Will Financing Costs for SMEs Finally Drop?

Reuters: China unveils rate reform to steer funding costs lower for firms
The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates,” the PBOC said in a statement published on its website.
Every effort to lower borrowing costs has failed. Every effort to steer capital away from zombie industries and real estate speculation has failed. That is the reality, not a prediction. This is a crucial moment for the economy.

iFeng: 重磅!央行降低贷款利率出大招 今后贷款更容易了
Financing Difficulties? Interest rate "two tracks and one track" needs to be promoted

The relevant person in charge of the central bank pointed out that at present, the upper and lower limits of China's loan interest rates have been liberalized, but the deposit and loan benchmark interest rates are still retained, and there is a problem of “interest rate double track” where the loan benchmark interest rate and market interest rate coexist. When banks issue loans, most of them still refer to the benchmark interest rate of the loan. In particular, individual banks set a hidden lower limit by a certain multiple of the benchmark interest rate (such as 0.9 times) through coordinated actions, which hinders the transmission of market interest rates to the real economy. An important reason for the obvious downward trend in interest rates but the lack of experience in the real economy is the core issue that needs to be urgently resolved in the current market-based interest rate reform.

"The main measures for this reform are to improve the formation mechanism of the loan market interest rate (LPR), improve the marketization degree of LPR, play a good guiding role of LPR on the loan interest rate, promote the loan interest rate 'two tracks and one track', and improve interest rate transmission. Efficiency, and promote the reduction of financing costs in the real economy," said the person in charge.

Dong Xiwei, vice president of Chongyang Financial Research Institute of Renmin University of China, told the China-China Jingwei client that due to the existence of interest rate “two tracks”, on the one hand, policy interest rates are difficult to be effectively transmitted among financial sub-markets such as currency, bonds and credit, affecting interest rate transmission. The effect is not conducive to the realization of monetary policy objectives; on the other hand, the pricing of financial products is difficult to accurately reflect the market interest rate in a timely manner, which is not conducive to the flow of funds from financial institutions to the real economy, affecting the efficiency of financial resource allocation. Therefore, we must actively and steadily push forward the interest rate "two tracks and one track" work.

Take more measures to reduce the actual interest rate of loans

The National Convention meeting held on the 16th pointed out that since the beginning of this year, all parties concerned have made active efforts, and the overall financing interest rate of the whole society has generally stabilized and declined. We must continue to maintain this situation, especially in the face of the current situation. We must maintain a reasonable and sufficient liquidity, adhere to the reform measures, promote a significant decline in the real interest rate, and work hard to solve the problem of “funding difficulties”.

The relevant person in charge of the central bank said that by reforming and improving the LPR formation mechanism, it is possible to use the market-oriented reform measures to promote the effect of lowering the actual interest rate of loans.

The person in charge said that first, the overall market interest rate in the previous period will be larger, and the LPR formation mechanism will be more reflective of the decline in market interest rates. Second, the new LPR is more market-oriented, and it is difficult for banks to coordinate the implicit lower limit of the loan interest rate. Breaking the implicit lower limit can cause the loan interest rate to decline. The regulatory authorities and the market interest rate pricing self-regulatory mechanism will supervise the banks, and the enterprise can report the bank's behavior of setting the implicit lower limit of the loan interest rate. The third is to explicitly require banks to refer to LPR pricing in newly issued loans, and use LPR as a pricing benchmark in floating-rate loan contracts. In order to ensure a smooth transition, the stock loan is still executed as originally agreed. Fourth, the People's Bank of China will incorporate the bank's LPR application and loan interest rate competition into a macro-prudential assessment (MPA) to urge banks to use LPR pricing.

For more measures to reduce corporate financing costs and loan interest rates, the relevant person in charge of the central bank said that the central bank will also take various measures with relevant departments to effectively reduce the comprehensive financing costs of enterprises. The first is to promote open and transparent credit rates and fees. Strictly regulate the fees and charges of financial institutions, and urge intermediaries to reduce fees and make profits. The second is to strengthen positive incentives and assessments, strengthen credit support for orders and credit companies, and better serve the real economy. The third is to strengthen multi-sectoral communication and coordination, form a policy synergy, and promote multiple measures to reduce the cost of corporate financing and other channels.

Global interest rate cuts look forward to the direction of domestic monetary policy

In early August, the central bank issued the China Monetary Policy Implementation Report for the second quarter of 2019. The report carried out a more comprehensive inventory of China's monetary policy implementation in the first half of the year. From the perspective of monetary policy, the report pointed out that a prudent monetary policy should be tight and moderate, maintain a reasonable liquidity, and implement counter-cyclical adjustments in a timely and appropriate manner to guide the broad-based monetary growth rate of M2 and social financing to match the nominal GDP growth rate.

Since the Fed cut interest rates, many central banks around the world have joined the “reduction of interest rate camps”. 28 countries or regions have chosen to cut interest rates to varying degrees, and have also strengthened domestic expectations for monetary policy liberalization. Looking forward to the direction of domestic monetary policy in the second half of the year, Dong Xizhen believes that China's monetary policy will still adhere to the stable main tone, maintain a moderate degree of flexibility, use a variety of monetary policy tools, and increase the frequency of pre-adjustment and fine-tuning, but there will be no “big flood irrigation”. "The situation." From the perspective of risk prevention, it does not support the further easing of monetary policy. At the same time, the deposit reserve ratio still has a certain room for downward adjustment, but the possibility of targeted RRR reduction is even greater. Dong Xizhen believes that as for the reduction of the benchmark interest rate for deposits and loans, the possibility is not high in the short term.


China Home Price Increase Slows in July

New home prices increased 0.59 percent nationally in July. Existing home prices increased 0.37 percent.

Shine: China's home prices generally stable in July
Reuters: Modest gains in China's new home prices give authorities breathing room
SCMP: China’s July home prices cool, as escalating trade war and slowest economic growth in decades send shivers through property market
NBS: 2019年7月份70个大中城市商品住宅销售价格变动情况

The Slope of Hope Arrives: Bounce Edition

Ifeng has a special section dedicated to central bank surrender.

iFeng: 5年来首次!又有全球大国降息了:26国"大放水" 中国跟不跟?
Trump just shouted that the Fed accelerated the pace of interest rate cuts, and another national central bank announced its participation in the "reduction of interest rate legions."

The Bank of Mexico recently decided to cut the benchmark interest rate by 25 basis points to 8% on the grounds that global economic activity is slowing and international economic and trade tensions are tight, and this is the first time the central bank has cut interest rates in five years.

Since the beginning of this year, the central banks of 26 countries have announced interest rate cuts, and the interest rate cut camp has continued to expand. The agitation of the global interest rate cuts has undoubtedly strengthened the market's expectation that domestic central banks will open monetary policy space and follow up interest rate cuts.

However, will “saving” the global economy through the release of money bring about the expected increase? Under the tide of interest rate cuts, risk assets will re-emerge? A series of questions are still waiting to be resolved.

Mexico cuts interest rates by 25 basis points to 8%

The global interest rate cut has not stopped.

The Mexican central bank decided on Thursday to cut the benchmark interest rate by 25 basis points to 8%, citing the slowdown in global economic activity and the tight international economic and trade situation. This is the first time the central bank has cut interest rates in five years. Before the Mexican central bank announced a rate cut, the market is expected to remain unchanged at 8.25%.

The Bank of Mexico said in a statement that “the risks facing the global economy have increased” and mentioned the commercial disputes, the “disordered” Brexit process and the deterioration of “some political and geopolitical risks”. The agency added that there is still uncertainty in the US-Mexico relationship.

After the announcement of the interest rate cut, the peso fell back 0.4% against the US dollar and quickly fell back. Mexico's 10-year bond yield fell 19 basis points.

In fact, before this announcement of interest rate cuts, institutions have expected that the Mexican central bank may be in a difficult position to eventually choose to cut interest rates.

On August 14th, BBVA expects the Mexican central bank to cut interest rates by 25 basis points in September and cut interest rates by 100 basis points in 2020. Last month, Goldman Sachs released a report stating that Mexico’s economy remained “moderate” in the second quarter of 2019; the weakness of the Mexican economy increased the probability that the Mexican central bank would cut interest rates in August.

It is reported that earlier this week, Moody's analyst Alfredo Coutino predicted that Mexico's GDP growth rate this year is only 0.5%, which is "moderately positive", but the above analysts also said, "If investors remain silent, The economy of 2019 may not grow, and there may even be a moderate contraction."

According to a report by the Global Forex Network on July 30, Mexican President Andres Manuel Lopez Obrador said in an interview with Bloomberg that Mexican interest rates are too high for a slowing economy, but he added that he Respect the freedom of the central bank to independently set interest rates.

“The Central Bank of Mexico is paying attention to inflation, which is not bad,” Ovrado said. “But it’s important to lower interest rates to start economic development.” This is also the case after the presidents of advanced economies such as the United States and Turkey offered to recommend central bank interest rate cuts. Another president of the country publicly expressed his views on interest rate cuts.

Global central banks set off a wave of interest rates

From the beginning of this year, after India started the "first shot of interest rate cuts", central banks in various countries began to rush to cut interest rates in order to cope with the slowdown in global economic growth. According to statistics, at present, half of the G20 countries have lowered their policy rates, and four of the BRICS countries have cut interest rates.

Starting from August this year, the Fed’s rare interest rate cuts have intensified this round of global interest rate cuts. After the Fed’s interest rate cuts, several countries once again intensively announced interest rate cuts within half a month.

After the interest-rate meeting that ended on August 1, the Fed decided to cut the federal funds rate target range by 25 basis points to 2%-2.25%. This is the first time the Federal Reserve has taken interest rate cuts since December 16, 2008.

The policy statement shows that US economic activity is growing at a moderate rate, the job market remains strong, and household spending growth has accelerated, but corporate fixed investment continues to be weak. Federal Reserve Chairman Powell said that the interest rate cut is to cope with the downside risks of global economic slowdown, the uncertainty of the trade situation and the 2% inflation target as soon as possible.

On the day when the US announced a rate cut, the central banks of the United Arab Emirates, Saudi Arabia and Bahrain followed the Fed’s pace and lowered the benchmark interest rate by 25 basis points. The analysis said that the reason for the rate cut was that the currencies of the three countries were pegged to the US dollar. On the same day, the Brazilian central bank announced a 50 basis point rate cut and cut the benchmark interest rate by 50 basis points from 6.50% to 6.00%, exceeding market expectations (the market expects to cut interest rates by 25 basis points).

On August 7, New Zealand, India and Thailand, three central banks announced interest rate cuts on the same day. Among them, the New Zealand central bank cut interest rates by 50 basis points, the second rate cut in the year. It is worth mentioning that New Zealand's interest rate cuts exceeded market expectations. The New Zealand Federal Reserve announced interest rate resolutions, the committee agreed to cut interest rates by 50 basis points, reducing the official cash rate (OCR) to 1%, after the market forecast will cut interest rates by 25 basis points. The Bank of India announced that it will cut its benchmark interest rate by 35 basis points from 5.75% to 5.40%, setting a new low since 2010. The Bank of Thailand’s Monetary Policy Committee decided to cut the benchmark interest rate by 25 basis points to 1.5%. This is Thailand's first interest rate cut since 2015 to stimulate economic growth and curb the strength of the Thai baht.

On August 8, the Central Bank of the Philippines announced that it would cut the benchmark interest rate by 25 basis points to 4.25%. This is the second time the country has cut interest rates since May this year. On August 9, the Peruvian central bank announced that the reference interest rate (base rate) was set at 2.50%, compared to 2.75%. In just three days, five consecutive countries have successively implemented interest rate cuts, and the rate cuts are very dense.

In just half a month, 10 central banks announced interest rate cuts, and the global interest rate cuts swept through. From the perspective of the interest rate cut cycle, most of the central bank's interest rate cuts are the first monetary policy water release measures taken many years later.

The domestic central bank is still "not moving"

The global entry into the interest rate cut cycle and the surge in interest rate cuts have undoubtedly strengthened the market's expectation of domestic central bank interest rate cuts. However, in the analysis of industry insiders, China's monetary policy space will be opened, but the scope may be limited.

Judging from the current action of the central bank, although the global central bank has followed the action of cutting interest rates, the domestic central bank has always adopted the strategy of “doing no action”.

On August 15, the People's Bank of China carried out a medium-term loan facility (MLF) operation of 400 billion yuan, 17 billion yuan more than the amount due on the day, and the operating rate was 3.3%, which was the same as the previous period. At the same time, the 7-day reverse repurchase operation was 30 billion yuan, and the operating rate was 2.55%.

This also means that the central bank still adopts other monetary instruments such as MLF to adjust the monetary policy, and the market interest rate cut is expected to fall again.

Earlier, the central bank said in the second quarter monetary policy implementation report that "in view of the possibility of maintaining the medium- and low-speed growth of the global economy in the medium and long term, we must adhere to the principle of taking the initiative, taking into account international factors and grasping the overall balance in multiple objectives. Keep your strength and plan for a long run."

At the same time, in July, in addition to insisting on the attitude of housing and not speculation and long-term mechanism, the Politburo meeting also added a new phrase “not to use real estate as a means of stimulating the economy in the short term”, and real estate regulation has become more stringent. Industry analysts pointed out that since the mortgage interest rate is greatly affected by monetary policy, if the currency is further widened, it will be contrary to the policy intention of not stimulating the real estate bubble. From the perspective of preventing the real estate market bubble, the monetary loosening plus code will also be constrained.

Economist Deng Haiqing said that China's monetary policy is highly independent of the United States. The Chinese central bank is not just like the small country central bank, it can only passively follow the Fed. When judging the monetary policy of the People's Bank of China, giving overseas factors too high a weight may be more emotional rather than rational.

Deng Haiqing said that the central bank's monetary policy will maintain its strength, with structural credit and dredge monetary policy transmission mechanism as the focus to stabilize growth, rather than engage in "big flood irrigation." The crux of the real economy financing also appears in "wide credit" rather than "wide currency."

This also means that looking at the adjustment of monetary policy and simply cutting interest rates is not necessarily a "universal medicine" that stimulates the rapid recovery of economic recovery. It may also bring other effects. It needs to say goodbye to the traditional "big flood irrigation" traditional thinking, but The goal of importing “live water” into the real economy is achieved through diversified policy adjustments and fine-tuning of monetary policy space.

Asset style switched to safe haven assets

It is worth noting that under the surge of global interest rate cuts, the general concern about the economic slowdown has not been much reduced, the short-term elasticity of risk assets has risen hard, and asset styles are shifting from risky assets to safe-haven assets.

On Friday (August 16th), the Asian market reported that the spot gold short-term surge suddenly rose to a maximum of 1528.1 US dollars / ounce. The analysis believes that the recent concerns about the trade situation and the speculation that the Fed will cut interest rates again will support the gold price. Market risk aversion has warmed up again.

According to industry analysis, the price of gold is rising strongly and is currently above the $1520.00/oz mark, thus consolidating the expectation that the price of gold will continue to rise in the future.

At the same time, the gold ETF holdings increased significantly. On August 15, the gold holdings of SPDR Gold Trust, the world's largest gold exchange-traded fund, increased by 844.29 tons compared with the previous trading day, indicating that investors are more optimistic about gold investment.

The risk aversion has warmed up, and it has also brought the market's enthusiasm for investment in safe-haven assets. Some hedge fund managers said that as the valuation of traditional safe-haven assets continued to rise, many investment institutions turned their attention to emerging market high-credit rating bonds with relatively high yields as new safe-haven investment targets, including China, Thailand, etc. Emerging market countries, national debt, etc.

Analysts at Zhongtai Securities said that global safe-haven asset prices have risen sharply. Since October last year, the risk-free yields of major economies such as the United States, Europe, and Japan have fallen sharply, and international gold prices have risen by 26%. Although short-term safe-haven assets have risen rapidly or have some pressure to adjust, the global economic downturn is difficult to reverse, and safe-haven assets are still attractive.


Low Volatility China Plays

Closed $CHU. Still holding $PTR.

July Economic Data Catches Down to Credit Growth

See the prior post on July credit growth for more context. Also the prior posts China Crisis Repeating a Familiar Pattern For the Last Time as well as China Credit Growth and Risk of Financial Crisis, the latter goes into why I believe China is getting very close to a tipping point. The punchline: credit bubbles do not burst when there is a recession and growth turns negative. Credit bubbles burst when credit growth slows to a rate that cannot sustains ponzi or speculative finance. That "no high enough" growth rate tips a high-flying economy still experiencing what looks like rapid credit growth into a recession and financial crisis.

Trade deal are not causing a slowdown in credit. Maybe exacerbating the effects, but not causing. Trade deals will not solve what's ailing China's economy or the global economy.

Here's July industrial production.
Drilling down into the numbers, the usual suspects are still in contraction, but the year-on-year contraction in July is below the YTD contraction, i.e. it's possible a bottom has been hit. Where was the new weakness to print a sub-5 percent industrial production number? Power generation. The left highlighted column is the July yoy, the right is YTD.
Also notable are the drops in pig iron and steel, alternative energy vehicles crash with 9.1 percent growth in July versus 32 percent YTD.

NBS: 2019年7月份规模以上工业增加值增长4.8%

Retail sales report from NBS: 2019年7月份社会消费品零售总额增长7.6%
Sales ex-autos rose 8.8 percent. Cars and fuel were negative, as was gold and silver jewelry.
The economy has been reliant on real estate as the PBoC admitted this week. Real estate did indeed prop up the economy last month, slowing slightly, but still at very elevated growth levels.

NBS: 2019年1—7月份全国房地产开发投资和销售情况
For context, this growth rate was sub-10% for nearly all of 2015 and 2016, several months saw contraction and the overall growth rate even threatened to go negative. Here's the chart from January 2017. I leave it up to readers whether the current growth rate indicates a healthy economy or not. My read is the underlying economy is in far worse shape.
Finally, fixed asset investment. Not negative, but also not positive as it remains at a depressed level.

NBS: 2019年1—7月份全国固定资产投资(不含农户)增长5.7%


China's Intensifying Credit Slowdown, M2 Falls, TSF Approaching Stall Speed

TSF outstanding increased 10.7 percent in July. The yoy comparisons show a markedly negative trend. A year ago, TSF was up 13.8 percent yoy. The mtm increase in TSF outstanding was 20 percent lower in July of this year versus last. August and September 2018 also saw large increases in TSF, setting up unfavorable comparisons for this year (barring a stimulus or surprise surge in credit). The next two months need to both be ¥2 trillion increases to maintain current growth. The only months above 2T this year, however, were January, March and June. If TSF increases 3 trillion over the next two months, growth in TSF outstanding will slow to 10.1 percent, approaching stall speed for the Chinese economy. Probably need to be closer to 9 percent for fireworks, but the current trend points to an intensifying slowdown.

M2 fell in July. The yoy growth rate slowed to 8.1 percent from 8.5 percent in June. The 3-month annualized increase was only 7.6 percent. Notice on the chart, those big spikes are the end/start of year, the smaller peaks are the mid-year credit burst. You can see the declining trend.
SCMO: China’s bank lending weakened in July, suggesting Beijing’s stimulus efforts not working
Chinese monetary data for July was weak across the board, suggesting that Beijing’s efforts to galvanise new lending are not having the intended effect.

Chinese banks extended 1.06 trillion yuan (US$150.17 billion) in net new loans last month, down from 1.66 trillion yuan (US$235.17 billion) in June, according to the data released by the People’s Bank of China on Monday.

July’s lending was well below the 1.25 trillion added bank credit predicted by a Bloomberg survey of economists, and was the lowest level since April, when banks issued 1.02 trillion yuan in new loans.

The slump raises questions over the need for additional credit easing – when a central bank sets lower interest rates, for example – from the People’s Bank of China (PBOC) to offset the effect of a weakening economy and the impact of the protracted trade war with the United States.


PBoC Digital Currency on the Way, Prototype Blockchain Completed

China is ready to roll out digital cash. It will be a two-tier system to protect the state banks, with digital cash issued through the banking system instead of directly by the PBoC. There's some question about the final technology, with the PBoC saying it remains technology neutral.

A public blockchain will give the PBoC (and the CCP)direct control over all economic activity in China and paving a way for full micro-implementation of the social credit reward/punishment system. It opens up new avenues for capital controls, direct stimulus for favored industries, negative interest rates and currency devaluation or direct inflation (mass money printing) into individual accounts.

CNStock: 穆长春:人民银行数字货币呼之欲出
Sogou: Mu Changchun: People's Bank of China digital cash Is Coming Soon
On August 10, Mu Changchun, a special member of CF40 and deputy director of the People's Bank of China's payment and settlement department of the Shanghai Stock Exchange China Securities Network News (reporter Zhang Jones), said at the 3rd "China Finance Forty-Person Yichun Forum" that the research on digital cash DC/EP of the People's Bank of China has been carried out for five years since 2014. "The People's Bank of China, digital cash, can now be said to be ready."

Mu Changchun said that the digital cash Research Group of the People's Bank of China has made a prototype and adopted a block chain architecture. Later, it was found that there was a problem, because the legal digital cash was replaced by M0. If we want to reach the retail level, high concurrency is an unavoidable problem. He said that in a large country like China issuing digital cash, adopting a pure block chain architecture cannot achieve the high concurrency required by retail. Therefore, it is finally decided that the People's Bank of China should maintain technological neutrality and not preset a technological route. In other words, it does not necessarily depend on a certain technological route.
I'm not sure what the technical argument is there. PBoC being technology neutral makes sense, but blockchain technology can scale.
In addition, according to his introduction, DC/EP adopts a two-tier operation system. The single-tier operation system is that the People's Bank of China issues digital cash directly to the public. The People's Bank of China first exchanged digital cash for banks or other operating institutions, and then these institutions exchanged for the public. This is a two-tier operating system.

There are several considerations for adopting a two-tier operation framework: First of all, China is a complex economy with a vast territory and a large population. The economic development, resource endowment, population education level and acceptance level for intelligent terminals are all different. If a single-tier operation framework is adopted, it means that the People's Bank of China has to face all the public alone. In this case, there will be great challenges. From the perspective of improving the availability and enhancing the public's willingness to use, a two-tier operational framework should be adopted to deal with such difficulties.

Second, the People's Bank of China has decided to adopt a two-tier structure in order to give full play to the resources, talents and technological advantages of commercial organizations, promote innovation and compete for the best.

Third, the two-tier operation system helps to resolve risks and avoid excessive concentration of risks.

Fourth, if a single-tier operating framework is used, it will lead to financial disintermediation.

Mu Changchun said that under the framework of single-tier deposit, the People's Bank of China will directly face the public to deposit money in digital cash. Compared with commercial banks' deposit money, digital cash's competitiveness is better than that of commercial banks' deposit money under the condition of credit endorsement of the People's Bank of China, which will have an crowding-out effect on commercial bank deposits, affect the lending capacity of commercial banks and increase the dependence of commercial banks on the interbank market. In this case, the price of capital will be raised, the cost of social financing will be increased, and the real economy will be damaged.

"To sum up, the People's Bank of China is the top tier and commercial banks are the second tier. This dual delivery system is suitable for our national conditions. It can not only use existing resources to mobilize the enthusiasm of commercial banks, but also smoothly enhance the acceptance of digital cash. "

Mu Changchun pointed out that the two-tier operation system will not change the relationship between the creditor's rights and debts of currency in circulation. In order to ensure that the digital cash of the People's Bank of China will not exceed the limit, commercial organizations will pay 100% of the reserve fund to the People's Bank of China. digital cash of the People's Bank of China is still a liability of the Central Bank, guaranteed by the credit of the Central Bank, and has unlimited legal repayment.

In addition, the two-tier operation system will not change the existing money delivery system and dual account structure, and will not compete with the deposit money of commercial banks. Since it will not affect the existing monetary policy transmission mechanism or strengthen the pro-cyclical effect under pressure, it will not have negative impact on the real economy.

Mu Changchun said that since digital cash of the People's Bank of China is a replacement for M0, no interest will be paid for cash, which will not lead to financial disintermediation and will not have a big impact on the existing real economy. In addition, all existing regulations on cash management, anti-money laundering, anti-terrorism financing, etc. should be observed, and large and suspicious transactions in digital cash of the People's Bank of China should be reported to the People's Bank of China.

Mu Changchun also pointed out that the digital cash of the People's Bank of China must have high scalability and concurrent performance, which is suitable for small retail high-frequency business scenarios. In order to guide the People's Bank of China's digital cash to be used in small retail scenarios, not to produce crowding-out effect on deposits, and to avoid arbitrage and pro-cyclical effect under pressure environment, transaction limits and balance limits can be set according to different levels of wallets. In addition, some exchange costs and friction can be increased to avoid pro-cyclical situations under pressure.
A currency crisis would be a great time to roll out the digital alternative.

Real Estate Trust Issuance Suddenly Cools in July

Real estate is the main driver of trust finance and its cooling sharply. Without offsetting credit growth or stimulus, the economy will slow yet again.

iFeng: 7月份房地产信托发行骤冷
Sogou: Sudden Chill in Real Estate Trust Issuance
Supervision continues to exert its power and the issuing market of the collective trust market is "cooled". Statistics show that the scale of real estate trust fund raising dropped sharply in July compared with the previous month, which may end the boom since 2018. However, the status of basic industry trust has risen after the real estate trust supervision has been tightened.

The scale of issuance has generally declined.

In early July, the China Insurance Regulatory Commission (CIRC) issued a warning to some trust companies whose real estate trust business grew too fast and increased too much. The rapid growth of real estate trust came to an abrupt end. Usufructuary trust data show that 63 trust companies issued collective trust products in July, with a total of 1,632 products issued, a decrease of 20.31% from the previous month. The issuance scale of collective trust products was 184.577 billion yuan, a decrease of 20.22% month on month.

Judging from the issuance situation, the issuance scale of Everbright Trust, which ranks first only, rose 2.48% month on month. However, the other four trust companies in the top five have seen their issuance scale decline to varying degrees.

In terms of product establishment, 59 trust companies established 1,473 collective trust products in July, down 7.06% from the previous month. The establishment scale of collective trust products in the month was 137.071 billion yuan, down 18.9% from the previous month. In July, due to the influence of "policy+window guidance", real estate trust fund raising encountered a "sudden brake" and the establishment scale of the overall collective trust market dropped significantly month on month.

Real Estate Trust Shrinks into Stereotype

In July, the real estate trust raised 58.425 billion yuan, a decrease of 19.63% from the previous month, but the proportion of the real estate trust still ranked first in that month. Since 2019, with the exception of February, which is affected by the long Spring Festival holiday, the scale of real estate trust fund raising in other months in the first half of the year has exceeded 60 billion yuan. The decline in July may be considered as the starting point for the scale contraction of real estate trust.

Industry insiders said that the regulatory requirements for real estate trust continue to tighten, and the contraction of real estate trust business is a foregone conclusion. For some trust companies that rely heavily on real estate trust business, the performance pressure in the second half of the year will be relatively great. Head real estate companies have become "hot cakes". Trust companies will face fierce competition against high-quality counterparties, and the rate of return of real estate trusts is expected to decline.

The scale of basic industry trust increased by 7.31% month on month

Tighter regulation of real estate trust forces trust companies to carry out other businesses to replace them. The continuous policy of "red packets" is an important reason for the growth of basic industry trust against the trend. The foundation scale of basic industry trust increased by 7.31% month on month.

The basic industry trust returned to the upward trend in March, and the product yield remained relatively high. In July, the amount of funds raised by basic industry trust was 36.385 billion yuan, up 7.31% month on month and 2.25 times over the same period last year. The basic industry trust has maintained a good upward trend since the second half of 2018, reaching its peak in March 2019. Influenced by the crowding-out effect of the massive issuance of local bonds and the improvement of local financing environment, the scale and yield of basic industrial trusts both showed significant downward trend in the second quarter. In July, the fund-raising scale of basic industry trust bottomed out and the product income also rebounded.

The status of basic industry trust has risen after the real estate trust supervision has been tightened. Industry insiders said: First, as an important means of counter-cyclical adjustment by the state, the policy effect of expanding investment in infrastructure has begun to emerge, with strong demand for capital in infrastructure and fewer policy obstacles in trust companies' development. Second, the mode of government-trust cooperation is becoming more standardized, and regions with strong fiscal revenue capacity should be carefully selected for cooperation.

It is worth mentioning that in July, the distribution of funds invested in basic industrial trust was distinctive, with economically developed provinces being the first choice, and gradually expanding to the central and western provinces. Jiangsu Province is far ahead with 151 products and has become the hottest area for basic industry trust development, while Sichuan, Shandong, Zhejiang, Guizhou, Hunan and Shaanxi are the second groups, and trust funds are also continuously flowing in.

Mortgage Interest Rates Rising, 56 Instances of Policy Tightening

In Journey to the West, Sun Wukong wears a band that can be tightened by saying a spell. It is used to control him when he is behaving badly.

iFeng: 房地产金融戴上“紧箍咒”
Sogou: "Band-Tightening Spell" put on Real Estate Finance
56 times, according to statistics from Centaline Real Estate Research Center, the number of national real estate control policies in July once again exceeded the year's record. This also led to 307 real estate control policies nationwide during the year, up 18% from 260 in the same period last year. However, after the downward trend of mortgage interest rates ended and rebounded in June, many places such as Hangzhou, Guangzhou, Suzhou, Wuxi and so on have recently received signals of rising mortgage interest rates and slowing down the approval rate.

Following the April 19 meeting of the Political Bureau of the CPC Central Committee, which reiterated that "housing will not be sold", the regulation of the property market has been upgraded again in the near future. On July 30, a meeting of the Political Bureau of the Central Committee proposed for the first time that "real estate should not be used as a short-term stimulus to the economy". The central bank also pointed out that the real estate industry occupies more credit resources at the symposium on the adjustment and optimization of credit structure of banking financial institutions held on July 29.

Zhang Dawei, chief analyst of Centaline Property, said that in 2019, the year with the densest real estate policies, the financial risks of real estate rarely mentioned in the past were intensively mentioned. Cumulatively speaking, since this year, the central ministries and commissions have issued 15 speeches or policies, all requiring attention to prevent real estate financial risks.

Under the background of the continuous release of tightening signals by the state and the regulatory authorities and the continuous implementation of the long-term real estate regulation mechanism, there is a great potential for further tightening in both residential mortgage business and financing for housing enterprises.

Interest rates on residential loans in many places tightened.

Judging from the mortgage interest rate, according to a survey conducted by a reporter from the Financial Times, the mortgage interest rate of major Chinese banks in Beijing has remained at a minimum of 10% upward since this year, and has not changed even in the first five months when the interest rate continued to fall. However, according to a real estate intermediary, in the near future, banks have strengthened their examination of mortgage qualifications and the speed of lending has also decreased slightly.

Different from Beijing's "staying put", mortgage interest rates in many parts of the country are showing a further upward trend. In the first half of the year, Hangzhou's first mortgage interest rate generally increased by 5% to 8%, but now, many banks have begun to implement the policy of increasing the first benchmark by 8% or 10%.

Among the first-tier cities, Guangzhou rebounded in June. According to the data released by Rong360 Big Data Research Institute, six banks in Guangzhou raised the mortgage interest rate in June, and Everbright Bank was the first to adjust the loan interest rate for the first suite to 20% above the benchmark.

In fact, the inflection point of bank mortgage interest rate appeared in June. According to agency data, the national average interest rate for first-home loans was 5.423% in June, up slightly from 5.416% last month. The average interest rate for second-home loans is 5.75%, which is also higher than 5.74% last month.

"In July, mortgage interest rates in some areas increased frequently, and more and more cities began to raise mortgage interest rates. However, the specific impact of the meeting of the Political Bureau of the Central Committee on mortgage interest rates is still uncertain. It needs to be seen in the light of whether there will be any specific adjustment measures in the future and the activity of transactions in the housing market. " Li Wanfu, an analyst at Rong360 Big Data Research Institute, told Financial Times reporters.

Strict control of real estate credit

"We will strictly check the' down payment loan'. For all kinds of consumer loan products, after lending, we will monitor the direction of the borrower's bank flow; For loans with specific purposes such as decoration loans, invoices need to be verified. Once it is found out that the loan funds are used for down payment, we will ask them to repay the loan in advance. " A joint-stock bank official said.

The risks existing in the mortgage business have already aroused great attention from the regulatory authorities. "In recent years, the leverage ratio of household departments in some cities in China has risen rapidly. A considerable proportion of households have reached unsustainable levels. What is more serious is that about half of the new savings resources in the whole society have been invested in the real estate sector." Guo Shuqing, Party Secretary of the Central Bank and Chairman of the China Banking Regulatory Commission, said at the Lujiazui Forum held in June.

In response, at the forum on the adjustment and optimization of the credit structure of banking financial institutions, the central bank proposed to maintain the continuity and stability of real estate financial policies. To maintain a reasonable and moderate growth of personal housing loans, it is strictly prohibited to use consumer loans to purchase houses in violation of regulations, and to strengthen the management of funds flowing into real estate through bank financing, entrusted loans and other channels.

Li Wanfu believes that "next step, the bank may adjust the conditions and amount of personal housing loans appropriately, at the same time, increase the proportion of consumer loans and personal business loans in retail loans, and strictly control the flow of consumer loan funds to the property market."

At the same time, the problem of real estate financing has also attracted attention. "Some real estate enterprises' excessive financing has diverted credit resources, further reducing the efficiency of the use of funds and encouraging speculation in real estate investment." Guo Shuqing said at the Lujiazui Forum.

Of the 56 real estate controls in July, nearly 10 were issued by the central ministries and commissions, of which there was a lot of tightening of funds for real estate enterprises. "Especially since July, we have issued two consecutive capital tightening policies for real estate trust and US dollar debt, both of which are aimed at real estate alone. The expectation of tightening policy is getting stronger and stronger. " Zhang Dawei said.

At the forum on the adjustment and optimization of the credit structure of banking financial institutions, the central bank also requested to strengthen the supervision and risk warning of the financing behavior of large housing enterprises with high leverage, and to reasonably control the scale of interest-bearing liabilities and asset-liability ratio of enterprises.

"For the public sector, banks may improve the conditions for loans for real estate development, and at the same time invest more credit funds in the manufacturing industry, small and medium-sized micro-enterprises and other directions currently encouraged by the state." Li wanfu predicted.

Building a Long-term Mechanism

"This meeting of the Political Bureau of the Central Committee will mark another stage of upgrading of real estate regulation." Zhang Dawei said that July was a node for real estate regulation to be upgraded again. Not only did the content of real estate regulation policies continue to be published frequently throughout the month, but the central government also made it clear for the first time that real estate would not be used as a tool to stimulate the economy, and the long-term mechanism would continue to accelerate its landing.

"Under the background of increasing downward pressure on the economy, the emphasis on' housing is not speculation' reflects the decision-making authority's firm attitude towards real estate regulation." Societe Generale believes that the request of the meeting of the Political Bureau of the Central Committee to "implement a long-term management mechanism for real estate" means that the real estate regulation will continue to be tight and the regulation policy will be more stable and continuous. With the long-term regulation, the market's expectations for housing prices will be more stable, and real estate sales may continue to decline in the second half of the year.

Compared with the previous meeting of the Political Bureau of the CPC Central Committee, this meeting did not mention such contents as "implementing policies for each city" and "implementing policies for each city". As for this, Zhu Jianfang, chief economist of CITIC Securities, believes that the real estate policy in the second half of the year will be tightened compared with that in the first half of the year, which is also consistent with the current tightening of financing support for real estate enterprises.

"The real estate market is under strict control, and' patching' measures against the rise in real estate prices continue to appear. It is expected that in the second half of 2019, the national real estate market will still be under two-way control. cities with stable house prices will not rule out loose policies, but as long as the increase is obvious, real estate control will definitely increase. " According to Zhang Dawei.

"From the point of view of credit interest rate, it is not excluded that the interest rate for real estate will be raised again." Zhang Dawei said that as long as there is no obvious change in the credit policy, the adjustment of other policies will have very limited impact on the property market. At present, the real estate policy is still fine-tuning more and more policies except credit, but the overall policy fundamentals remain relatively tight.

How Low Can They Go? Interest Rates in a Time of Deflation

Bank prime rate minus the 12-month change in the CPI.
Negative interest rates prevent a deflationary collapse and instead stretch it out for as long as the central bank can maintain the negative rates. A deflationary collapse or a sustained inflationary growth cycle or loss of faith in currency will end it.

Check out home prices in America's rural areas or inner cities. They were frontline in the decline of the country. As the country takes on more of the demographics of inner cities and, barring a successful rebalancing of trade and economic reform that doesn't involve a currency devaluation, what happened to home prices in these areas will spread to the entire nation. There will plenty of room for negative interest rates, up until the currency crumbles.


What if China Dumped U.S. Treasuries

Unload treasuries into a bear market where everyone is fleeing bonds and you create a catastrophic collapse in treasuries and the U.S. dollar. Your currency will soar.
Dump U.S. treasuries in the middle of a crisis and there will be plenty of buyers. Your currency may collapse in value if you aren't swapping those treasuries for a more valuable asset.

Dumping treasuries doesn't make a lot of sense from a Chinese perspective since they would be blamed for the fallout. Global contagion may be inevitable, but putting your fingerprints on it isn't wise. It does make sense as a political maneuver if they fear repayment. It doesn't make sense economically since even if it succeeded, they'd unleash even worse deflation on their economy than is already happening. If they succeeded in pushing the dollar down and U.S. rates up, Germany, Japan, South Korea and other export economies would pancake as the U.S. "wins" the trade war by immediately ending its import of foreign-made consumer goods.

ZH: Former Chinese Central Banker Warns Beijing May Dump Treasuries In Retaliation
Chen Yuan, former deputy governor of the PBOC, said that the U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts.

The U.S. currency-manipulation charge is part of its trade-war strategy, and it’ll impact China “more deeply and extensively” than the trade differences, Chen said Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the U.S. over the currency.

And in a striking warning from the former central banker, he effectively admitted that dumping US Treasurys is certainly a possible retaliation: “The U.S. believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said,. “That means the U.S. is not completely without weakness.”

He also said that China should work to increase the use of the yuan in global trade such as the purchase of commodities.

Speaking at the same venue - the China Finance 40 meeting in Yichun, Heilongjiang - former PBOC Governor Zhou Xiaochuan said that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system. Of course, the conflict that is most concerning is the military one. Luckily, that barrier has not been crossed yet, but it is only a matter of time before the US and China clash somewhere in the South China Sea with deadly consequences.

Sure enough, one of the other PBOC officials at the meeting signaled that tensions with the U.S. could increase. Zhu Jun, director of the PBOC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate.

Finally, ensuing that "more measures are coming", the Communist Party’s flagship newspaper People’s Daily said in a commentary Saturday that the U.S. move is an "appalling" act to gain an advantage during trade negotiations and is doomed to fail.

Oh yes, and speaking of more devaluation - with Citi, JPM and SocGen now expecting the yuan to tumble to 7.35 or lower - Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun, said that while markets haven’t reacted too strongly to the weakening yuan this week, it is possible that "the yuan could weaken further on unexpected shocks in the future."

Stimulus Prep or Prelude to Deflationary Crisis: China Tightening Screws on Real Estate

The PBoC second quarter report admits the economy is still highly reliant on real estate and infrastructure. As I reiterated back in January and many times before and since, any stimulus effort will likely flow into real estate. Home prices rallied this year because some localities eased buying restrictions, but also on the assumption of second-half stimulus. The government and central bank recently reiterated that "homes are for living in, not speculating on" and that real estate would not be used to pull GDP growth higher.

The government has failed to stop credit flowing into real estate. It has failed to make it flow to SMEs and other favored areas. It hasn't been able to reign in steel production. China can't afford a real estate slowdown with no offsetting growth. It can't afford a stimulus that flows into real estate. Given no sign of stimulus at the moment, a successful crackdown will be visible in deteriorating macroeconomic data.

21st Century: 32个城市银行房地产专项检查 房企融资闸口再紧
Sogou: 32 City Banks' Special Real Estate Inspection, Housing Enterprises' Financing Tight Again
Banks in 32 cities including the first-tier cities and the second-tier cities are facing a special inspection of real estate business, and financing of real estate enterprises is facing stricter supervision.

On August 8, a reporter from 21st century business herald learned that the general office of the China Banking Regulatory Commission recently issued the Notice on Special Inspection of Real Estate Business of Banking Institutions in 2019 (hereinafter referred to as the Notice), focusing on the inspection of real estate business of banks in 32 cities in four major areas.

Several bank branches said that the supervision had already entered the premises to inspect the agency's real estate business, including development loans, operating property loans and mortgage loans involving commercial bills.

The "circular" said that it insisted on the position of "no speculation in housing" and severely punished all kinds of illegal acts of transferring funds into the real estate industry through misappropriation or diversion, and was highly vigilant against the real estate bubble and financialization.

Real Estate Financing Supervision Becomes Tighter

"The current real estate supervision is to control the right and left hands, the left hand is the supply and the right hand is the demand." On August 8, a bank insider told reporters that the supply side controls the financing of real estate developers, forcing them to speed up the push and increase the housing supply. The demand side controls the down payment and interest rate of house loans through measures such as purchase restriction and loan restriction.

From the supply side, real estate financing has been tightened continuously since this year. In May this year, the China Banking Regulatory Commission issued Document 23 to scrutinize five real estate businesses such as direct or disguised use of on-and off-balance-sheet funds for land leasing. This notice can be regarded as a detailed and upgraded version of Document 23 in the real estate field.

The circular requires that, according to the national sales price index of 70 cities in June 2019 released by the national bureau of statistics, and in combination with the list of key cities participating in the "one city, one policy" real estate pilot, this special inspection of real estate business includes 32 cities such as Beijing, Tianjin, Shijiazhuang, Qinhuangdao, Hohhot, Shenyang, Changchun, Shanghai, Nanjing, Suzhou, Wuxi, Xuzhou, Hangzhou, Hefei, Fuzhou, Jinan, Zhengzhou, Luoyang, Wuhan, Xiangyang, Changsha, Guangzhou, Chongqing, Chengdu, Guiyang, Kunming, Dali, Xi 'an, Ningbo, Xiamen, Qingdao, Shenzhen, etc.

"The 32 hot cities are basically the national real estate market's nose. If these 32 cities are stable, the national real estate market will be basically stable." According to Zhang Dawei, chief analyst of Centaline Property. Jiang Guojun, a researcher in Zhuge's housing search market, believes that the risks of real estate funds are relatively high in cities with relevant market changes, especially those with large price changes. It is expected that cities with obvious changes in subsequent house prices and frequent policy changes may be included in such supervision.

All housing-related credits are included in the inspection.

This inspection involves bank real estate-related loans such as land reserve loans, development loans, personal loans and housing lease loans.

Specifically, in terms of real estate credit business management, check the implementation of real estate credit policy and internal control system; The management of real estate development loans and land reserve loans, including concentration management, authenticity review of capital sources, implementation of minimum capital ratio requirements, enterprise qualification review, etc., as well as illegal financing of "four certificates" incomplete projects; Personal housing loan management, including the implementation of differentiated credit policies, the implementation of minimum down payment ratio and loan restriction policy requirements, the implementation of down payment funds authenticity and loan applicants solvency assessment and inspection, etc.; Housing rental loans. Including the cooperation with housing rental enterprises, the problem of bank credit obtained by intermediary agencies, the problem of misappropriation of rental loans, and the provision of funds for intermediary agencies, housing rental enterprises and other acts that disrupt the rental market.

The growth of real estate development loans dropped significantly. According to central bank data, 21st century business herald reporters estimated that in the first and second quarters of 2019, the real estate development loans increased by 660 billion yuan and 190 billion yuan respectively. During the same period last year, the increase was 700 billion yuan and 480 billion yuan respectively.

Judging from the balance, by the end of the second quarter of 2019, the balance was 11.04 trillion yuan, up 14.6% year on year, 4.3 percentage points lower than the end of the previous quarter. Among them, the balance of affordable housing development loans was 4.61 trillion yuan, up 12.9% year-on-year, 7.3 percentage points lower than the end of the previous quarter.

According to the Circular, another focus of the inspection is that non-housing related credit funds are diverted to the real estate sector.

Specifically, it includes: personal comprehensive consumption loans, operating loans, "down payment loans", credit card overdrafts and other funds misappropriated for house purchase, and other bank credit funds misappropriated for real estate in violation of regulations; Funds illegally flowed into the real estate market through shadow banking channels; Loans such as M&A loans and operating property loans are not carefully managed, and funds are diverted to real estate development; Provide financing for real estate development projects through working capital credit and operating property credit.

This is also the focus of current supervision and inspection. On August 9, the CIRC issued a fine of 22.2367 million yuan to China CITIC Bank. Among the 13 violations, they included issuing real estate development loans in the name of working capital loans and failing to include loans from real estate enterprises in the real estate development loans.

Real estate trusts plummet

The Notice also gives clear requirements for off-balance-sheet funds from banks to flow into real estate.

Specifically, check the supervision and management of interbank and off-balance sheet businesses, including the investment of bank wealth management funds in non-standardized assets in the real estate sector; Interbank investment risk review, capital investment compliance review and post-investment risk management for real estate enterprises or projects; Problems such as providing financing for real estate enterprises to pay land purchase fees directly or in disguised form, or providing support or channels with their own credit, etc.; To bypass illegal land reserve financing, enlarge government debt and other issues, illegally flow into the real estate sector in a multi-level nested way, and entrust loan funds to illegally use in the real estate sector.

A North China bank insider said that the above policy has long existed and the key lies in the implementation. For example, land reserve financing has long been earmarked.

Earlier, on July 6 this year, the China Insurance Regulatory Commission (CIRC) issued a message calling on some trust companies whose real estate trust business has increased too fast and too much recently to carry out interviews and warnings, requiring these trust companies to control the growth rate of their business and improve the level of risk control.

Some analysts believe that the scale and proportion of trust products invested in real estate has continued to rise in the past two years, while the scale of trust has shrunk under the supervision of access channels. The proportion of real estate in trust products rose from 8.4% at the beginning of 2017 to 14.8% in the first quarter of 2019. In the third and fourth quarters of this year, the pressure on the maturity of real estate financing is great, and it is expected that the net financing of real estate trust may also face pressure.

Judging from July, real estate trust decreased significantly. According to the data of usufruct trust, the issuance scale of collective trust products in July was 184.577 billion yuan, a decrease of 20.22% from the previous month. Among them, the real estate trust raised 58.425 billion yuan, down 19.63% from the previous month.

Copper, Gold and The End of Growth

The early 1980s mark the historic low for the copper/gold ratio. It has fallen steadily over time thanks to the deflationary impact of technology. On the flip side, gold is money and the stock is large relative to the flow. The long-term trend is down.

The massive spike in the 2000s is nothing against the spike from the 1940s to 1960s as the developed world and the electronics industry emerged from the ashes of World War II.

If copper and gold have another week like they just had, the ratio will fall to the 2008 low. There is deflation and recession fear, but a panic low is not in sight.

The optimistic scenario is the 2016 copper/gold low. There will be a bit more selling, a bit more yuan depreciation, maybe another 20 percent correction in U.S. stocks to test or even break the 2018 low. Copper/gold hits the 2008 low, but rebounds as China fears abate. The ratio rebounds and we find out this is the first half of a 20-year bottoming process.
The pessimistic scenario is the 2008 low doesn't hold and the early 1980s low looms. That move requires going beyond 700. That's huge for global markets and could entail major dislocations such as a major China crisis, but then comes the much larger question.

Is this a massive 40-year basing pattern for the gold/copper ratio? Gold soared relative to copper during the 1970s. A measured move off this basing pattern would carry gold to more than 1200 times the price of copper. That could mean $2 copper would trade alongside $2,400 gold or $10 alongside $12,000. The more probable move, in my opinion, is the former. A doubling of gold and stagnant or even falling commodity prices as growth evaporates.
Or looking at copper alone, a move to $1.40 seems possible. In a major deflation scenario and a 725 ratio, gold trades at $1000. At a 1200 ratio, gold trades around $1,700.

Copper is trading right at the .618 fib from the 2008 low to the 2011 high. A break and the next stop is trendline support just above $2.25. Break that and $1.40 opens up.

Canadian Imperial Bank

Great topping pattern. If it doesn't retake the support line (zoomed in on third chart) then this will start accelerating to the downside.


PBoC Says Economy Reliant on Real Estate and Infrastructure for Growth

The report also reiterated "houses are for living in, not speculating on."

NBD: 央行:坚持房子是用来住的、不是用来炒的定位 ;教师“加班用餐时间猝死不算工伤”?人社局回应:已重新介入调查
The central bank issued a monetary policy implementation report for the second quarter of 2019. The report said that economic growth is highly dependent on real estate and infrastructure investment, and the economic endogenous growth momentum needs to be further enhanced. It is necessary to objectively understand and treat it rationally, strengthen confidence, maintain certain strength, make full preparations, and conscientiously do well in their own affairs, adopting targeted measures combining short-term and long-term, micro and macro, and promoting the formation of an effective final. Demand and new growth points. In accordance with the basic principle of "sincerity for the city", we insist that the house is used for living, not for the positioning of speculation, implementing the long-term management mechanism of real estate, and not using real estate as a means of stimulating the economy in the short term.
PBoC: 2019年第二季度中国货币政策执行报告

The part about real estate and infrastructure reliance:
It should also be noted that there are still some deep-seated problems and outstanding contradictions in the economic operation. Judging from the international environment, the international economic and financial situation is complicated, the momentum of global economic growth has weakened, monetary policies in major economies have turned loose, geopolitical risks remain high, and external uncertainties and instability have increased. Judging from the domestic economic situation, the production investment of enterprises tends to be cautious, the growth of manufacturing investment and private investment has slowed down, the economic growth is highly dependent on real estate and infrastructure investment, and the endogenous growth momentum of the economy needs to be further strengthened. This should be viewed objectively and rationally, confidence should be strengthened, concentration should be maintained, full preparations should be made, one's own affairs should be done well, and targeted measures should be taken to combine short-term and long-term and micro-and macro-level to promote the formation of effective final demand and new growth points.

Late 1990s Repeat on Hold

The ADX on the bottom, the red line did not crossover in the late 1990s rally. This doesn't completely invalidate it, but this chart looks more like the 2000 and 2007 tops now.

Third Bank Failure in China: Hengfeng

The takeaway: smoke is increasingly revealing fire in China.

SCMP: Unit of China’s sovereign wealth fund takes over Xiao Jianhua-linked HengFeng Bank in third case of nationalisation since May
China’s sovereign wealth fund has taken over HengFeng Bank, a troubled lender linked to fugitive financier Xiao Jianhua, in the third case in as many months of the state exerting its grip over wayward financial institutions.
Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government’s shareholder in the country’s four biggest banks, has emerged as a strategic investor in HengFeng, according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua.
The investment was a breakthrough in HengFeng’s debt restructuring led by the Shandong provincial government, the state-owned newspaper said, without citing a source or providing financial details. Huijin’s investment would increase HengFeng’s capital adequacy, improve the troubled bank’s management and enhance its operational capability, the paper said.
HengFeng, based in Yantai city, was founded in 1987. It operated 18 branches and 306 sub-branches across the country. It is among more than a dozen city-level and rural lenders that had been put on notice by the authorities for a shake-up, as regulators step up their programme of cleaning up financial malfeasance and profligate lending.
财新: 恒丰银行重组方案获批 山东省与汇金联手注资详情
According to many sources of Caixin reporters, the non-performing assets divested by Evergrowing Bank are over 100 billion yuan, which can release some risk capital “return blood”. According to the 2016 annual report of Evergrowing Bank, the bank's total share capital is 11.194 billion shares, and the net assets per share is 5.6 yuan. The total assets are 1.2 trillion yuan, the loan is 430 billion yuan, and the non-performing rate is 1.78%. The annual report was audited by ShineWing Certified Public Accountants and a standard unqualified audit report was issued. However, the annual report that has been delayed for two years shows that the book data of the above-mentioned disclosure of Evergrowing Bank is seriously untrue.
Caixin: Another Lender Gets State Lifeline
Hengfeng Bank is no stranger to scandal. Two of Hengfeng Bank’s former heads have come under investigation for alleged embezzlement. The bank also failed to disclose its financial reports for two consecutive years through 2018.

Hengfeng Bank had 1.2 trillion yuan in total assets at the end of 2016, according to its annual report that year, the most recent one it released.
Only a month ago, Hengfeng's HQ was moved to the provincial capital. See: Hengfeng Bank Falls Under Regulator Scrutiny, HQ Moved

It has been embroiled in scandal.

Here's a 2017 post that mentions the bank in passing as one of many involved in "fake seals" scandals, where bank employees use fake bank seals to engage in fraudulent or outside regulation lending.
3 Billion Yuan Fake WMP at Beijing Branch of Minsheng Bank

Hengfeng bought some fake bills back in 2016: ICBC 2 Billion Yuan in Fake Electronic Bills
The scheme unraveled when Hengfeng Bank (HFB), a provincial lender in Qingdao that had bought some of the slippery bills, learnt during an internal inspection in early August that the Bank of CTS has not authorized ICBC to issue bills on its behalf. HFB had suspected the bills because the Bank of CTS reported much higher yields than the market price, one of the bank's employees said.

Here Comes the Porkflation: China CPI Up, PPI Down

China's PPI remains in deflation and the headline number has flipped into deflation. If August prices are similar to July, the headline PPI could be down around 1 percent in August.
China's CPI is running hot as well, but it does "benefit" from favorable year-on-year comparisons. August and September 2018 saw 0.7 percent price increases. That's not good news for Chinese consumers, but it'll help keep the headline CPI from hitting 4 percent.
Pork drove up meat costs. Fruit prices are still way up this year, but came down in July. The first column is the price increase from June, the second the single-month increase vs last year (12 month inflation) and the last is the YTD increase since end of 2018.


Socionomics Alert: Nations, Markets on Edge

Don't buy the shooting explanation for the videos below. The mass shootings are the proximate event, but look at financial markets. Is there a "mass shooter" at the stock exchange or the forex market? Why have the streets of France been filled with protesters for months, why are the streets of Hong Kong filled with them?

A short-term bottom is possible here with many charts hitting oversold/overbought conditions. However, oversold and overbought conditions are also when huge trend moves can happen.


China Crisis Repeating a Familiar Pattern For the Last Time

Special topic | Central Bank Discusses Exchange Rate Twice in One Day! Yi Gang: I am confident that RMB will continue to be a strong currency!
Back in 2014, I wrote The Logic of Strategy: Yuan Devaluation and the Road to Trade War after reading Luttwak's book on how to contain a rising China. Luttwak's book has proven prescient. Beyond the arguments in the book itself, it fit the template of my macroeconomic model for China. I anticipated a weaknening Chinese economy, followed by a credit crunch and currency devaluation. Whatever path was taken, it seemed the U.S. and China were headed for a political, military, economic and currency confrontation.

One of the main reasons I wrote this blog over the years was to provide an alternative view on China. The standard narrative was China taking over the world. The yuan would challenge the dollar for reserve currency status, China's private economy would boom, reform would unleash the talent of the Chinese people and eventually, the U.S. would be pushed out of the Pacific either willingly or unwillingly. Events took a very different turn, and the Western narrative on China even contradicted what Chinese officials were publicly saying in the daily papers. A theme that would return in Brexit and Trump, through to today. The mainstream/establishment thinking glued to its own narrative rather than observing the facts on the ground. Great volatility and profit was and is still available to those paying attention.

A brief and truncated history of China's post-2008 economy

The yuan devalued in 2008, as covered in this post from 2013: Chinese Yuan Could Devalue 50% Or More (the title was a think piece, not a target). Instead of letting the market take its course, China did what it got accolades for doing in 1997: it did not join in the broader wave of currency depreciation. As a result, it may have helped arrest the 2008 downturn. The Chinese markets, emerging markets and many commodities would bottom in November 2011 (certainly on a relative basis). The U.S. economy experienced a shallow recession. And along with central bank action across the globe, the world's economy returned to a slow path of growth. Or not, depending on if you adjust for debt. Either way, the bill is coming due.

China never experienced healthy growth out of the crisis. It launched major infrastructure projects such as the national high-speed rail and citywide subway systems. It is possible to walk to most, if not all, major Chinese cities by taking a subway to the train station. However, this growth ended in 2011 and came with a run-up in debt. The stimulus was 40 percent of GDP in 2008 and was force fed through banks. Distortions were all over the place (such as SOEs borrowing at low rates from banks and loan-sharking at double-digit interest to private developers). The country experienced a real estate downturn as stimulus faded in 2011. In January, the real estate market was smoking. The WSJ ran an article titled: Real Estate Rage Erupts in Hangzhou. The rage was a fight breaking out among people trying to buy new apartments. By September, a new form of rage was setting in. Home buyers in Shanghai angry at massive price drops, smash offices

August 2011 was a volatile time for global markets. Europe's sovereign debt crisis was in full swing, the U.S. Congress was threatening to enforce a hard debt limit, one that would have terminated the U.S. government's ability to spend beyond its means. Gold would peak later that year. Emerging markets failed at their 2007 high. The global impulse created by central banks and China stimulus was over. There were hints that yuan depreciation could follow: Chinese yuan depreciation coming soon? By December, banks were selling dollars to halt the yuan's relatively minor slide: Devaluing the renminbi. It was a little late as devaluation pressure lifted by spring, but in July, investors were still shell shocked: Chinese hoard dollars. A credit growth cycle was underway though, one that wouldn't end until 2014.

As for the acute crisis, China saw falling real estate prices from June to Decemeber, with some currency depreciation into the early second quarter.

In 2014, China stimulus ran out. Resource investors and companies ignored the Chinese government's repeated warnings that there would be no repeat of the 2008 stimulus. The big blog post for that year was China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. By October, it was Liaoning Sounds Warning on Chinese Economy. The real estate development model looked busted. Local governments relied on real estate for GDP growth as traditional commodity-related industries went into recession. There was a real threat of the entire country tipping into recession should the decline in real estate be repeated elsewhere. Credit guarantees were blowing up left and right. Trust and bond defaults shook the notion that the government would always step in to prevent any default. Globally, the U.S. dollar bottomed in June and began a major bull market that appears unfinished. In November, crude oil began a plunge that would not end until 14 months later. Emerging markets would fail at their 2007 for a second time.

China would not escape with modest currency depreciation this time. In August 2015, it allowed the yuan to find its market price, far lower than the high of 6.04 in late 2013. The currency impact of this round would last until early 2017, with USDCNY touching 6.96 and threatening to break 7.00. It would cost China $1 trillion of its reserves. Global equity prices wouldn't bottom until early 2016 along with commodity prices. Bonds would peak around the time of the U.K.'s Brexit vote. The dollar would spike following President Trump's election. The crisis was acute for China, natural resources and currency markets.

This was also the point at which China ran out of political room. Eventually, the U.S. dollar was always going to break under the stress of the global economy. It was becoming too large for the Federal Reserve to control. It likely reached that point sometime in the early 2000s with China's entry into the WTO. At some point, America was going to say no more. Moreover, as China ran up its debt-to-GDP, the risk that the currency would devalue was rising. How unfortunate would it be if at the moment China needed to devalue most, the United States was ready to launch a trade and currency war?

Starting in mid-2015 and again in early 2016, China launched yet another round of credit stimulus following the implosion of the stock market bubble. Much of the stimulus would flow into real estate. By June 2016, Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market and also Ministry of Finance Owned Cinda Real Estate Becomes Land King. The government tried kicking SOEs out, but in February 2017, I posted SOEs Ordered Out of Land Market, Again

In October 2017, the green light for a national deleveraging is given by the National Congress. 19th National Congress: Deleveraging Will Have No Negative Effect on GDP

In summer of 2018, there was a report showing a speculative takeover in housing, beyond anything seen previously. Speculators Take Over Chinese Housing MarketBy September 2018, Fresh Reports of Real Estate Rage Signal Turn in Chinese Housing Market. China's economy has been slowing into 2019. Baoshang Bank failed and the Bank of Jinzhou needed a bailout, tying the story back to Liaoning 5 years earlier as laid out in China Credit Growth and Risk of Financial Crisis

China's stock market would decline in 2018 along with the rest of the world. Emerging markets experienced a failed breakout and fell below their 2007 high for a third time. They would recover this level in early 2019. They failed for a fourth time today, August 5, 2019.

The yuan has started depreciating again and broke the all-important former "line in the sand" of USDCNY 7.00. A simple overlay of prior events suggests the currency could depreciate for another 12 to 18 months, and that's if the magnitude is similar. As I recently discussed, the prior downturn saw trusts and a few bonds default. This time a bank has failed and another required a bailout. There is a trade war threatening even greater U.S. dollar pressure than the market alone creates. China has now been named a currency manipulator. Events have moved full circle back to the Logic of Strategy.
Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.

Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.
I was wrong about the 2014 crisis turning into a major global downturn. Whether central bankers arrested it or not, it terminated in early 2016. The signs of a 1937 event were there, but there was not follow through. I'm always open to the possibility I could be wrong again, but I don't think the next cycle will be similar. If I'm right, I believe we have arrived at the base camp of Everest. What I've written about over the past 8 years or so, had led up to the moment. The preparation is done. The main event is here. If I'm wrong, then I'm wrong about how it ends because I don't expect another stimulus out of China. It's too late, the political, economic and financial situation around the world won't allow for another coordinated kick of the can. We are crossing the event horizon into a new future for China, the United States, and the world order.

The Long Goodbye

This blog was started with the intention of writing about Chinese stocks, believe it or not. It turned into a meta joke over time as that is one of the least discussed topics on the blog. Perhaps there is another couple of years of activity on this subject, but I sense the end is beginning for this blog. It will finally be time to get a new address (maybe on a whole new planet) and a new topic that is years in the making. Already, my long portfolio is increasingly filled with junior gold and cryptocurrency miners. In the end, the biggest emerging markets of the next 10 to 20 years might be right at home.