated from eurodollar funding after 2008 and the Europe after 2011. The financial system is moving in a deflationary direction, but "everyone" believes inflation is right around the corner because central bank policies are laying the groundwork for higher inflation. The flaw is there's no catalyst. Base money isn't multiplying into new credit. Each round of QE (and the Chinese stimulus burst in 2016) is better understood as preventing a deflationary collapse.

Europe and the United States could turn "Japanese," but as I wrote back in 2012 and still believe:
I do not expect a Japan scenario for the West, it will be far messier because the culture and political systems are more volatile.
We are already seeing the political breakdown. The U.S. and Europe cannot continue post-2008 economic policies for another decade and not see their political institutions totally transformed. Whether first by political or economic forces, the current path will be broken. Eventually all nations will pay a price for poor decision making over the previous 40+ years. It is not impossible that number will eventually increased 10-fold, to 400+ years as modern belief systems fall apart.

For today, however, it still looks like emerging markets have made the larger error in the short-term. They are heavily "short" dollars and the Federal Reserve isn't interested in helping. Moreover, neither are the emerging markets.

Xinhua: China not to accept another Plaza Accord, says ambassador
Chinese Ambassador to the United States Cui Tiankai said here on Thursday that China would not accept a Plaza Accord imposed on it.

He made the remarks while addressing a working lunch of roundtable discussion that focused on the topic of "Next Steps" at the Center for Strategic and International Studies (CSIS), a Washington-based think tank.

"On what to do next, for China it is very clear," Cui said. "I wish to advise people to give up the illusion that another Plaza Accord could be imposed on China. They should give up the illusion that China will ever give in to intimidation, coercion or groundless accusation."
It is true the Plaza Accord artificially inflated the yen, but it is important not to lose sight of the fact that Japan had poor economic policies.

EJ Insight:Did the Plaza Accord ‘conspiracy’ doom Japan, and is China next?
The question is, however, was the Plaza Accord really something imposed upon Japan against its will by the US, like many people think?

Historical facts suggest otherwise.

In fact, back in the mid-’80s, Tokyo was as eager for the Plaza Accord to be signed as was Washington, because at that time the US Congress, dismayed at the country’s widening trade deficit with Japan, was already working on a bill that, once passed, would impose punitive tariffs on Japanese exports to the US.

Fearful that it might lose the irreplacable American market, the Japanese government was therefore more than willing to allow the yen to appreciate in return for the withdrawal of that bill.

Also, Japan was hoping to adjust its economic structure, stimulate the domestic economy and reduce its overreliance on exports.

Whether the appreciation of the yen is a direct cause of Japan’s subsequent recession remains a subject of dispute.

That’s because, while the rising yen led to a real estate bubble in Japan, the rising Deutsche mark didn’t lead to an economic bubble or a recession in Germany.
The context of the Plaza Accord was a soaring U.S. dollar.
Bringing Socionomic theory into it, I expected a big run in the U.S. dollar in part because I do not believe there will be international cooperation. The U.S. and China will not agree to a new Plaza Accord and the euro might be losing members. Political intervention won't stop the rise of the U.S. dollar. Central bank intervention won't work either because if the Fed is cutting rates, it means the global economy is weakening and bond prices are probably rising (if they're falling its an even worse scenario for everyone). The U.S. dollar will rise as more "short dollar" positions blow up.

2018-08-30

Emerging Market Bonds Sink to Fresh Lows

VanEck Emerging Market Local Currency Bond (EMLC) hit a new 52-week low today. Below are five currencies that combine for nearly 35 percent of the portfolio. Two have broken down (lira, peso). The other three (real, rand and rupiah) are all on the verge of breaking down.

2018-08-29

PBoC's Counter-Cyclical X-Factor Returns

The PBoC reintroduced its counter-cyclical X-factor this week.

Reuters: Yuan hits four-week high as China signals support, revives X-factor for fixing
The announcement was seen as the latest signal from the People’s Bank of China (PBOC) that is not comfortable with further depreciation in the yuan which could spark capital outflows from the cooling economy.

The move late on Friday came a day after the latest Sino-U.S. talks aimed at resolving the trade dispute ended with little progress, with tougher U.S. measures expected to kick in next month that could add more pressure on the Chinese currency.

...“Should China’s economy decelerate more than expected, the pressure on RMB weakness may come back again. Otherwise, we expect the USD/CNY to stay below 7 comfortably,” he said.

The PBOC said it was adjusting how the yuan’s official midpoint was calculated to keep the currency more stable amid dollar strength and trade tensions, but gave no details as to how the new “X” factor is derived.
What is the X-factor? Over the past couple of weeks of U.S. dollar weakness, the X-factor could be nothing more than a bluff. China can say whatever they want as long as markets are relatively stable and reserves hold steady. It might also involve shifting the weight of the dollar in the basket.
The last time the PBoC introduced its counter-cyclical factor was in the midst of a 10 percent rally in EURCNY.

Bloomberg: China Considers Changing Yuan Fixing Formula to Curb Swings
The PBOC’s move “validates our views that yuan devaluation is not a weapon of the trade war,” Mizuho Bank analysts said in a note.

“It also resonates with our ‘7-3’ stability threshold hypothesis, which refers to not breaching 7 for dollar-yuan and FX reserves not falling below $3 trillion.”
A 3 percent move in the yuan would send USDCNY past 7.00. This is a very tight window for stability. If China has to choose between USDCNY 7.00 and $3 trillion in reserves, it will choose $3 trillion in reserves because reserves are a stabilizer. If USDCNY slides to 7.5 amid a 10 percent U.S. dollar rally and the country still has $3 trillion in reserves, a run on the yuan is less likely than if China spends a couple hundred billion defending 7.00.

Negative Social Mood in Europe: Scallop Wars Resume

A foretaste of what could become regular occurrences if social mood sinks and international conflict, rather than civil, becomes an outlet for anger.
CBS: Drama on high seas as France-U.K. "Scallop Wars" escalate
Stone-throwing, insults and dangerous manoeuvres on the high seas: French and British fishermen clashed in the English Channel over a hoard of scallops Tuesday, the latest flare-up in a years-long war over the prized shellfish. The British were heavily outnumbered at five boats to around 35 French vessels, according to maritime official Ingrid Parot, and were eventually chased from the scallop-rich waters of the Baie de Seine area of Normandy.

The skirmish took place more than 12 nautical miles out to sea where the British are legally allowed to fish all year round.

But their French counterparts, restricted to fishing for scallops between October 1 and May 15, have accused the British of depleting stocks and want them to face the same rules.

"The French went to contact the British to stop them working and they clashed with each other. Apparently there was stone-throwing, but no injuries," said Normandy fishing chief Dimitri Rogoff.

Rogoff said "around 40" French boats had gathered overnight in protest at British "pillaging" of the scallop supply.
FT: What caused the ‘scallop war’ in the English Channel?
According to Agence France-Presse, the French fishermen were protesting against what they see as British overfishing of the prized Normandy scallops known as “coquille Saint-Jacques”.

The large molluscs are considered such a delicacy in France that local media outlets often report the first day they will be on sale. The scallops are sold in France with a red label that verifies them as being “the real Saint Jacques” from the waters off the coast of Normandy, Scotland or Ireland.

But French and British fisherman are bound by different rules when it comes to harvesting in the Channel.

French fisherman are only permitted to harvest the molluscs between October 1 and May 15, beyond a 12-nautical-mile exclusion zone off the coast, in accordance with environmental rules designed to maximise breeding.

British fishermen do not operate under the same restrictions, but generally agree not to raid the scallop stocks when the French are restricted from doing so.
There was another skirmish in 2012.

2018-08-28

German Establishment Losing East Germany

Germany's nationalist turn is accelerating. Back in early 2016, anti-Islam protests increased after thousands of women in Cologne were sexually assaulted at New Year's festivities and police covered it up. Counter-demonstrators swarmed the anti-Islamic protesters and police used water cannons to disperse the protesters.

The Independent: Cologne attacks: What happened after 1,000 women were sexually assaulted?
Against the cries of, "Nazis out, refugees welcome", Robinson uses a megaphone to say: "Islam is the cancer, Pegida is the cure."

He adds: "Angela Merkel is handing out the birthright of Germans like she is handing out sweets to children."

Eventually, captured on film, anti-Islam protesters are dispersed by police using high-powered water hoses.
Fast forward two years. There are still counter-demonstrators, but they are greatly outnumbered (perhaps mainly because this is East Germany where nationalist support is far higher).

DW: Violence in Chemnitz as leftist and far-right protesters clash
The eastern German city of Chemnitz was gripped by a febrile atmosphere on Monday night as several thousand people took to the streets to demand foreigners leave Germany. At the same time, roughly 1,000 opposing demonstrators collected in a small park opposite far-right protesters to call on "the Nazis" to get out of the city.

...The evening began calmly enough, as a heavy police presence kept the two sides apart and the groups confined themselves to jeering at each other beneath the gaze of Chemnitz's colossal Karl Marx monument. But by around 9 p.m., when the demonstrations began to move, six people were injured by fireworks and rocks thrown by members of both camps who were wearing the customary black hooded tops, gloves, face coverings and dark glasses.

The protests eventually subsided and "everything was quiet during the night" the police said on Tuesday morning.
The protests were sparked by the murder of a German man:
The 35-year-old, named only as Daniel H., died in hospital on Sunday after having been stabbed multiple times during a fight late on Saturday night. Two other men, also reported to be of immigrant backgrounds, were also injured in the attack. Two younger people, a 22-year-old Iraqi and a 23-year-old Syrian, remain in custody over the killing.
The police and media are losing control on social media because their history of lies (outright or by omission) has destroyed their credibility, creating fertile ground for rumors. They're also taking flack from the left who want a more authoritarian crackdown:
Police in the state of Saxony, where Chemnitz lies, spent much of Monday struggling to re-assert their authority following an awkward few weeks. After detaining a TV news crew in Dresden at the behest of a PEGIDA supporter who turned out to be a police employee, they faced serious criticism for their failure to control spontaneous outbreaks of violence on Sunday afternoon, which led to the Chemnitz festival being cut short.

Apart from preparing for two potentially violent demonstrations, the police also spent the day quashing rumors on social media, including that one of the other two attack victims had died of his injuries, and that the fight had been triggered by a sexual harassment incident.

Earlier in the day, there was some criticism that the media had chosen the word "demo" to describe Sunday's far-right marches. These were, organizations such as the Turkish Community Germany (TGD) said, pogroms. The police did report two cases of physical assault during the marches on Sunday night, while videos posted on social media showed neo-Nazis attacking people they considered to be of foreign origin in the street.
Another accounts describes the police losing control of the situation.

DW: Opinion: A predictable fiasco in Chemnitz
Nightfall marked the end of reporting for many journalists in Chemnitz in the eastern state of Saxony on Monday. The situation was too chaotic, too dangerous. Groups of potentially violent far-right radicals lurked throughout the city, and the situation kept on escalating. One reporter sustained a broken nose, another man performed the Hitler salute [an illegal gesture in Germany — editor's note] live on television and then sought to impede the journalists. Hundreds of neo-nazis, hooligans and violent residents were seeking an outlet for their aggression.

The police was out of its depth, lacking the necessary manpower. It was a black day for fans of an open society.
The future will see many black decades for fans of the "open society." They have created the conditions for extreme violence across the world.
The police knew about this mobilization and about the structures enabling it. Nevertheless, they did not arrange for more officers to provide security and order on the streets. Politicians and policing services simply aren't taking the threat seriously enough.

Why not?

Because the majority of politicians and civil servants are not the primary object of the right-wingers' rage. What's lacking is empathy with the victims.
Put another way: some of the state apparatus are not going to stick their necks out for their superiors' decisions. The establishment is losing control.
One dangerous misconception ought be cleared up now: The hatred shown by people on the streets is not directed against refugee policies or Angela Merkel.

It's against German democracy as a whole.

For this seething mob reject pretty much every key point of the German constitution: human dignity, citizens' equality, the ban on discrimination on the basis of religion, sex or country of origin.

For years now, this new right has gone after people with different political views, or different color skin, and in recent years, they've focused increasingly on Muslims. They freely associate themselves with Adolf Hitler, performing Nazi salutes, celebrating the German Wehrmacht's World War II crimes, and fighting their opponents wherever possible. They want to return terror to the streets.

But there's a larger danger.

In recent years, extremist marches are merging ever more, as is the case now in Chemnitz, with protests by those who are disappointed or feel left behind by globalization. This latter group does not support fascism. But they have dangerous tie-ins with racist and anti-democratic schools of thought.

This is alarming because German history teaches us that an organized mob can go a long way, if it manages to unite the broader society in frustration and anger.

German politicians should consider themselves warned.
The establishment are the extremists. They are implementing policies that make ordinary Germans willing to march alongside neo-Nazis. The establishment is in trouble because they think they are in a fight over German democracy as a whole, when they are in a fight over Germany as a whole. The people increasingly believe their choice is Germany or not-Germany.

Breitbart: German President Declares There are ‘No Native Germans, We are a Nation of Immigrants’
German President Frank-Walter Steinmeier has declared Germany “is a nation of immigrants and will remain so”, asserting: “There are no half or whole Germans, no biological or ‘new’ Germans”.

Speaking at Berlin’s Bellevue Palace, where a small group of people with Turkish heritage had been invited to share their views on immigration, integration, and xenophobia in Europe, the German president strongly denounced “exclusion of and discrimination against people with foreign roots”.

“A permanent suspicion of immigrants, no matter how long they have lived in Germany, is not only harmful for the individuals involved but it is a cause of shame for our country,” said President Steinmeier — who serves as a largely symbolic head of state, while Chancellor Angela Merkel is head of government.
Great conflict is coming because nationhood is defined as a people, not only abstract lines on a map. Empires and kingdoms have been multicultural in the past and can be in the future, but they are rife with identity politics if they are democratic. Democratic movements and movements for self-determination have typically fallen along ethnic and religious lines. Germany was founded as a nation-state, the state of the German people. Now the establishment wants to change the definition, but they do not have the complete agreement of the German people. Hence the threat to democracy is actually coming from the establishment. Either they will decide to end democracy because it will risk their multicultural project or they will whip up such opposition in the process that the people will choose whatever leader is the best positioned (in their eyes) to defend the German people.

In Germany, the potential for conflict may be heightened because there is a clear geographic split. East Germans are more similar in their politics to Eastern Europeans. Those nations were under Soviet occupation for decades. They view their independence and self-determination as precious. They are still working on removing the last vestiges of communist influence in countries such as Hungary and Poland, and are not interested in new projects that undermine self-rule. East Germany will become a stronghold for nationalists in the coming years.

China and the West Locked Into Demographic and Dysgenic Decline

China's fertility rates will decline unless it implements a three-child policy or fertility targeting because all of its economic and social policies are fertility killers.

Back in 2016 I laid out some of the important factors in China's 2-Child Policy Can't Stop Fertility Collapse

First, China's replacement fertility rate is 2.2 children per woman, not 2.1, because of the sex-ratio imbalance (a result of the one-child policy and sex selective abortions).

Second, fertility rates in Taiwan, Hong Kong and Singapore indicate Chinese fertility is likely to fall or remain low even with zero restrictions.

Third, the small bump in fertility seen in recent years was likely coming from the more fecund families. The table below shows fertility rate broken down by child. The first row is first child; then second child; third and up; total fertility at the bottom.
More second and third children were being born over time, but more women were choosing to go childless.

Fourth, as demographer showed in the linked post up top, a population requires many families with 3 or more children to offset those with one or none.
Assume the desired number of children has following distribution: 6,3,2,2,1,1,0, and all the family can fulfill their desire, then the seven families will bear 15 children, the fertility rate of 2.14, barely approaching replacement level. Of these 15 children, two families have nine children, two-thirds of the total; two children families only four; and only child only two less than the total number of 1 / 7. This also means that only when three or more children families are very common, will society be just at replacement level fertility.

This also shows that a comprehensive two-child policy is not enough. Under this policy, the number of births, respectively, in the same families will become 2,2,2,2,1,1,0, namely a total of seven families bear 10 children, the fertility rate was only 1.43. That is when people feel two children is very common for families with children, the fertility rate has been far below the replacement level.

Fifth, urbanization lowers fertility. Expensive family formation (high real estate prices) suppresses fertility. China's development model is a fertility crusher.

Sixth, social pressure and social structure lower fertility because the "three-person family" becomes a unit. A trivial, but important example: a KFC meal deal is designed for two parents and one child. Far more important: an apartment large enough for a three-child family that wants to maintain its living standards, will fall into the luxury category in many cities.

Seventh, modernity. Feminism, extended education, materialism, secularism and other social, cultural, religious (or lack thereof) forces influence fertility in a negative direction.

ZH: China May Scrap Two-Child Policy, Ending 40 Years Of Limits
Speculation about a change grew this month after a government-issued postage stamp for the Year of the Pig in 2019 showed a porcine family complete with three piglets.
The slide in population growth means China's consumer population has hit a brick wall and is already starting to decline.
Back in 2010 the entry-level workforce was already heading into decline. Now seven years later, the last vestiges of a Millennial baby-bump are hitting and the entry-level workforce will again decline. The age 25 to 35 cohort would naturally boost births in the coming decade if fertility remains steady. A policy to boost fertility should create an even larger than expected jump in births, but there's no signs of one yet.
And if you really want to dig into the demographic decline in China (and across the West and Japan for that matter), the outlook is far worse than the numbers reflect.

Unz: Dysgenics and Low Creativity: Why China Can’t Save Civilization
It’s possible to derive some comfort from contemplating the Chinese. Sure, unless something radical is done, Western civilization is going to collapse due to the most intelligent women having the fewest children and massive IQ (and highly fertile) immigration from the Third World [See At Our Wits’ End: Why We’re Becoming Less Intelligent and What It Means for the Future, By Edward Dutton and Michael Woodley of Menie] but surely civilization will be preserved by the Chinese. Unfortunately, research is showing that this is just wishful thinking.

Thus the leading IQ researcher Professor Richard Lynn actually proclaimed in his book Dysgenics that China’s one child policy—introduced in 1979 and abolished in 2015—was the saviour of civilization. The strongly cultural desire in China for a boy and the abortion of female fetuses, meant that by the late-1990s, young males massively out-numbered females in China, showed Lynn. The females would naturally be attracted to the wealthiest and most educated males, as these males would be able to provide the optimum lifestyle for them and, anyway, females tend to sexually select for status because doing so, under evolutionary conditions, ensured the survival of their offspring [Women marry up, By Edward Dutton, In T. Shackleford, & V. Shackleford-Weeks,Encyclopaedia of Evolutionary Psychological Science, Springer, 2018]. The inevitable result, argued Lynn: less intelligent Chinese men would fail to breed, as intelligence robustly predicts wealth and status and is about 80% genetic. In addition, the ability to pay the fines for breaking the One-Child law would allow the wealthy, and thus more intelligent, to have more than one child. As such, concluded Lynn China must have “eugenic fertility” and it is to China that the “torch of civilization” will pass.

Unfortunately, this is not what research by a young Chinese psychologist has found. In a study published in 2016 in the leading journal Intelligence, Mingrui Wang presented some shocking—and counter-intuitive—findings. Even despite the one child policy, there is dysgenic fertility in China. [Evidence of Dysgenic Fertility in China, by Mingrui Wang et al, Intelligence, July-August 2016]

The Chinese researcher and his team explored the relationship between intelligence, education-level and fertility, using a large sample from the China Family Panel dataset, which is highly representative of the Chinese population. They found that among the cohort born between 1951 and 1970, the correlation between general intelligence and fertility was -0.1, very similar to that found in Western countries.

Between 1986 and the year 2000, the Chinese lost 0.31 IQ points per decade and between 1971 and the year 2000, the Chinese lost 0.75 IQ points.

The researchers also discovered that education level is negatively associated with fertility in China. And the negative correlation between fertility and both IQ and education level is stronger among females than males.

In other words, though the Chinese have an average IQ of 105 according to Richard Lynn, and despite their introduction of the One-Child policy, they are suffering precisely the same process as the West. The most intelligent females are not selecting for the most intelligent Chinese males or, indeed, any males. As in the West, they are dedicating themselves to their education and then their careers, meaning they are simply failing to pass on their genes at all.
This is the IQ shredder effect. Women and men are boosting GDP here and now, but future GDP could decline if automation doesn't pick up rapidly. Whether it picks up or not, the future will look much more like a hereditary aristocracy, a very religious one in the West be it Islamic or Christian.

2018-08-27

China's Uber Murderer Had Loans From 51 Lenders, Borrowed Heavily From P2P

China's Uber, Didi Chuxing, has suspended service after a driver raped and murdered a young woman. The story is hitting many hot button topics in China these days including P2P lending. Investigators have learned the driver had borrowed from at least 51 lending institutions.

SCMP: Didi stops hitching service in China after second murder – and admits it was warned about accused driver
Didi Chuxing, China’s largest taxi hailing service provider, has said it will suspend its hitching service on Monday, after the second murder of a woman passenger in three months – and admitted it failed to investigate an earlier complaint from another woman about the driver accused of the killing.

..Its reaction came a day after police in Yueqing, in China’s eastern Zhejiang province, said they had found the body of a 20-year-old woman surnamed Zhao and arrested a Didi driver who had allegedly confessed to her rape and murder on Friday.

According to the police’s official microblog, Zhao had entered a Didi carpool vehicle at 1pm on Friday, and sent a message asking a friend for help at around 2pm before losing contact.
Many netizens were left wondering how the driver passed basic screening tests such as a credit check. One site reported he had borrowed from 51 lenders and was overdue on many loans.

iFeng: 滴滴杀人疑犯信用调查:曾向51家机构借款 多笔逾期已失信
According to the latest news from the police, the girl in the murder case of the Yueqing drip rider was forced to transfer more than 9,000 yuan to the driver Zhongmou WeChat before being killed.

Tim Seng Finance (micro-signal: tsfinance) found in the investigation that Zhong had previously borrowed from 51 institutions and had too many overdue. When Didi is reviewing its eligibility, whether to use its personal credit as an indicator of investigation is a question left to us to think about.

...The investigation found that Zhong, the driver of the Yueqing Drip and Windmill driver murder case, had borrowed from 51 institutions; he also applied for loans from four platforms within one week before the accident. Specifically, 51 lending institutions include car rental, consumer staging platforms, consumer finance companies, credit cards, microfinance companies, and P2P online lending. From traditional financial institutions to emerging online lending institutions, it can be said that Zhong has borrowed from almost every type of institution that can lend.

...The main borrowing institution of Zhong is P2P online lending institutions and consumer finance companies. The survey of Tiansheng Finance (micro-signal: tsfinance) found that the general borrowing rate of the P2P online lending industry is as high as 30% per year. There are also low interest rates, but the requirements for borrowers are very high. Generally, they are not required to use real estate mortgages, or they require borrowers to work in government and public institutions . These conditions are not available to Zhong.

...It is worth mentioning that there have been many overdue loans in the history of Zhong, and there were overdue records on November 13, 2017 and January 13, 2018. In the third-party inquiry system, Zhong’s personal credit evaluation results are displayed as “recommended rejection”.

...This is not the first time that Zhong has driven for Didi. According to his relatives, two or three years ago Zhong spent tens of thousands of yuan to buy the current car to drive for Didi, and has driven in the town and other places. After the Spring Festival this year, he went to Wenzhou with his parents. .

Is it true that people like Zhongmou, who are often untrustworthy, are suitable to serve as the Didi driver for the public? Can they be responsible for the safety of passengers? Do you use your personal credit as an indicator when reviewing their qualifications? Leave us thinking about the problem.

Trade Fight Impacting U.S. Brands

Here in March: Prepare for Smashed Up KFCs and McDonald's
If I was running a visible American brand in China, I'd be thinking about lowering my profile right now. China could unleash nationalist riots in response to a trade spat.

SCMP: McDonald’s, Starbucks could take a hit in China as trade war fuels anti-US sentiment
“There is a huge risk in general for American brands, but especially for iconic ones like Starbucks,” said Shaun Rein, managing director at China Market Research Group. “With increased competition, combined with nationalism, and the trade war as a back drop, it is very possible Chinese consumers will boycott McDonald's and Starbucks and instead go to Chinese brands.”

DW News: 贸易战下为何中国人没有抵制美国品牌 韩媒揭原因
Yonhap News Agency reported on August 27 that for this phenomenon, marketing experts said that in April, China’s social media launched a campaign of “not buying American products”, but did not receive consumer response. With the intensification of Sino-US trade wars, the Chinese government may target guns at American brands. Chinese consumers are not too dissatisfied with the American brand, nor have they carried out a boycott. On the contrary, due to the Sino-US trade war, the growth rate of corporate profits in China has slowed down for three consecutive months. Concerns about the Chinese economy are constantly expanding.
Trade spat is the more accurate term than trade war today. Economic growth is slowing, but relatively healthy. If one or both of those factors change, then there will be a visible boycott in sales, if not a literally visible boycott with protests outside of restaurant and stores.

2018-08-18

America Will Be Lucky To Escape 2020s and 2030s In Peace

Turchin: The Ginkgo Model of Societal Crisis
What I found remarkable as we have lived through the past two years (indeed, the past eight years since I made my prediction of the impending crisis), is how precisely we today are following the trajectory into crisis that my colleagues and I saw in the historical societies we have studied. The explanation, probably, is that the three major mechanisms driving up social pressure for crisis in the SDT work in a mutually reinforcing way. The fundamental drive (a kind of a “pump” that drives up social pressure) is the oversupply of labor, which developed after the 1970s as a result of multiple interacting factors, and more recently was made acute by technological change driving automation and robotization. Oversupply of labor is the root cause for both popular immiseration and elite over-production/intra-elite competition. Both of those factors, then, contribute to the fiscal crisis of the state, because immiserated population can’t pay taxes, while the elites work to reduce the taxes on themselves.

We saw all those mechanisms operating in our current crisis. Immiseration of large swaths of the American population was what fueled the successful campaign of a counter-elite presidential candidate, Donald Trump. Intra-elite conflict has reached unprecedented heights (since the First American Civil War), as the established elites are using various means at their disposal to get rid of the counter-elite chief of state. At the same time, a weird coalition of Trump and the established elites (remember, laws must be approved by the Congress) legislates deep cuts into the taxes the elites will pay, bringing the fiscal crisis of the state much sooner. Political violence has also reached new heights, although thankfully mostly demonstrators and counter-demonstrators are beaten up, not killed (a major exception was Charlottesville a year ago).

Until last year I thought that we collectively have a decent chance of avoiding the crisis, but I now have abandoned this hope. A major reason for my pessimism is the resolute refusal by our ruling class (including its both Liberal and Conservative wings) to see the real causes of the crisis. They are internal, not external. As a result, the mid-term elections will be completely free of (largely mythical) Russian influence, but no attempt is made to address the deep structural-demographic causes. All these pressures continue to increase.

However, unlike in the Ginkgo leaf analogy, the fan of probabilities of emerging from a crisis is heavily lopsided—and unfortunately in favor of really negative outcomes. Over the years I have studied about thirty cases of historical societies going into crisis, and emerging from it, ranging from Rome and China to France, Russia, and the United States. I scored the crisis severity in each by such parameters as the effect on the population (none, mild decline, catastrophic decrease), on the established elites (from mild downward social mobility to dispossession or even extermination), and on the state (territorial fragmentation, external conquest). Adding together these indicators, here’s the result:
Click through to see the impending risks.

Central Planning 101: Blood-Sucking Realtors! The Rent Is Too Damn High!

iFeng: 房租暴涨正在惩罚不买房的人?资本抬租抢房? 监管部门出手了
What does the average monthly rent of nearly 5,000 yuan mean? You should know that in the first-tier cities, the starting salary of college graduates last year was an average of 5,000 yuan. According to the "2018 China University Graduates Salary Rankings" data, even the top graduates of such top universities as Tsinghua University and Peking University have an average monthly salary of 9,000. According to this calculation, renting a house in Beijing alone will cost a large part of their salary.
The article has a table showing average salaries from 20 universities. Even graduates from 2013 must pay 40 percent of their salary for rent.
There are bizarre stories of rents rising like home prices during the housing bubble:
Recently, in the Shuimu community, a landlord posted that the 120-square-meter three-bedroom home of Tiantongyuan should be rented. The psychological price is expected to be 7,500 yuan/month. After asking about the two housing rental companies, they will compete for each other. Give the price of 10,800 yuan / month, pay 11 months.
Surprisingly, because of a post on the forum, long-rental apartment operators are considered to be the driving force behind the increase in rents and encounter a major public opinion crisis. Not only did it alarm Beijing's various administrative departments, the People's Daily also commented that it should strictly control the bad mediation of bad intermediaries, but long-term apartment operators also feel wronged.
The landlord who posted the post said that the agency of a company said at the time that no matter how much the other company produced, it would add 300 yuan. According to the China Times, Mr. Chen, the landlord who posted the post, said that he rented a house when he was young. He felt that young people were not easy, so he wanted to expose this matter.

In the reply to this post, many netizens shared the same experience.

The netizen named the answer, replying on August 3rd:

Around my home, the normal 7500 to 7800 a month, the intermediary is now 9500 × 11 months of large-scale collection.

The netizen named Leonardo replied on August 2nd:

I discovered this routine 2 years ago. Last year, the neighbor's two-bedroom rental market price was 5k-5.5k. I might be willing to go out for 5k when I started talking about it. The result was that the agent directly rented 8k for 3 years. He was forced to rent it to him. A week later, I saw his house in the circle of friends in the intermediary. The living room was partitioned and rented as 3 dwells. The whole rent was 9.5k.

Posts on the forum have quickly become network hotspots after being reported by the media. Long-term rental apartment operators have also been labeled as “malicious competition, raising the rent” and “sucking the blood of young people”.
Rental companies are hitting back. They say the above story and others like it are nonsense:
The People’s Daily published a comment on Weibo on the evening of August 17th:

Rents are up and down, and if it fits the market logic, it is not necessary. However, unscrupulous intermediaries make waves and maliciously promoted, not only disturbing the rental order, increasing the cost of living for tenants, but also affecting the livability of the city and harming the image of the city. Strictly prevent "specialized rents", and once the relevant behaviors are verified, they will be severely punished and jointly punished. Supervised by law, and also lease the market to be healthy.

However, long-term rental apartment operators are also aggrieved.

According to the 21st Century Business Herald, the eggshell said, "The incident mentioned in this post, we have conducted internal investigations and found that there is no such owner and property, it is false information, which is a typical rumor and disruption of market behavior. We have not We have a price war with our friends, and there is no vicious competition. At present, we are conducting investigation and evidence collection and notarization, and we will resolutely resort to legal means to protect our legitimate rights and interests."
The government concurred:
Freely, an official response was issued on August 17th, saying that the incident was a false rumor, there was no evidence, and the rent of the region was never higher than the market price.
Realtors are driving up rents, however, by upgrading properties:
However, from the perspective of the industry, long-rent rental housing is indeed an important factor in the rise in rents.

Zhang Dawei, chief analyst of Zhongyuan Real Estate, said: "Many leasing companies, especially long-term rental apartment operators, hoard low-end and low-end properties at low prices, and upgrade them. After the renovation, they rent the houses at high prices and earn rent. The difference brought by the rise."

On August 17, I loved my vice president Hu Jinghui to tell the media in the conference call that when the capital entered the long-term rental apartment, it actually pushed the rent up. Hu Jinghui directly named the free, long-rent apartment operators such as eggshells to close the market at a price 20% to 40% higher, which led to a direct increase in the cost of selling houses, which seriously violated the market rules.
Developed cities such as Beijing are also hitting a natural supply limit, in addition to the government crackdown on real estate:
Zhang Dawei believes that capital has flooded into the long-term rental apartment market, but the rental market is not much new supply. The long-rent apartment occupancy behavior has magnified the tension between supply and demand, which is equivalent to adding a barrier to earn the rent difference.
Obviously, using only "capital robbing houses" does not fully explain the current situation of rising rents.

Compared with the impact of long-term rental apartments on the rental market, experts said that the shortage of supply is an important reason for the increase in rents.

According to data released by the Shell Research Institute, Beijing has 8 million renters. The current number of leased houses is about 3.5 million, facing a rental gap of more than 4 million. Supply shortages are still the main contradiction in the current Beijing housing rental market. In fact, not only Beijing, but also major supply problems in China's major first-tier cities.
One other factor that isn't mentioned at all: recent government policies to promote renting. As is the case with every government policy shift, speculators and smart money front run the move.

The two cities with the highest increase in rental prices are Beijing and Shenzhen. Only two months ago, there was news that China was promoting lending for long-term rentals. One of the first moving cities was Shenzhen.

The Final Stage: China Copies U.S. Housing Bubble Policies
Liu Feng, a 28-year-old product manager, was one of the first to take out a rental loan from CCB for his 90 square meter (970 square feet) three-room apartment in Shenzhen.

He said his monthly payments under the plan - including interest - came to about 6,000 yuan, less than if he paid for it himself, meaning the bank was effectively subsidizing his rent.

“The property developer leased the apartment to CCB, and CCB leased it to me,” said Liu.
There's no mention of the government's rental promotion scheme, but credit-backed rental agreements goes a long way to explaining how prices could suddenly rise as they did during housing bubbles when overall consumer prices and wages are stable.

To recap, the government is cracking down on new home construction and home sales. Real estate companies are shifting into rentals. The government has a pilot program of giving "mortgages" to renters. Rental companies are renovating housing and increasing rents. There's a great imbalance between rental units and rental population in some cities. Rents are soaring.

Looks like the market is functioning perfectly, producing the output (prices) that one would expect given these conditions.

2018-08-17

Trump Looking for Pre-Election Deal or Knockout Punch

Given how events have played out to this point, I'm starting to lean away from expecting a pre-election deal and towards escalation with China. Putting odds on that is difficult because negotiating before the election makes sense either way. If Trump wants some type of pre-election deal to boost his poll numbers and stock prices, he has to do it soon. He doesn't have to give up everything on trade, maybe it's only a small deal, a "first step," but it has to happen soon because voters start early voting by late September and early October. It's also the best time to hit China hard because they likely believe he wants a pre-election deal. They might think they can take advantage of the U.S. election cycle. It is the perfect time to show how much cost he's willing to bear for the deal he wants.

The Guardian: China to send delegation for US talks to avert trade war
A Chinese trade delegation will visit the US this month to kick off a new round of talks, the first since negotiations broke down two months ago.

China’s ministry of commerce said the US had invited a delegation, led by vice-commerce minister Wang Shouwen, to meet a group led by US Treasury undersecretary, David Malpass.

Updated: Chinese Scholar Lights Up Social Media With Maternity Fund Idea

Update: An article with more detail on the policy proposal is posted at the bottom.

A Chinese scholar has come up with a fertility enhancing policy. Force everyone to have a savings account for children, but it can only be unlocked if you have a second child.

iFeng: 央视严批倡设生育基金“砖家”:少打群众的歪主意!
Original title: "Establishing a maternity fund system" is a ridiculous suggestion
What is ridiculous is family leave. Who pays for it? The company pays for it because the government simply mandates time off for workers. Do companies pay the full cost? No. They adjust their hiring practices to reduce the risk of paying family leave: hire fewer women of child bearing age. Family leave policies penalize the people they're trying to help.

Family leave is a perfect example of voters (in democratic countries) wanting something for free. Neo-Socialism is built around the idea of mandating actions, but not paying for it. Obamacare is an example of Neo-Socialism, albeit an extremely ineffective one that was instead designed to loot middle class Americans. Force everyone to buy insurance. The cost falls on the individual, not government. Family leave is another one. Force companies to bear the cost of the policy. Forcing everyone to have a savings account to finance family leave puts skin in the game.
Recently, some media published a signed article on "Improving Fertility: A New Task for China's Population Development in the New Era." Among them, the "establishment of a maternity fund system" triggered a strong rebound in public opinion, and social media was slamming.

First look at the expert's specific recommendations: the establishment of a maternity fund system, try to achieve the self-operation of the two-child birth subsidy. It is stipulated that citizens under the age of 40, regardless of gender, must pay a maternity fund at a certain percentage of their salary each year and enter their personal accounts.

The expert further pointed out that when a child has a second child or more, he or she can apply for a maternity fund and receive a maternity allowance to compensate women and their families for short-term income losses caused by the interruption of labor during the reproductive period. If the citizen has not given birth to two children, the account funds will be taken out when they are retired. The maternity fund adopts the pay-as-you-go system, that is, the maternity fund that has been paid by the individual but has not been taken out, and can be used for the government to pay the maternity subsidy to other families, and the insufficient part is subsidized by the state.
It would be more effective to confiscate the accounts after age 40 and use the funds to pay for the maternity leave. [Update: see below, this is in the proposal.] The state could see how behavior changes and could set the tax much lower assuming most people still only have one child. That's how China should carry it if it wants to maximize fertility because nudging works. Neo-socialism is often effective at changing behavior (even if it creates more problems down the road). Leaving the money in the account makes sense because people with fewer or no children need it for retirement, but as long as the state is providing pensions, confiscating it and making it a pure tax will lead to higher fertility.
These so-called suggestions give people a feeling of "suddenly separated from the world". If it is not in black and white, it can't be believed, even though we have seen many experts in these years.

First of all, fertility is the basic right of human beings. It is the freedom of individuals and families to live or not. We can encourage fertility through propaganda, or we can formulate incentives to guide fertility, but we cannot punish those who are not born or have fewer families in the name of “establishing a maternity fund”. This kind of suggestion is unfounded, unreasonable, and inconsistent. It is contrary to common sense and exposes the lack of professionalism of researchers.
Anyone who uses a system such as Social Security and doesn't have children is effectively taxing families. A person with children must pay for their own children, plus retired people. Social Security is a ponzi scheme based on rising population. If you do not have children, you are "stealing" from the fund. That's not hyperbole. There's no savings in the fund. Your retirement is paid by younger workers. If you don't add new workers to the pool, you're "stealing" from the fund.

This is how things work in socialist systems. Personal responsibility and incentives get lost in the complexity and the rearranging of social relationship. If there's no social security, then people understand the incentive to have children for old age. If they don't want or can't have children, they know to save all that money they would have spent on children for retirement, to pay someone else's children to take care of them. Social security creates free riders who do not have children and do not pay into the system.
Secondly, if you don’t want to beat the masses, don’t move. In recent years, with the rapid economic growth, the people's living standards have improved significantly, but at the same time we have to see that the burden on housing, education, medical care, etc. is still very heavy, and the level of Chinese household debt has remained high for a long time. According to a report just released by the Institute, as of 2017, the ratio of household debt to disposable income in China is as high as 107.2%, which has exceeded the current level of the United States.

The reason why China's current fertility rate is not high, in addition to economic and social development, women's labor participation and other objective reasons, the sharp rise in the cost of raising children is an important reason, this is the consensus of the community. Some young people want to have children, but they are really under pressure. The cure for the right medicine is to solve the reality and worries of people's births through a series of effective preferential fertility policies and public investment in real money, rather than the opposite. In fact, the wool from the people, it seems to be a national worry, but it is a high-level black. This is also the key to why such a proposal will be unanimously criticized by public opinion.
People always want free stuff.
Moreover, China's economy is in a critical period of transformation. Faced with the uncertainty of foreign trade and the diminishing marginal effect of investment, the role of domestic demand in economic development has become more apparent. We must do everything possible to reduce the taxation, reduce fees, improve social security and other policy measures, enhance the momentum of domestic demand, and promote the transformation and upgrading of consumption, rather than the so-called "fertility fund" to increase the burden on the masses. Therefore, whether it is from the improvement of people's lives or from the long-term consideration of healthy economic development, we should try our best to let the masses' wallets bulge, instead of squatting.
The critics are right about the tight finances of Chinese consumers. People don't have spare capacity to be paying into a maternity fund. It's also true that lowering home prices would be a more effective policy. Where family formation is affordable, people have more children. (A big reason why mass migration costs are under estimated is the pressure it puts on real estate prices. Migration policies are annihilating living standards in many Western countries. China's urbanization policy is driving its GDP and also crushing its fertility.) However, China struggles with lowering real estate prices and instead comes up with policies to correct the problems caused by planning, or more fundamentally from having an atheist-materialist value system at the core of the CCP.

The best policy is do nothing. Don't create socialist systems that destroy civilization from the ground up and people will deal with the problems in organic, sustainable ways. A maternity fund only looks like a bad idea because the family leave and social security are very stupid ideas that create massive unintended/unseen costs. Institutionalized stupidity is expensive and socialism is a low intelligence system down to its dysgenic effect on fertility. Stupid people also don't understand how socialism inevitably leads to totalitarian systems or collapse because they don't work. Government increasingly becomes involved with healthcare, education, even fertility, because its own policies creating massive contradictions in the society.

When it comes to fertility, it's not only socialism destroying the society. It's also capitalism. As some have put it, the cities are "IQ shredders" that maximize current GDP, but will eventually collapse future GDP because the people producing high levels of GDP leave few to no heirs. An extreme example of eating your seed corn. Until policymakers understand the fundamental flaws of their systems, unlikely because they are ideologically and even morally opposed, the countries they "manage" are headed for extreme downward adjustments. They have a massive turkey problem that is playing out on multi-generational time scales. The benefits are collected by those living today and the costs will be borne by future generations.

Update: In the post, I said the proposed fertility-boosting policy would work better as a tax. The article I read didn't fully explain how it would work. It turns out, the scholar did propose it as a pay-as-you-go system where the money would be taxed from people with one or fewer children, to pay for maternal leave of people with two (or more?) children. The money would be replaced when they are in retirement, in a roundabout way by the children the policy is designed to help.

提高生育率: 新时代中国人口发展的新任务
Establish a maternity fund system and try to achieve the self-operation of the two-child birth subsidy. It is stipulated that citizens under the age of 40, regardless of gender, must pay a maternity fund at a certain percentage of their salary each year and enter their personal accounts. When the family has a second child or above, they can apply for the withdrawal of the maternity fund and receive a maternity allowance to compensate the short-term income loss caused by the interruption of labor during the growing period of women and their families. If the citizen has not given birth to two children, the account funds will be taken out when they are retired. The maternity fund adopts the pay-as-you-go system, that is, the maternity fund that has been paid by the individual but has not been taken out, and can be used for the government to pay the maternity subsidy to other families, and the insufficient part is subsidized by the state.

2018-08-16

Biggest QT Week Yet, $29.1 B Reduction, Only $12.5 B in Treasuries

The Fed reduced its balance sheet by $29.1 billion this past week. It was the biggest $QT week thus far, but only $12.5 B in Treasuries, less than I anticipated. The S&P 500 lost 39 points.

While the S&P 500 is relatively correlated on a weekly basis, it hasn't tracked the Fed balance sheet over the longer-term, though it looks like a headwind. The Chinese yuan has tracked more closely.

Central Planning Goes Haywire: Beijing Rents Soaring

Cities leading the way in cracking down on home price increases, such as Shenzhen and Beijing, are now experiencing soaring rents. Speculators are blamed for moving into rentals and buying up properties to control the market. Intermediaries are also blamed for helping. The work of the central planner never ends because the harder they work, the worse things get.

The headline of the second article highlights the potential PR disaster if prices aren't stabilized: Rising home prices are an economic problem, rising rents are a societal problem.

iFeng: 上涨15.5%!停不下来的北京房租
Zhongxin Jingwei client August 15 (Luo Huanlin) Before entering the Beijing Film Academy officially, the graduate student Qi Ming needs to find the house first.

In mid-August 2017, at this time last year, he and his friends shared a 60-square-meter two-bedroom house in Jiandemen. The house is the landlord who is contacted by the intermediary, and the monthly rent is 6,500 yuan.

In mid-August of 2018, You Qiming finally succeeded in finding a new residence, which is also a 60-square-meter two-bedroom, this time also 6500 yuan per month. But the difference is that he originally went to Beijing Film Academy and only needed to ride 3 kilometers, which took less than 15 minutes. Now it takes at least 1 hour to get to the school by subway. The small two houses around BFA have generally risen to 7500 per month. Above that, he can't afford it.
Beijing rents top in the country

The excuse of You Qiming is not an example. According to a report compiled by the Shell Research Institute from the Real Data database, Beijing has taken the lead in a number of housing rental data. In the first half of 2018, the absolute value of rent in Beijing reached 76.1 yuan per square meter per month, while the second place in Shenzhen was only 68.8 yuan per square meter per month.

Beijing's rental income ratio reached 29.81%, and the total rent was as high as 137.63 billion yuan. Compared with this, although Hangzhou surpasses Beijing in the per capita annual rent to reach 16,375 yuan, the total rent is only 38.67 billion yuan. The Beijing housing leasing market is huge and the price is high, basically forming other cities in the country. "The situation."
Similarly, Yu Qiming issued a sigh of "prices all the way" and there is data to support it. According to a report compiled by the Shell Research Institute from the Real Data database, the average rent for rents from August 6 to 12, 2018 was sampled, and the average rent for rent in Beijing increased by 15.5% year-on-year. In the rental market Beijing and Shenzhen are leading the way.

And specific to individual communities, there is a greater increase. For example, Tiantongyuan [In Changping, North Beijing], which was dubbed by the netizens as “the largest community in Asia”, rented two houses in the East 2nd district for 4,300 yuan per month in the same period of last year. It has been rising since the end of last year and has risen to 6,000 yuan per month as of July 30. The increase is nearly 40%.
The first table below shows rising rents in Tiantongyuan. The second shows Beijing and Shenzhen leading the country with average rent increases of 15.5 and 16.1 percent.

Zhaopin: China White-collar Average Salary Dips in the First Quarter of 2018
First-quarter of 2018 China white-collar labor market highlights:

The average monthly salary for white-collar workers fell to RMB7,629 in the first quarter of 2018, down 2.1% over the fourth quarter of 2017.

Beijing continued to be the city with the highest pay in the first quarter of 2018, with an average monthly salary of RMB10,197, slightly below RMB10,310 in the fourth quarter 2017.
Back to the iFeng article:
Qian Gang is a “free housekeeper” who rents a room freely. He told the Zhongxin Jingwei client (WeChat public number: jwview): “The media reported that the Beijing rent increase of 10% in July is not new, in fact, Beijing. The rent has already risen for half a year.” He said that since Beijing’s efforts to regulate the housing rental market at the end of 2017, “Beijing’s rent from south to north has suddenly risen.”

Qian Gang observed the housing data of the area he was responsible for. He believed that the rent increase from last year to this year was “very fierce. Many houses were originally priced at 5,000 yuan. It is difficult to find a house below 5,500 yuan.
A couple of white collar workers would have a household income of about 15,500. If they keep housing costs to one-third of salary, they could only afford a 58 to 68 sqm apartment based on Beijing's average rental (going by the two different numbers above). Fertility crushed.

A crackdown, justified or not, may be coming as some blame the rental agencies for driving up rent:
According to industry analysts, the current free-to-market, eggshell and other rental mediation platforms have begun to form a monopoly. Zhang Dawei also analyzed that more than half of the current rental market has been monopolized by various leasing agencies, and the largest leasing institution has controlled hundreds of thousands of suites. It is true that the fundamental contradiction is the tight supply and demand structure in the leasing market. In particular, some suburban housing units have been strictly regulated in the past year and cannot be rented out. In addition, the rental-to-sale ratio is too low, and there is a general expectation of rising rents. Fundamentally, there is nothing wrong with the intermediary.

"Intermediaries can't create panic, but they can amplify panic and use panic to make more money." Zhang Dawei said that from the perspective of capital, intermediaries are now generally engaged in investment business, generally locking in the 3-5 year lease period and earning the difference. In this case, the rising space for future rents is the intermediary's profit. From the perspective of the listing itself, the low-end and mid-range listings were packaged into medium-to-high-end rental listings, which also significantly increased the rent.
iFeng: 北京房租上涨背后的资本逻辑:房价是经济问题 房租是社会问题
Each group has different needs for leasing. High-income groups, although they have the ability to buy a house, need to rent a house nearby because of changing jobs or going to school. The middle-income group is mainly composed of new graduates such as fresh graduates, freelancers, and migrant workers. It is the main demand group in the leasing market, with the largest base and increment. Low-income groups with housing difficulties are in desperate need of the most basic housing security.

These three groups have a common appeal, that is, the lease period is stable and the rent is reasonable.

House prices are an economic issue and rent is a social issue. The rise in housing prices affects economic stability, and the rise in rents is quietly damaging, damaging people's quality of life and willingness to consume, and laying a hidden danger to the competitiveness of a city. Rents are more scary than house prices.

Why is Beijing rent rising? On the surface, the supply is reduced, the simple houses with safety hazards are removed, and the group rent is forbidden; the demand has increased. Every year, new employment groups in Beijing want to rent houses, and a large number of young people with “Beijing Dream” come to the city. . The gap between supply and demand leads to rising rents, which is a concise economic logic.

But this time the rent has risen, there are still differences.

Driven by the policy enthusiasm, the participants of long-term rental apartments have a strong impulse to seize the track and market share. At present, many long-term rental apartments operate as “two-host mode”. Under the pressure of huge housing competition, aggressively expand housing and seize the market. The founder of an apartment once said that the company is about to complete a new round of financing, and that the money will be used for the company's nationwide expansion, even at no cost. Such radical listings will inevitably push up the market rent. The various parties in order to compete brand market share, high probability will select "financing - Get project - refinancing - and then get the project," added leverage development model to scale-oriented. Large-scale financing, aggressively grab the housing, seize market share at all costs, and strive for the pricing power of rent. Capital is eager to move from a money-burning model to a money-making model, and rising rents are an inevitable result.

And this is the capital-driven logic of this Beijing rent increase.

"Once the capital is selected, it will only continue to raise on it in the future. If the latecomer does not have a way to live, he will not be able to get the money." One founder once felt so. “burning money” burned out industry barriers and burned out the pricing power of the industry. Companies with insufficient capital strength could not enter the market or they could only stand by.

Along with the competition for housing and the rise in rents, it is the operational risk of the operating agencies. In the case of hoarding during the aggressive expansion period, the base rent may be too high, and the price of flour and bread may be upside down. Under the pressure of huge housing competition, there may even be some operating agencies, which are not perfect in preparation in the early stage. Long-term leases have houses with property rights. After entering the operation, they will face the change of property rights and the change of leases, and benefit the tenants. Caused great losses. From the perspective of externalities, the operational risks of an organization are also transmitted to competitors, and their operational risks are transmitted to the same institutions. Leasing institutions with poor management and high financing costs are likely to have insufficient cash flow to cover costs and constitute a substantial default. Eventually leave a local feather in the rental market.

Under the guidance of "the house is used for living, not for speculation," it is necessary not only to prevent speculation in the house, but also to avoid speculation in rentals. The regulation of the leasing market requires legal and institutional norms, and it requires more strong supervision. It must be bound by capital, and the policy orientation is people's livelihood. Rather than being in the jungle of capital, capital is king, and markets are sometimes out of order in the field of public goods supply.

Cities Ramp Up Real Estate Regulations Following July Price Rise

Althoguh they weren't at the heart of the problem last month, Shenzhen and Suzhou announced a renewed attack on speculators and vowed to clean up the housing market. Ten and nine government departments, respectively, issued a joint statement in those cities. Last week, the central government said it will hold cities accountable if they fail to control real estate prices.

Caijing: 深圳十部门联合出击整顿楼市 严禁投机炒房等行为
On the afternoon of August 14, Leju got a joint report issued by the Shenzhen Ministry of Land and Resources, the Municipal Supervisory Committee, the Housing Bureau, the Public Security Bureau, and the Taxation Bureau, jointly launched the fight against the violation of the interests of the masses and the violation of laws and regulations to control the real estate market chaos. The Special Action Work Plan has severely cracked down on the chaos in the property market.
Suzhou issued a similar statement and outlined all the illegal activity it will target.

Caijing: 苏州九部门联合发文:开展规范房地产市场秩序专项行动
In addition, according to the summary of Suzhou Housing Construction, there are 31 illegal activities in this special action focused on rectification.

Among them, there are 8 speculative real estate speculations, including bundled sales in the form of marketing channels, starting prices, monopolizing housing, and manipulating housing prices; after entering the sales chain, reluctant to sell or disguised hoarding housing; through newspapers, radio, television, websites, New media and other means to fabricate and disseminate real estate virtual information.

There are 10 illegal and illegal acts of brokerage institutions, including “Yin and Yang Contracts”, and the provision of false materials to defraud the purchase of housing.

There are 7 violations of laws and regulations of real estate development enterprises, including the purchase, approval, reservation, numbering, sale of cards, bank deposit funds, etc., before the acquisition of the pre-sale permit for commercial housing, or the deposit of the deposit, disbursement, In good faith and other acts.

There are 6 advertisements for publishing false real estate advertisements, including the publication of false and homophonic advertising terms, such as: × city pursuit, "up" sound, confusion, consumption and other behaviors.

Sweden Democrats Should Surprise in September Election

Sweden Democrats have been polling between 17 and 25 percent, but this story below makes it sounds like there could be shy SD supporters who will show up at the ballot box.

ZH: "I'm Not A Racist, But I'm A Nationalist": Why Sweden Faces A Historic Election Upset
“Trains and hospitals don’t work, but immigration continues,” Roger Mathson, a retired vegetable oil factory worker in Sweden, told Bloomberg on the same day as the violent, coordinated rampage by masked gangs of youths across five Swedish cities.

...“I’m not a racist, but I’m a nationalist,” Mathson said. “I don’t like seeing the town square full of Niqab-clad ladies and people fighting with each other.”
Trump voters didn't want to tell pollsters they supported Trump because they thought it was socially unacceptable to some degree. It is far worse in Sweden for SD supporters. I suspect the polling underestimates their support, but we'll see.

Additionally, voters who want to send a signal to the establishment have one option: Sweden Democrats. It's the only opposition party because it's the only party that has been rejected as a coalition partner by every other party. Mainly on migration, but if a voter considers migration important enough to vote on, then they are also more likely to vote SD. The only vote that will "make them listen" is one for SD.

Look for SD to surprise on the upside.

Spray and Pray Faster: 1 Trillion Yuan Infrastructure Bonds in August

SCMP: China’s finance ministry goes back to old playbook with move to spur bond sales
The move also indicates a return to Beijing’s old playbook of relying on debt-fuelled state investment to keep economic growth on track at a time when the leadership is worried about dangers beyond its control, though it has refrained from an all-out stimulus strategy, analysts said.

The Ministry of Finance issued the order on Tuesday, after Beijing decided to prioritise maintaining growth over cutting debt due to headwinds from a trade war with Washington and decelerating investment at home.

The cabinet had already said it would allow local governments to issue 1.35 trillion yuan (US$195.12 billion) of “special purpose” bonds for infrastructure investments. But the finance ministry took it a step further, telling local governments to sell at least 80 per cent of those newly approved special purpose bonds before the end of September. Most local government bonds are sold to the country’s financial institutions and a surge in their supply will in turn put pressure on the People’s Bank of China to loosen its monetary policy.

...Local governments have been quick to take advantage of the new opportunity to raise funds.

In Guangdong, the provincial authorities released three bond sale prospectuses on Tuesday, aiming to raise a total of 44 billion yuan for urban development, affordable housing and water treatment projects in the Pearl River Delta region. The bond issues were described as “extremely urgent” by the Guangdong government in the official documents.

Local government bond sales could raise more than 1 trillion yuan this month, official newspaper the China Securities Journal reported.
A couple of days ago it was supposed to take 4 months. Spray and Pray: Work Round the Clock to Issue Local Govt Debt, 1 Trillion in 4 Months

2018-08-15

Rush to Buy New Homes Pushes Prices Up 1.2pc Nationally in July

It looks like Chinese homebuyers rushed to buy in July with new home prices rising 1.2 percent. Larger gains were seen mainly in lower-tier cities.

Reuters: China's new home price growth hits two-year high as small cities boom
Outside the recent boom periods of 2016 and early 2013, monthly price gains of more than 1 percent have been rare in China's official home price data.

China Squeezing Local Govts

Fixed asset investment from state entities tumbled 5.8 percent in July. I haven't seen as much shock about that number as I expected. Granted, the government wants the private economy to grow faster (at least it says that). Local governments and SOEs are the biggest threat to the private economy because they'll get first drink at the credit tap. China also doesn't want another real estate bubble. It says it doesn't want speculative credit in housing. The PBoC and CBIRC say they'll support lending. Maybe the private economy is getting a headstart, first dibs at new credit and in a few months, local governments and SOEs will by unleashed. If not, it is hard to imagine the private economy sans real estate absorbing enough credit to keep the economy going.

The Chinese government is also using carrots and sticks with local governments. On the one hand, its rushing 1 trillion in special-purpose bonds over the next four months.

On the other...

SCMP: Low-hanging fruit and a mountain of debt – how China’s credit binge is playing out

Now, the vineyard sits at the centre of a “new town” covering an area of 27 sq km (10.4 square miles). A 3.3 billion yuan (US$481.8 million) hospital has just opened there, an imposing city hall will follow, and on a recent visit by the South China Morning Post, workers were installing curtain walls on two high-rise buildings that will be the headquarters of the city government’s biggest fundraising vehicle, Changde Caixin Financial Holding Group.

“This is totally beyond my imagination – the whole area developed very quickly after several new main roads were built,” said Ma, a 44-year-old father of two. “But construction of many government projects has really slowed down recently. It seems they’re suddenly running out of money.”

...It is one of hundreds, if not thousands, of Chinese cities trying to take a bigger place in the country’s economic landscape. But like many others, its ambitious development blueprints and countless infrastructure projects go well beyond what the government can afford. Changde’s fiscal income of 16 billion yuan last year covered just a quarter of its spending – the rest came from Beijing and Changsha.

...The mid-sized city made headlines in June when a memo from a meeting between government officials and local bank branches was leaked. According to the memo dated June 22, the Changde officials asked the banks to roll over all loans to financing vehicles to the local government and its affiliated vehicles from July, and to lower their interest rate to the benchmark of 4.35 per cent a year.
See: History Repeats: Chinese City Tells Banks to Lend To City LGFV or Else

Back to the SCMP story:
A local private equity professional who is involved in raising money to fund government projects said “Changde did nothing different from hundreds of other Chinese cities” through its borrowing.

The financing vehicles did a pretty good job of shoring up the local economy, improving urban infrastructure and controlling debt,” said the person, who declined to be named.

...In Changde, it was clear by April that the authorities were under huge pressure to start repaying debts. City officials called a meeting of more than 30 financial institutions, telling them the government guarantee for local financing vehicles would be withdrawn in line with Beijing’s orders.

One banker who was in the room said it was not taken seriously by the lenders at the time because that “tacit guarantee” had always been there and all local governments were part of the centralised apparatus, backed by Beijing.

But the banks have become worried since it became apparent that the central government may let some local vehicles go bust.

...One of the first to start offloading assets is Changde Economic Development and Investment Group, which has instructed agents to sell properties including stores at two tourism sites – Hejie, or River Street, and “Little Hanover”, a new area inspired by the German city.
Lots of China bulls think Chinese officials are smarter than their Western counterparts. Let's assume its true. They know QE is failed policy. Stimulating the economy and blowing bigger credit bubbles will put them right back into a larger crisis in 3 years. The smart thing to do is break the cycle. Stop borrowing. Stop building simply for the sake of GDP. Let debts default. Have a recession. It's the only way to shake excesses out of the system.

I still believe China will err on the side of inflation and currency depreciation because that's the lesser evil from a political standpoint. Yet whether by inflation or deflation, the impact on the global economy and emerging markets will be bearish.