Euro shorts still below peak as euro crumbles

Chinese yuan slides

Chinese GDP numbers are out and the bulls see positive signs in the data. If the bulls are right, China is going to inflate its way out of the economic doldrums, possibly reigniting the housing bubble.

One-year non-deliverable forward contacts have the yuan at 6.42. The yuan closed at 6.3789 per U.S. dollar; the fixing was 6.3247.

Guangdong slows; jewellery sales slump

Friday morning pre-GDP news:

Guangdong growth alert for mainland

Guangdong Governor Zhu Xiaodan on Wednesday conceded that the provincial economy grew a "weaker than expected" 7.4 per cent in the first six months of the year. Exports grew only 6.9 per cent, a slowdown which is already spilling into the second half. Zhu told his subordinates to have "a higher level of crisis awareness" as other key economic indicators, such as fixed asset investment, retail sales, and the government's fiscal revenue were worse than anticipated and were below national averages.

Guangdong is one of the faster growing provinces, although the article quotes predictions of 7.7% GDP growth for all of China in Q2.

Elsewhere, I warned that China has a gold bubble because investors are very speculative, treating the metal like a hot stock.
Sales decline hits jeweller's shares

Chow Tai Fook said in a filing on Wednesday night that same-store sales in its Hong Kong and Macau stores dropped 1 per cent for the three months to June, despite a 5 per cent increase in volume. This is a sharp decline compared with the 48 per cent growth in same-store sales recorded for the fiscal year to March.

"While the weakness may not be totally unexpected, the reported sales growth and same-store growth were still notably below the market and our estimates," said Catherine Lim, an analyst with Citi Research.

...A spokeswoman at the Hong Kong Retail Management Association said mainland consumers have cut spending on jewellery, apparel and cosmetics in their shopping trips to Hong Kong this year.

To deal with the challenging market environment, Cheng said the company had adjusted the product mix to meet consumer demand.

Chow Tai Fook has expanded aggressively across the border in recent years, which has strained its cash flow.

The retailer received net proceeds of HK$15.4 billion in its initial public offering but said it held only HK$10 billion in cash at the end of March.

Liu Junluo: PBOC will hike rates later this year, in the middle of the Great Depression, regional war coming to Asia

Liu Junluo's latest blog post argues that the central bank is helping the stock market decline and supporting the trade surplus, in order to reduce consumption and attract deposits into the banking system, with the ultimate goal of covering up bad debts.

He argues that the central bank should have allowed inflation to accelerate in 2011, but instead has created a man-made deflationary crisis. He says that in 2012Q4 or 2013Q1, the PBOC will hike interest rates. He doesn't explain why, but he expects the Great Depression will again rear its head during this time. Why would a country hike rates during a depression? Either to attract capital into the banking system or to defend the currency, or both.

中国央行在2012年四季度~2013年一季度将进入加息周期

Google Translate version (with very slight edits, mostly still terrible Google Translation): China's central bank will enter a rising rate cycle in the fourth quarter of 2012 to 2013 first quarter

Mr. Guo Shuqing task is completed, not a large number of Chinese stock market participants in the 2400 points along the zoom, the Chinese stock market fell to 2000 points and 1800 points, a relatively large rebound. Chinese stock market traders zoom lever, in the future, it will easily in the Chinese stock market .


The two previous blog, has written very clearly. December 16, 2011 blog "2012 China's macro-policy will continue to hope that the large-scale stock market fell and the new book announcement " is written to the - now, more and more intense as the European debt crisis of self-direction" China's macroeconomic policy is nothing more than the need to rely on the Chinese stock market in the 2012 to continue the large-scale fell to solve the Chinese central bank's bad debt exposure. In 2012, China's economy faces an "election year", is to continue to manufacture hard big crash of the Chinese stock market to reduce the Chinese residents' consumption of local products and foreign products, the acceleration pushed up China's household savings rate, to reach out to expand the trade surplus, good this astronomical figure of bad debts hidden good to the next term, or let the bad debt exposure are far behind even the Empress, and then handed over to the new term? So, you do not see Jinglian, Li Yining, and the Chinese central bank talk and action, you are still a living economy "idiot".


A result, the 2012 , China's trade surplus is 31.7 billion U.S. dollars, far more than expected. 2012 1 to 2 months, the trade deficit to 2012 years, until March rebound. Chinese investors are China's trade surplus only, it is important contributors. In this way, you should like the film in the cinema to see an intrigue to see our Mr. Guo Shuqing do our best to show.


So, 2012 , I made ​​Sina microblogging a microblogging - China's central bank cut interest rates, is it good? Chinese people today, is certainly to be every day of the positive destroyed, has always been to eat people do not spit out the bones "feel good" a person to grasp the logic of economics and the social division of labor is very important. Chinese stocks will make many people unknowingly ruin, or broken up the fate. The ignorance is so sad, perhaps, so far the evolution of society is the need for most people, to destroy the financial markets. Otherwise, there is no way to explain! Why would anyone buy a stock, buy a house. Liu Jun Luo, July 5, 2012, Thursday.


The question now is, in mid-2011, I expected China's central bank by the end of 2011 or start of 2012 to urgently loosen monetary policy. Today, China's central bank is not only done, but haphazardly to do.


So, there should be a problem - the Americans will not let the Chinese central bank raise rates in the 2012 fourth quarter ~ 2013 in the first quarter?


Now, the Chinese central bank's monetary easing will continue, however, is coming to an end.


The world economy has entered the Great Depression; we are living in the middle of the Great Depression; the Great Depression of the tail of - a large number of ​​people go bankrupt; a large number of ​​people jumping off buildings; a large number of ​​people are unemployed and the danger of regional wars in Asia.


2010 to 2011 , I criticized the Chinese central bank's monetary policy is a serious strategic error, because the real problem of the Chinese economy is a long-term catastrophic deflation. However, the 2010 to 2011 the Chinese central bank's monetary policy is strong anti-inflationary, China's central bank monetary policy is actually artificially serious strengthen China's economic deflation. Therefore, China's central bank will soon have to choose the strength to raise interest rates to solve the problem they have committed a serious strategic error. We have entered the economic world incurable. 2013 years, the most the threat of human fear - Asia regional outbreak of war.


The blog is written, because the economic situation all step by step into the run. I do economic research, economic trends are very difficult to change, So do not waste time writing repetitive words. How to operate their own money, as I have already made it clear. Able to escape this hell on earth "economic catastrophe, that is, you good luck thing.

Liu Jun Luo
2012

Another factor for yuan devaluation: capital losses

In Red Capitalism, authors Walter and Howie show that the Chinese financial system is an extension of the Communist Party, used for the benefit of the ruling members. Investment losses are put onto the bank balance sheets, which are then transferred to the central government. China bailed out the banks at the end of the 1990s, and it continues to implement policies in the banks favor. Another bailout is also likely, should NPLs surge.

If the yuan is close to fair value, however, the implication for the currency is devaluation because China's source of funds is the foreign exchange reserves. China socializes investment losses through the banking system and via currency devaluation, but as foreign exchange reserve growth slows, tapping this capital will result in devaluation of the yuan (since deflation is counter-productive).

Here's a post from FT Alphaville China as a post-capital economy discussing the bull and bear case for China.

Here follow extracts from an absolutely fascinating note from Australian analyst James White at Colonial First State, which argues extremely convincingly that none of the usual economic arguments apply to a country that has transcended the conventional role of capital. In short, nobody does financial repression like the Chinese.

What does Mr. White have to say?

In China, capital is just one piece on the board where the aim is to raise living standards of all households. As a result, capital is used and treated remarkably differently, often to the consternation of external observers and investors. It is not a matter of aggregating up the investment decisions of individual firms and households to predict macro-economic outcomes, as was done by some economists prior to the sub-prime crisis in the US. The government’s role is paramount. Despite claims of dramatic imbalances (investment spending has made up to 45% of GDP in recent years, compared to below 15% in some developed economies), investment is driving sustainably higher economic growth. This high investment economy has led to some important outcomes that support the economy’s growth model.

Unlike in developed markets, where the aim is to generate a return on capital, the politically managed Chinese economy views capital as one piece of the puzzle. And it can afford losses in part because it is the state:

First, and most obviously, the government has the ability to fund losses on individual capital projects through the accumulated financial reserves, totalling at least $3.2 trillion. Second, and most importantly, the Chinese government, as ultimate capital allocator, can recoup returns from projects by capturing the positive externalities from projects in the form of higher tax revenues created by higher levels of activity.

Without getting into the long-term results of such a policy, the implication is that China can continue this policy for some time, but capital losses will accumulate and be socialized, as discussed above.

Foreign reserves will not accumulate at their historic pace—unless there's another round of global coordinated money printing led by the Federal Reserve launching QE3. Since those reserves back the currency, depleting them in order to bailout the banks would be deflationary if the central bank took yuan out of circulation. In a bailout situation, deflation would lead to more losses and larger bailouts. Instead, they will take dollars from the reserves, but leave the renminbi in the economy.

Inflation of the money supply by itself doesn't lead to currency devaluation—there are more factors at work—but China's approach to capital may eventually express itself in the exchange rate.

China's foreign currency loan-to-deposit ratio sinks again; gold, oil and monthly FX reserve changes

The People's Bank of China released Q2 data today, showing the foreign currency loan-to-deposit ratio declining again. Chinese firms have been "hoarding" U.S. dollars and there may be a large net short position at the corporate level. The short positions come in part from U.S. dollar borrowing; now firms are holding U.S. dollars because they do not expect yuan appreciation and others are repaying their dollar loans. The result is a plunging foreign currency loan-to-deposit ratio-a slide larger than the decline in 2008.

The yuan was weak in May and stabilized slightly in June, now we see that this weakness coincided with a decline in China's foreign exchange reserves. We saw a similar situation in November-December of 2011, when the yuan was weaker and FX reserves declined.

Below are charts of gold and oil against the yuan. Hugh Hendry proposed the 2008 oil bubble was related to the value of the Chinese yuan (Yuan and Oil-The Bubble Connection?) and that once the yuan stopped appreciating, this carry trend ended, sinking oil prices.

Gold replaced oil as a favorite of Chinese traders post-2008, and while they haven't blown oil or gold into a bubble, there's definitely some correlation. The yuan has slightly depreciated in 2012 and both oil and gold are down for the year.

The story here is less about China, however, than it is about the global economy. Manufacturing is at the higher stages of production and the sector leads the broader economy. China's economy was hurting in early 2008 and it's stock market both plunged and bottomed first (along with many other emerging markets). Combined with economic data from the developed world and the continuing crisis in Europe, the parallels with 2008 are growing stronger.

Is the real estate bubble reflating? Now Beijing sees a new land auction high

Following last month's record auction in Guangzhou, Beijing sees a record price for residential land:
Record price paid for site in Beijing

Sinobo Group, a private local developer, won the Haidian site in a land auction with the 46th bid of 2.63 billion yuan (HK$3.21 billion), or 33,831 yuan per square metre. This surpassed the previous record for a residential site, in Shunyi district, which sold for 29,859 yuan per square metre in 2009.

The developer's offer included allocating 16,400 square metres of floor area for subsidised housing. Excluding this area, David Zhang, a director of research at Centaline China in Beijing, estimated the land price was 41,500 yuan per square metre, making it the most expensive residential site in the country.

..."The land supply in the 4th Ring Road area is very tight. Prices of nearby housing estates range between 60,000 and 70,000 yuan per square metre. Developers are optimistic about property prices in the area."

...Wang believes the winning bidder will have to sell flats there for 80,000 yuan per square metre to generate a reasonable profit.

Fourth ring is quite far from the city center and Haidian is underdeveloped compared to the eastern part of the city.

China's dollar short position

Earlier this week in Chinese hoard dollars, we saw that Chinese exporters are holding onto their U.S. dollars and repaying U.S. dollar loans.

FT Alphaville took an in-depth look at the numbers in China and those dollar shorts, and draws a similar conclusion to mine:

BoAML’s last attempt to downplay the importance of these shorts is to claim that none of this matters in the grander scheme of things because the shorts are ultimately a sovereign liability rather than a corporate one due to the state’s long-standing intervention in the FX market. And, as everyone knows, China on a sovereign level is definitely not dollar short.

But this again is missing the point. Which is that China’s short-term dollar liabilities are currently balanced by longer-term dollar assets. They represent a duration mismatch. That China can liquidate its holdings is obvious. It’s about how you interpret these liquidations if and when they happen.

That is to say, one should not regard them as dollar negative but rather as dollar positive.

One last unintended side-effect is the pressure the dollar shortage is putting on RMB liquidity in its own right. Dollar absorption, after all, has always provided a key RMB liquidity distribution mechanism for the PBoC. Hence the growing need for alternative PBoC liquidity measures such as reverse repos.

FT Alphaville had report on China's dollar short position (coming from the corporate sector) in late June: China’s remarkable short USD position. That post discussed Standard Charter's estimate of an $800 billion short position.

If China is short dollars, it means the banking system has excess renminbi. A closing of this position is deflationary, but the central bank started cutting interest rates and reserve requirements. Instead of draining yuan as dollars are pulled from the system, they are instead inflating the money supply, with the long-run consequence of devaluing the yuan. Whether the yuan is currently under, over or fairly valued will determine which direction it trades in, but the net effect is to weaken the yuan.

Euro shorts contract ahead of decline in euro

Last week the euro shorts were "lightly smoked" as the euro rose in the face of a large decline in short contracts. The euro is extremely weak and buying, when it occurs, is mostly short covering. This snapshot from July 3 shows the euro just before it breaks to new 2-year lows.

Chinese hoard dollars

In order for the yuan to devalue, Chinese must increase their preference for U.S. dollars.......and it is happening, as anticipated on this blog.

Below are the main points from a Chinese article on the topic, interspersed with my comments.
囤点美元 (Hoard dollars)

China's largest privately run shoemaker, Aokang, exports 40 million pairs of shoes to the United States and Europe each year. Previously, the firm would swap U.S. dollars for yuan on the same day they were received, but now, "[We] keep as much as possible, we even wish we could keep all of it."

In the wake of the PBOC's interest rate cuts, demand for U.S. dollars has increased as the interest rate spread between the two currencies narrows.

The CEO of Aokang used to ignore the renminbi exchange rate because it was in an appreciating trend versus the U.S. dollar, but now he views it online everyday. Other executives check the exchange rate changes daily.

Hoarding of U.S. dollars is helped by an April 16 change in financial regulation, when SAFE repealed the regulation that compelled businesses and individuals to exchange their U.S. dollar remittances for renminbi.

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Leaving the article for a moment, as far as I can tell, this news was not reported, as news outlets opted to focus on the widening of the trading band and allowing banks to short sell U.S. dollars. Chinese link:
强制结售汇制度退出历史舞台 企业和个人可自主保留外汇收入. The law had been gradually weakened over time, but this year saw it's full repeal.
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A Dongguan shoe exporter has the same strategy as Aokang. Before, they would immediately exchange USD, EUR and JPY for CNY, but now they consider their business needs and the exchange rate before changing money. They slowly increased their retention rate of U.S. dollars from nothing to a current 40%.

Firms are also closing their dollar short positions. In previous years, Chinese firms would borrow in USD in order to benefit from the rising exchange rate and higher renminbi deposit rates. Now, they are reversing these trades and paying back dollar borrowings.

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Here's a chart of foreign exchange loans to deposits (all foreign currency is included, not only U.S. dollars) showing what's happening:

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The article quotes Wang Tao of UBS saying China has "oversold" $200 to 300 billion, while Citibank estimates it could be as much as $800 billion. China's SAFE reported a $3.7 billion foreign exchange settlement deficit in April, the first of 2012. (There was a deficit of $800 million in November and $15.3 billion in December of last year, when we last saw weakness in the yuan.)

Individuals and businesses aren't alone—although they are now allowed to short U.S. dollars, banks wish to hold net long positions in the U.S. dollar because all the major banks expect yuan depreciation in the short-term.

The central bank is also defending the renminbi when necessary (my edited translation):

Everbright Securities macroeconomic analyst He Yuanyuan found in the fourth quarter of last year and April this year, the central bank bought yuan and dumped foreign currency (expressed as a reduction in the total of foreign currency assets). This shows that China's central bank is in the market to support the RMB exchange rate, to prevent it from excessive devaluation. This shows from another perspective, the pressure of RMB devaluation.

Google Translation of the article: 囤点美元

Commentary

China is selling foreign exchange in order to defend the renminbi, which flies in the face of common wisdom that fears China dumping its U.S. Treasuries. The other side of the trade matters. It is the same with gold: common wisdom says buying gold will strengthen a currency, but look at India—massive gold imports are working to devalue the rupee. Various scenarios call for the U.S. to devalue against gold, but it is at the same time a gold buying strategy. If Chinese swap U.S. dollar assets for gold, oil or Japanese equities, the trade will weaken the dollar and may strengthen the yuan. If instead Chinese citizens or foreigners demand U.S. dollars, the other side of the trade is dumping yuan.

The takeaway is that the Chinese people have turned into U.S. dollar buyers, which will drain foreign currency from the central bank. Interest rates should be rising to defend the currency, but they are instead falling, opening up the potential for more significant devaluation later this year, most likely after the U.S. dollar strengthens and euro weakens.

There may be no major crisis in the currency, but that will depend on how much capital the central bank expends fighting devaluation. The country has moved from the dollar peg to a currency basket and advanced the internationalized the yuan, which will allow for more dollar outflows and depreciation should the greenback rally versus the yen and euro.

Finally, a yuan depreciation of 10% or more would be far from an FX crisis, but it would shock financial markets that remain overwhelmingly yuan bullish, especially because it will come in the midst of a global crisis. The psychological effects of a yuan devaluation expressed in the financial markets will far outweigh the economic impact.

U.S. hedge fund sees Chinese GDP growth at 3%

From Bruce Krasting:
It Ain't Priced In

I had an e-mail exchange with an old fried who now works for a large macro hedge fund up in Greenwich. The broad topic was the very long list of signs that the global economy is hitting the skids. He had this to say:

…certainly does not point to robust job growth…manufacturing activity globally really falling sharply..think weakness in Europe spilling over to those who export to the region..retail sales in Europe plunging…China growth may now be down to 3% in our view…U.S. q2 may be sub 1.5%..Europe- contraction…Brazil sub 3%...Australia slowing sharply...

I almost fell of the chair reading this. Say this group is right about China. What does it mean if its growth rate falls to 3%? A very hard landing for all manner of things, is the answer.

There have been many China bears the past year or so, but against these bearish views there has been a widespread belief that China will muddle through. My point is that China GDP = 3% is absolutely not priced into today’s market.

If one Connecticut hedge fund believes this, many believe it or are at least hearing it.

Is China losing control of the housing market? Or is this the housing market's last gasp?

Chinese leadership is running scared that the economy is finally out of their control as jawboning of the real estate market steps up.

China Must Prevent Rebound In Property Prices, Wen Says

Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

...“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said.

Not only will their efforts be for naught, they will have been to the detriment because the public will learn that the government, even when it uses all of its power to enforce an economic policy, cannot achieve its objective.

I find it strange that China bulls think the rise in the property market is bullish and signals a strong Chinese economy. Growth will resume in the housing sector, but rising property prices will be accompanied by higher inflation at a time when exports are suffering and there's a general slowdown, with credit growth contracting. High inflation in a slowing economy is a recipe for very high inflation—and rising crop prices in America will throw gasoline on the CPI fire. This is a political worst case scenario for the CCP.

Which is why the central government is dropping the hammer on local governments:

住建部：若房价大幅反弹调控松动 地方将被问责 (Housing Ministry: If prices rebound and regulations slacken, local governments will be held accountable)

Local officials are promoted based on a variety of criteria, one of which is GDP growth. Additionally, they rely on land sales to finance local government spending. The central government appears to be changing the formula, however, by threatening local officials who do not carry out Beijing's orders to reign in home prices.

China home prices could fall again

Recent gains in Chinese house prices might be a result of misguided expectations, according to economist Yi Xianrong of the government-affiliated Chinese Academy of Social Sciences, writing in the state media Thursday.

In commentary for the China Daily, Yi said the price rise has taken place without easy credit, making it strange in a historical context. "The current rise in house prices has, to a large extent, been a result of misinterpretation of the government's policies to stimulate the economy, an increase in real-estate speculation, and excessive concerns among ordinary home buyers that prices will continue to rise," Yi said.

I am in agreement with Yi, the real estate market is likely to turn down again. But the events of the past month and the government's response indicates that they're not sure they can pull it off. The use of rhetoric and now threats of punishment for local officials indicates that there's worry in Beijing. This may itself be a reaction to the bubble, and in keeping with socionomic theory, the Chinese government will ratchet up the restrictions on the housing market even as it is structurally weakening. Nevertheless, I still remain open to the potential for the central government to lose control of the economy, completely, with the housing market bubble reflating, inflation rising and the yuan depreciating.

Finland is willing to leave the eurozone

Finland Would Rather Exit Euro Than Pay for Others

"Finland is committed to being a member of the euro zone, and we think that the euro is useful for Finland," Urpilainen told financial daily Kauppalehti, adding though that "Finland will not hang itself to the euro at any cost and we are prepared for all scenarios."

"Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," she added.

Urpilainen's spokesman Matti Hirvola stressed to AFP that the minister's comments did not mean Finland was planning to exit the euro zone.

"All claims that Finland would leave the euro are simply false," he said.

They're not leaving yet, but they've thought about it.

Martin Armstrong's predictions from 1998

PDF Link: 1998 Fall Seminar Tour

Fear of massive crop failures

Social mood strikes again:

What Happens If Record Heat and Crippling Drought Cause Widespread Crop Failures Throughout the United States?

If temperatures continue to stay this high and we don't start seeing more rain, farmers and ranchers all over the nation are going to be absolutely devastated. So what happens if we do see widespread crop failures throughout the United States? That is a question that is frightening to think about.

Below is a chart of two Teucrium ETFs, symbols WEAT and CORN.

China reserve ratio cut coming?

They are already behind the curve. The question shouldn't be whether there will be a cut, but how large? The economy needs a shock here, if monetary policy is to work. (Not that generating inflation here wouldn't create a whole separate set of problems.)

If they cut this weekend though, it will spook the market. They will likely time a big cut with the release of bad data.

Will China Cut Reserve Ratios This Week?

The China Banking Association wrote in a front-page editorial in the China Securities Journal on Tuesday that the central bank needs to cut the banks' RRR, currently at 20 percent, to ease a short-term liquidity crunch.

The PBoC pumped about 143 billion yuan ($22.53 billion) into the banking system on Tuesday following a 125 billion yuan injection via two reserve repo offerings the previous week. The last time it injected liquidity into the market in May, it was followed by a cut in the banks' reserve requirements, triggering talk that this time around as well the central bank may follow up with a cut.

Bank lending was also weak in June. China's 'Big Four' banks issued 180 billion yuan ($28.3 billion) worth of new loans, the Shanghai Securities Journal reported on Tuesday, down about 28 percent from the 250 billion yuan in new loans the four banks issued in May.

Update: Within about an hour of posting this, China cut rates 0.31% for 1-year money (6.31% to 6%) and cut the reserve requirement by 0.25%. Deposit rates were cut from 3.25% to 3%. The minimum interest rate was also reduced to 70% (which means a bank could make a 1-year loan at 4.2%). In the previous month, that was cut from 90% to 80%.

These moves shore up liquidity and could ease the credit crunch, but it will not do anything to turn the economy around.

China's spiraling financial bubble

Over at Steve Keen's Debtwatch are two articles on China's growing debt financing schemes.

The Looting of China by the Kleptokapitalist Bourgeoisie Roaders

Zoomlion has an interesting business model, it is similar in many of ways to Caterpillar, except whereas Caterpillar report falling sales, Zoomlion reports astounding sales growth with a fivefold increase in revenue since 2007. Zoomlion customers sometimes buy ten concrete mixers when they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion.

Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3 per cent YoY, down from 19.2 per cent recorded last year. Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day .

This is the type of financing that did in firms such as Lucent at the end of the Internet Bubble.

China’s Concrete Bubble

Chinese construction keeps trending down with Sany the worlds sixth largest heavy machinery maker reporting a rise in profit of 5.4% in the same quarter as a blow out in receivables of USD $1.39 billion and cash reserves falling by USD $535 million . Sany is clearly booking profits on 100% financed machinery while providing zero transparency on credit risk and delinquency . If the GFC has taught the world anything. then 100% ‘no money down” vendor finance should ring alarm bells. This all started about about 3 months ago when Zoomlion started to aggressively financing heavy machinery for anyone that wanted to sign up.

Concrete is a very good indicator of GDP growth and the slide in demand is a major red flag. The debt financing is accelerant should the economy slow sharply, which is a growing possibility.

Here's a look at the Baoshan Steel Index. As you can see, since peaking in 2011 there have been three price decline movements. The first was the cliff drop last fall (when the real estate slow down hit, Europe and U.S. debt crises were front page news), then a slow decline into February before a bounce into early spring. Since April 20, the decline has resumed at a steeper pace than the winter.

Chinese steel industry profits continue to shrink

The Economic Information Daily citing statistics from an industry association said the combined profits of China major steel producers dropped more than 94%YoY to CNY 2.53 billion in the first five months this year amid sluggish demand as well as severe overcapacity in the sector.

According to the report in May, the combined profits of the 77 steel mills surveyed by the China Iron and Steel Association slid 21.7%MoM to CNY 1.4 billion, even though the second quarter is supposed to be a peak season for the industry. Also in May over 30% of companies in the sector suffered losses.

Investors have priced a slowdown into shares of Sany this year (600031). Shares of Zoomlion (1157) have held up better, but they are both down sharply from their highs of years past.

Germans turn on the euro

The Euro Endangers German Economy

In a situation reminiscent of the autumn of 2008, after the bankruptcy of investment bank Lehman Brothers, ailing banks are infecting the rest of the economy. "Cross-border financing is declining in Europe," says Michael Keller, managing partner of the Frankfurt-based management-consulting firm Keller & Coll.

Investment bank Morgan Stanley says that Europe's banks are undergoing a "Balkanization" that will have "serious implications" for the availability of loans and for growth in some countries. The euro, which was intended to stimulate growth in Europe, is becoming a divisive force in the crisis.

Particularly along the edges of the EU, weakened banks are bringing companies down with them. "Companies are only doing business in the peripheral countries of the euro zone if they can obtain the necessary financing locally," says consultant Keller.

Real estate bounce in June

Keep in mind that housing is the main asset used by ordinary Chinese to hedge inflation risk.
Beijing home sales rebound in June

A property market rebound has been seen in Beijing as home sales in China's capital jumped to 25,602 units in June, 10.5 percent more than in May and 50.6 percent more than June 2011, new figures have indicated.
The trading volume of new homes in Beijing rose 14.1 percent month-on-month to more than 11,983 units in June, according to data released by the municipal commission of housing and urban-rural development on Sunday.
The average new housing price in Beijing in June was 20,678 yuan ($3271.8) per square meter, a 2.1 percent increase from the previous month, according to data from 5i5j Real Estate, a major housing agent in China.
Lower prices from developers and banks' reduction of interest rates prompted the rebound, according to Hu Jinghui, vice-president of 5i5j Real Estate.

The government's tightening policies have meant housing stock remains high. It is not necessary for home buyers to purchase in haste or make speculations, he added.

Real-Estate Prices Rise in China

According to a survey of property developers and real-estate firms, the average price of housing in 100 major Chinese cities rose in June from the previous month, after nine straight months of decline. The survey follows other signs that the Chinese market has bottomed out, including a pick up in real-estate investment in May and a far shallower decline in property sales during that month compared with April.

Assuming the economy isn't going to slow and do the job of lowering prices, will government restrictions work? The Chinese government looks smart because when an economy is growing strongly, it is relatively easy to redirect demand into other sectors of the economy. However, if things start going poorly, the wheels come off. A failure to stop rising home prices will be a signal that the real estate market cannot be stopped, that the government cannot control the economy and that homes remain a good inflation hedge. This could reignite the housing bubble.

Guangzhou Cars Sales Capped at 10,000 Per Month

The city of Guangzhou, a booming center of Chinese industry and economy, the capital of the administrative region of Guangdong, and China’s third largest city with 12.7-million inhabitants is imposing strict limits to the number of cars that can be purchased. According to autnews.gasgoo.com, local authorities will be limiting car purchases to 120,000 per year, which equates to just 10,000 per month.

Flashback to 2010: China's policy to encourage auto-buying shows effect

China's policy allowing car-buyers to enjoy both a purchasing tax cut and old-for-new trade-in subsidies, which took effect on Jan. 1, was generating good results with increasing applications and subsidy handouts, the Ministry of Commerce said Saturday.

Chinese government interference in the economy is starting to take its toll.

Violent protest in Shifang, Sichuan

Pictures of the protest are all over Weibo, posted below.

Sichuan Protest Turns Violent

Police in southwestern Sichuan province deployed tear gas against residents protesting a planned molybdenum copper plant in the latest case of environmental activism facing at times violent resistance from authorities.

Unrest in the small city of Shifang, famous for crafting cigars for Mao Zedong, comes roughly a year after massive protests rocked the northeastern city of Dalian. Unlike in Shifang, environmental protests in Dalian in August ended largely peacefully after local officials promised to close a controversial petrochemical plant.

Details of the protest Monday in Shifang were murky. The search term “Shifang” quickly became the most-searched term on Sina’s popular Weibo microblogging service Monday afternoon, with users posting photos and videos they say were from the protest.

“Save our homes and environment for the next generation,” read one protest banner, according to a picture posted on Weibo.

The exact size of the protest wasn’t clear, and city officials couldn’t be reached to comment. An employee at the emergency room of Shifang People’s Hospital said not many had sought treatment as a result of the protest, but declined to provide details.