Time To Buy Chinese Stocks?

Here's a look at the Shanghai Composite over the past 10 years:

Here's the Chinext, which went higher with the tech stocks in America.

Chinese stocks offer solid dividend yields in some cases, and that's not accounting for faster growth than in the developed markets. Chinese stocks should do well in a yuan devaluation scenario as well. Except, importantly, when the devaluation begins, since it tends to accompany great uncertainty.

Here's two conflicting headlines on real estate (though one is residential and the other commercial).

Templeton Braving China Home Bubble With Bet on Cheap Shares
“We found a couple of these very good, strong property companies focused on very key markets and we have invested in them,” Dennis Lim, a money manager at Templeton who helps oversee more than $50 billion in emerging markets, said in an interview yesterday from Singapore without naming specific companies. “Everyone talks about a housing bubble in China but it’s not one homogeneous country.”

Soho China Sells Shanghai Buildings Amid Deepening Office Glut
Soho China Ltd. (410), the biggest developer in Beijing’s central business district, will sell two office buildings in Shanghai as an office glut deepens in the country’s financial center.

The company signed an agreement with Financial Street Holdings Co., a developer of Beijing’s central business area, to sell its entire equity stake in Soho Hailun Plaza and related loans, and Soho Jing’an Plaza for about 5.23 billion yuan ($853 million), it said in a statement to the Hong Kong stock exchange today.

“We’ll optimize our assets by selling some projects at relatively non-prime locations and buy better ones at an appropriate time,” said Chairman Pan Shiyi in an e-mailed statement today. “The company’s long-term strategy of holding and operating office buildings Shanghai and Beijing’s prime locations will not change.”
Soho is shifting to a REIT model, so they'll need to put that money to work......at an appropriate time.

Overall, Chinese shares are starting to look attractive again. It has been a long time since I considered investing there, but there will be great opportunities even in a scenario where the Chinese economy grew at 0% for a few years. There will be great losses in some sectors, but this will be offset by great gains in others.

America Shifts Right in 2014

Although it doesn't look like it at first glance, there's is a decided rightward shift in America. It is in the early stages and at the moment, much of it is being driven by negative social mood and the end stage of democracy—when the money runs out.

Entropy: Decoding the DNA of This American Moment
The rejection of Governmental power in aid of the governed is so rare as to be the stuff of legend. (When George III heard of George Washington's resignation as commander, the king remarked, "He is the greatest man in the world.")

The question, finally, is, What is going on here? How is it possible that Germany and England, twice in two decades, retired to the traditional dueling grounds to kill off an entire generation of their youth? Why did we follow France to Vietnam, and Russia into Afghanistan? Why have we, the citizen—owners of this country, allowed an entrenched class of bureaucrats to have control over our laws and resources? Here is my own law of thermodynamics: The blonde always breaks up the band.

The successful band attracts groupies. The groupie, girlfriend, boyfriend, spouse of the most successful member of the band may inherit a certain power. He or she, at the least, may, in bed, comment upon or indeed contravene the decisions made in the studio. He or she is taking easily offered (cheap) power and using it. Does this make these operations evil? Not necessarily. The paramour may very well have the interests of the band at heart and may even have musical knowledge and insight. But the mechanism of decision (the band in the studio) is forever altered and weakened. The other band members, faced with this new regime, each will find his or her own blonde (paramour, agent, brother-in-law), for the precedent has been set, the compact has been broken, and energy will take the most efficient path downhill, and thus it ends in court. As it does with our government in the waning days of American hegemony.

What can one say of a country in which elected officials voted, in a 2,400-page bill, to give the government power over six percent of the economy, according to laws that no one had read? "We have to pass the bill to find out what's in it," said Nancy Pelosi, Speaker of the House. Is this an example of daylight madness? Of course.

......If before the big bang there was nothing, and if all energy since then is expended in the manner best suited to return the world to that state, then all seemingly random permutations of energy dispersal must be attempts to accelerate the return to chaos.
Democracy leads to decay and chaos.

Alec Baldwin: Good-bye, Public Life
Am I a homophobe? Look, I work in show business. I am awash in gay people, as colleagues and as friends. I’m doing Rock of Ages one day, making out with Russell Brand. Soon after that, I’m advocating with Jesse Tyler Ferguson and Cynthia Nixon for marriage equality. I’m officiating at a gay friend’s wedding. I’m not a homophobic person at all. But this is how the world now sees me.

I haven’t changed, but public life has.

It used to be you’d go into a restaurant and the owner would say, “Do you mind if I take a picture of you and put it on my wall?” Sweet and simple. Now, everyone has a camera in their pocket.

......I’ve lived in New York since 1979. It was a place that they gave you your anonymity. And not just if you were famous. New Yorkers nodded at you. New Yorkers smiled at you at the Shakespeare & Co. bookshop. New Yorkers would make a terse comment to you. “Big fan,” they’d say. “Loved you in Streetcar,” they’d say. They signaled their appreciation of you very politely. To be a New Yorker meant you gave everybody five feet. You gave everybody their privacy. I recall how, in a big city, many people had to play out private moments in public: a woman sobbing at a pay phone (remember pay phones?), someone studying their paperwork, undisturbed, at the Oyster Bar, before catching the train. We allowed people privacy, we left them alone. And now we don’t leave each other alone. Now we live in a digital arena, like some Roman Colosseum, with our thumbs up or thumbs down.
Tocqueville warned against this mentality in Democracy in America. It also could be found at America's founding, when mobs of patriots would loot the homes of Loyalists and chase them out of town.

I probably have to move out of New York. I just can’t live in New York anymore. Everything I hated about L.A. I’m beginning to crave. L.A. is a place where you live behind a gate, you get in a car, your interaction with the public is minimal. I used to hate that. But New York has changed. Manhattan is like Beverly Hills. And the soul of New York has moved to Brooklyn, where everything new and exciting seems to be. I have to accept that. I want my newest child to have as normal and decent a life as I can provide. New York doesn’t seem the place for that anymore.
Alec Baldwin is giving into despair. He wants to get out of the chaos.

This is consistent with a decline in social mood—a desire to be separated from the public. However, poor people cannot put gates around their homes because they cannot afford them. Poor people avoid the other by pushing them out of their neighborhood through intimidation and violence.

Then there is Spike Lee's rant against immigration.
Then comes the motherf—ing’ Christopher Columbus Syndrome. You can’t discover this! We been here. You just can’t come and bogart. There were brothers playing motherf—ing’ African drums in Mount Morris Park [in Harlem] for 40 years and now they can’t do it anymore because the new inhabitants said the drums are loud …

Nah. You can’t do that. You can’t just come in the neighborhood and start bogarting and say, like you’re motherf—in’ Columbus and kill off the Native Americans. Or what they do in Brazil, what they did to the indigenous people. You have to come with respect. There’s a code. There’s people.
Spike Lee doesn't like outsiders coming into the community and changing it, but that is exactly what the dominant ideology in America, multiculturalism, says must happen. So there's an anti-democratic sentiment from anyone who doesn't want their neighborhood changed.

Lee is actually talking about gentrification in his rant, but it applies equally to the Hong Kong people railing against Mainland locusts or Southernors slamming Northeast liberals who move in and try to change the culture.

Then there's democracy turning into the ouroboros and consuming itself in battles such as The Battle of San Jose.
It doesn’t take much imagination to see where the blue model is heading in the long run. The poor and middle-class are paying more in taxes even as services are being cut. And a growing portion of those tax dollars is going to fund pensions that pay out 90 percent of a public employee’s final salary level in retirement. According to the report, pension costs account for a full quarter of San Jose’s fiscal pie, quadruple what it did only ten years ago.

And we still can’t even call public employees the clear victors in this ugly contest. In San Jose, the number of current public employees has been cut by almost thirty percent. In other words, public employee union members are paying dues to secure benefits that could eventually force cities to fire them.

For this reason and others, the blue civil war is seeing many more Spotsylvanias than Gettysburgs: battles in which the bodies pile up quickly without any clear winner to show for it. Both public employees and poor residents are long-run losers in this system that union leaders and their allied legislators have imprudently designed. This is the case in Detroit and Chicago as much as it is in San Jose.

Make no mistake: the blue civil war is raging amongst the leadership ranks of the political class, every bit as much as it is at the level of individual citizens. Mayor Reed is fighting an uphill battle to ease constitutional restrictions on pension reform, measures which unions and some fellow Democrats vehemently oppose. A similar battle is being fought in Illinois, Rhode Island, and Chicago.

Is retirement security for public workers more important than social services for the poor? Are pensions and job security for teachers more important than a poor child’s access to a good education? These are the kinds of questions that will continue to pit Democratic legislators and voters against each other.
Speaking of bankrupt cities, here's another one to add to the list: Rome. It's not American, but the story is the same. Rome days away from bankruptcy
Matteo Renzi, the Italian prime minister, came under pressure on Thursday as the city of Rome was on the brink of bankruptcy after parliament threw out a bill that would have injected fresh funding.

Ignazio Marino, Rome mayor, said city services like public transport would come to a halt and that he would not be a "Nero" - the Roman emperor who, legend has it, strummed his lyre as the city burnt to the ground.

And then there's this article that sums of the effect of democracy on the public: A morbidly obese patient tests the limits of a doctor’s compassion
The patient is in his 40s. He spends his days on the sofa at home, surviving on disability checks related to his back pain.

Facing him, I feel momentarily put off. I’m not sure just where to start the examination, and when I begin, my hands look small and insignificant against the panorama of skin they’re kneading.

It’s hard to tell, exactly, but I think his pain is coming from somewhere around his stomach.

I call the surgeon. When he finds out how much the patient weighs, he says that he’ll be down to see him “in a while.”

Awaiting his arrival, we try to shoot some X-rays. When we roll him onto his side, though, he turns an unnatural shade of blue-gray and can’t tolerate the position long enough for us to put the X-ray cassette behind his back.

We try a chest X-ray, turning up the power to the maximum setting. All we see is white: The patient’s body is just too thick to allow standard X-rays to penetrate to the bones; he is a walking lead shield.

......“The Americans with Disabilities Act says that they should have the proper equipment to handle me, the same as they do for anyone else,” he says indignantly. “I’m entitled to that. I’ll probably have to sue to get the care I really need.”

......Though I have no way of knowing it, within a few months a crane will hoist the patient’s body through a hole cut in the side of his house, a hole that allowed EMS personnel to lower the body onto their new ultra-wide, ultra-sturdy gurney.

There's the PC card game.

Consider the following actual situations.

Should Christian Bakers Be Allowed to Refuse Wedding Cakes to Gays?

Muslim taxi driver dumps family out of his cab after spotting an unopened bottle of wine saying it was against his religion

Gay activists have met their match with Muslim barbers (In which a Muslim barber refuses to barber a lesbian because his religion forbids him to touch a woman other than his wife.)

ASA Members Vote To Endorse Boycott of Israeli Academic Institutions

Not safe to display American flag in American high school on Cinco de Mayo

Is there any difference between them and why?

Bonus question re number 3: suppose the Muslim taxi driver refusing the couple with the bottle of wine was white and the passengers were black, would that change your mind? Why should it? An unrelated but practical question: why would you like a wedding cake baked for you by someone patently disapproves of your life style? Wouldn’t you be afraid to eat it? Why on earth would you want a shave or haircut from an angry Muslim barber? Have they run out of other barbers in Canada or is there a principle involved.

Officials at a Northern California high school acted appropriately when they ordered students wearing American flag T-shirts to turn the garments inside out during the Mexican heritage celebration Cinco de Mayo, a federal appeals court ruled Thursday.

The 9th U.S. Circuit Court of Appeals said the officials' concerns of racial violence outweighed students' freedom of expression rights. Administrators feared the American-flag shirts would enflame the passions of Latino students celebrating the Mexican holiday. Live Oak High School, in the San Jose suburb of Morgan Hill, had a history of problems between white and Latino students on that day.

The unanimous three-judge panel said past problems gave school officials sufficient and justifiable reasons for their actions. The court said schools have wide latitude in curbing certain civil rights to ensure campus safety.
The threat of violence is now grounds for revoking first amendment rights.

And then in the UK: Tough Love
I asked her whether she thought a young and violent burglar would have proved much of a companion. She admitted that he wouldn't, but said that he was the type she liked; besides which—in slight contradiction—all boys were the same.

I warned her as graphically as I could that she was already well down the slippery slope leading to poverty and misery—that, as I knew from the experience of untold patients, she would soon have a succession of possessive, exploitative, and violent boyfriends, unless she changed her life. I told her that in the past few days, I had seen two women patients who had had their heads rammed down the lavatory, one who had had her head smashed through a window and her throat cut on the shards of glass, one who had had her arm, jaw, and skull broken, and one who had been suspended by her ankles from a tenth-floor window to the tune of, "Die, you bitch!"

"I can look after myself," said my 17-year-old.

"But men are stronger than women," I said. "When it comes to violence, they are at an advantage."

"That's a sexist thing to say," she replied.

A girl who had absorbed nothing at school had nevertheless absorbed the shibboleths of political correctness in general and of feminism in particular.

"But it's a plain, straightforward, and inescapable fact," I said.

"It's sexist," she reiterated firmly.

H/T: Outside In
Alpha Game

Rail Data Still Heading Lower

Still no downturn, but the data is very close to breaking below the lows of last year, ending the uptrend in rail traffic.


The Logic of Strategy: Yuan Devaluation and the Road to Trade War

There's an excellent post for anyone interested in China: Review of “The Rise of China vs. The Logic of Strategy” by Edward Luttwak. I just finished the book and I don't think I can add much to that complete and thorough review. Read through it to get an idea of the arguments put forth in Luttwak's book, plus a summary of all the players.

If you're lazy, the quick and dirty summary can best be given by a comparison with Germany and England prior to WWI, with China as Germany and the USA as England. Germany was the up and coming power and had surpassed England economically, culturally and academically. What got Britain very nervous was Germany's decision to build a large navy. England responded with a new ship, the dreadnought, and with a diplomatic flurry to move enemies into the neutral or friendly category. The result is well-known: although eclipsed in many areas, British superiority in diplomacy and war defeated Germany twice.

China's rise was similarly peaceful, but China's aggressive military buildup and claims to South China Sea territory have all of the surrounding nations on alert. Due to the advent of nuclear weapons, logic dictates that total war will be avoided in Asia. However, the U.S. and a group of allies could effectively deter Chinese aggression in the Pacific, and even though the U.S. has not sought out a coalition, Chinese aggression has pushed Southeast Asian nations (and even Mongolia) into the arms of the U.S. Finally, due to its size and the desire to avoid an outright conflict, the United States has a very powerful weapon if it can overcome the free trade ideology: economic policies designed to slow China's economic growth. Using economic policy, the U.S. could deliver an effective blow to Chinese growth that will keep its military from exceeding U.S. capabilities without requiring a massive buildup in military spending, a policy which would further slow GDP growth in China. If the U.S. and regional economies prefer U.S. influence in the region to that of Chinese influence (and putting aside all ideology, the distant hegemon remains more attractive than the near), they can choose a path of slower economic growth designed to keep China from becoming the dominant power.

The reason for this policy is not a U.S. desire to keep China from rising. Instead, it is China's increasingly aggressive policies in the region that make neighbors nervous. China makes claims to territory based on very loose evidence, such as a map from hundreds of years ago. Using the same logic, Italy could claim all the land formerly held by the Roman Empire or Sri Lanka can claim India (one example given by Luttwak). No one would fear a claim by Italy or Sri Lanka, but imagine Italy was among the fastest growing economies in the world, rapidly building up its military capabilities and it was openly making bold claims to territory. Everyone in Europe, North Africa and the Middle East would be nervous.

There's a talk by Luttwak on the topic of his book:

The "logic of strategy" coincides with social mood and current events. Protectionism is on the rise due to economic factors tied to declining social mood, but Luttwak's book adds a geostrategic grounding for protectionism as part of an economic cold war in the Pacific designed to restrain China's ambitions. Luttwak doesn't delve into economics in his book, but it is very easy for me to imagine the path to protectionism.

There are three U.S. China policies according to Luttwak. The first is the Pro-China Treasury Department. This wing also represents the capture of American government by Wall Street and the financial industry: Treasury doesn't care about manufacturing and pursues a China policy solely almost aimed at profits for Wall Street. The Treasury also represents the idea of free-trade as ideology. Manufacturers have almost no voice in American policy these days.

Next is the State Department, which confronts China in Asia. The State Department is mainly concerned with the "Asia Pivot." It was not U.S. policy to encircle China by forging closer alliances with Southeast Asian nations, rather China's own aggressive posturing pushed these nations into proactive efforts to attract the United States. There are areas where the U.S. was proactive though, such as working to strengthen ties with India.

Finally, there is the national defense establishment. They view China as potentially the main enemy of the future, though this is as of yet undecided. China is a cyber threat and potential military threat. The Defense Department is involved with strengthening regional military ties, such as the naval visits to Vietnam.


The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.

There are also the academic attacks on free trade. Australian economist Steve Keen discusses the work of Dani Rodrick in 1,000,000 economists can be wrong: the free trade fallacies - See more at: http://www.debtdeflation.com/blogs/2011/09/30/1000000-economists-can-be-wrong-the-free-trade-fallacies/.
But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?

The obvious answer is that you don't. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo's model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the "new" model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo's argument would be considered, but it has never been seriously addressed.

Ricardo also assumed that British businessmen wouldn't uproot their life and open a factory in Portugal. As the real life modern example of free trade has shown, thanks in part to modern travel and telecommunications, that is exactly what happens. Not only does the factory close in America, but the capital follows it to China. Instead of building a new industry in the United States, the entire manufacturing sector is hollowed out. There are small diverse benefits to lower consumer goods prices, but the vast bulk of the gains go to two groups: workers in the destination country such as China, and to the holders of capital, which are mainly the nation's wealthiest citizens. The nation's capital base is sold off or relocated, with the profits going to the top. The median male income is flat since the 1970s in the U.S., with trade playing a huge role (along with the increase in labor supply from immigration and feminism, both of which also benefit the wealthiest Americans who own most of the capital).

With a growing economic case against free trade, a shift in social mood making anti-free trade opinion more popular, plus the loss of political support for the financial sector, free trade will become a centerpiece issue in American politics. The trigger will be one of two factors. One is economic. China's credit bubble isn't going to slowly ride off into the sunset. There will be pain, it is only a matter of where it lands. The path of least resistance is devaluation of the yuan, something I have been looking for here for several years now due to the growth in credit. A target of ¥8 to $1 is a reasonable ballpark figure, with ¥10 to 1 not unbelievable given the rise of the shadow banking sector. The actual number isn't as important as the size of the devaluation: it will likely be large and set off the anti-China arguments that have been growing in the United States. The left and right have their beef with China's economic policies and the right has provided the main rhetorical cover for business. When that goes, there will be a bipartisan push for policies that counteract China's "predatory" currency policies. A Chinese devaluation could be the trigger.

The second factor is geopolitical. Do take the time to read the lengthy review linked above, and/or watch the video. Luttwak's main point is that China cannot simultaneously build up its economy and influence at the same time it builds up its military, and not run into resistance from surrounding states. He cites the Chinese policy on the island disputes as the case in point: instead of increasing China's power in the region, it has pushed Vietnam, the Philippines, Japan and Indonesia into the arms of the United States. An anti-China coalition is building up due to each nation following the logic of China's inevitable rise in power along with the perception of an increasingly aggressive China. China has "tipped its hand" so to speak and these nations are moving preemptively. Due to the nuclear arsenal of the United States and China (to say nothing of Russia's interest in the region), there isn't going to be a major war for survival. This reduces the options for confrontation, with one of the most powerful being economic. If there is a minor military confrontation that is too large to be ignored, the most politically acceptable response will be economic.

Either the economic or the geopolitical event can happen first then, but in time, the two will be seen as inseparable. Once events move in this direction, the logic to continue down the path is compelling.

Anyone can run GDP numbers for the U.S. and China. One simple calculator is here: Catching the eagle. The default is 7.1% GDP growth, 4% inflation and 2.9% yuan appreciation for China. For the U.S., 2.4% GDP growth and 1.4% inflation. With these numbers, China's economy overtakes the U.S. in 2019. If growth is more like the 4% that Marc Faber believes (and the debt growth/gdp growth ratio suggests is correct), China overtakes the U.S. in 2022. Lowering that GDP growth to the 3% low end forecast of Michael Pettis adds one year, to 2023. However, take down the inflation number (due to credit deflation) or factor in a devaluation of the yuan, and China quickly falls behind the U.S. and can "never" catch up. See: China may not overtake America this century after all.

The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty. For East Asian nations, a distant hegemon is better than the near one with an appetite for your territory.

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.

Yuan Insanity

The Chinese yuan has depreciated about 1.3% in the past month. Overall, it was a move from around 6.04 yuan per dollar to 6.11 yuan. It's a big move for the yuan because of the way the currency is managed, but it is not a big move in terms of currencies.

However, as with people believing home prices never go down, a lot of people believe the Chinese yuan never goes down. Oops.

Morgan Stanley Warns Of "Real Pain" If Chinese Currency Keeps Devaluing

The tipping point for spiraling losses is very close because many people are piled into contracts that assume low volatility in the yuan. Not only are they betting on appreciation, they are betting that the yuan doesn't move by much.

Thus if they yuan starts to depreciate, losses will pile up very quickly for investors and corporations. The market can slam into reverse very quickly and depreciation will be far larger than most people anticipate. Along with the rest of the Chinese financial system.


Other Coverage of Weak Real Estate Market

Chinese Realtor: 2014 Real Estate Risk Falling Prices

China Appears on Verge of Dangerous Real Estate Decline
For years, Ren Zhiqiang, one of the largest property developers in China, said he has been attempting to draw attention to the risks in China’s real estate market. He is chairman of Huayuan Property, which has a market capitalization of 4.5 billion yuan, ($740 million).

He alerted investors to slowing house prices in a real estate award ceremony on Jan. 21 of this year.

“I’ve raised the topic of ‘risk’ in real estate reports for the first time in over 10 years,” Ren said. “It’s a very dangerous thought that developers still believe house prices will increase like in 2013. That’s my biggest worry.”

Housing price growth has been worse in third and fourth tier cities so far this year, with a declining trade volume for the last three months.

‘Ghost Cities’
The slowdown in the real estate market is having a more pronounced impact on the smaller cities than many predicted.

“Real creative and big companies in China are located in top tier cities, and almost none of them are in China’s third and fourth tier cities. This leads to brain drain and population outflow in those places,” Jason Ma said.

“So small cities can only rely on natural resources such as mining or government projects. But local governments have less and less ability now because of huge local debts.”

March Cash Crunch All But Guaranteed

China PBOC Offers CNY100 Billion 14-Day Repos Tuesday -Traders
The PBOC will probably drain more liquidity this week than it did last week, when it drained only 108 billion yuan for the whole week. It offered 48 billion yuan of 14-day repos last Tuesday.

Most Asian Shares Fall as China Property Concerns Weigh
The Shanghai Composite lost another 2.1% to end at 2034.62 and Hong Kong's Hang Seng Index lost 0.3% to 22317.20 after the People's Bank of China offered 100 billion yuan ($16 billion) of 14-day repurchase agreements in Tuesday's open-market operation, which in effect drained money out of the system.

In June, September and December there were quarter end cash crunches fueled by banks rushing to window dress for the regulators. The cash crunch in September was not reported as a cash crunch because the PBOC intervened ahead of a move higher in interest rates. In June and December, they only intervened after the cash crunch raised interest rates.

Now the PBOC is draining interest rates. Trusts are coming due. Banks are tightening lending policies to developers who make up a huge proportion of trust borrowers. Banks are fighting with a surge of online money market funds winning over depositors. Meanwhile, the PBOC is depreciating the yuan in order to halt hot money flows (this is the wisdom of the crowd, we still don't know for sure), which leads to less foreign currency flowing into China, which leads to fewer renminbi created. The situation is shaping up to be much worse than in any of the prior three quarter ends.

If Chinese Banks Didn't Have Enough To Worry About, Here Comes More

Chinese Banks' Four-Front Online Battle
First, online money-market funds are luring deposits away. The government caps the rates banks may offer on deposits, so lenders have had to respond by offering other products, with higher yields, paying more for funds. So far, the online funds' share is still tiny, equal to about 2% of bank demand deposits, but Credit Suisse expects that to quadruple to 8% this year.
Alibaba pays about 6% for deposits. The big banks pay 4%. Interest rate deregulation has led to higher interest rates especially at the lower end, which destroys the banks' easy profits.
Ironically, these online money-market funds became so popular so fast because of intermittent cash squeezes in the banking system, which have caused a surge in yields on loans between banks. Funds like Alibaba's Yu'e Bao took advantage of the high yields to offer returns above 6%, attracting investors looking to do better than the typical 4% offered on similar funds sold by banks. A demand deposit account at a bank earns just 0.35% a year.
The more money that leaves the bank, the better the odds of a cash crunch at the end of March (odds are already near 100%). Another spike in interest rates and surge in Yu E Bao yields will draw in more deposits.

Scrambling to match terms offered by those cash-rich innovators will hurt bank profits. In highly competitive markets such as Wenzhou, Industrial & Commercial Bank of China, Ping An Bank and others already try to keep up with the Internet players by offering money-market products of their own that yield more than 6%. Having to roll out such products nationwide will drive up banks' funding costs further, affecting their ability to raise new capital to cover expected loan losses.
The reason why the banks can charge high rates for loans and can pay low rates for deposits is because of financial repression. The government instituted this policy to recapitalize the banks. Now, banks are in bad shape once more. They added bad debts from 2009 to 2013 at the behest of the Party and now they're being repaid with interest rate deregulation.
Even if the yield difference between money-market funds and bank deposits narrows as China's cash crunches ease, online finance will retain its edge in convenience and efficiency. The great switch is just starting. In the U.S., within seven years of the opening of the first money-market fund that allowed check writing, assets in money-market funds had grown to equal almost half of household bank deposits.

The second front is payment services. Chinese consumers are already using their phones to pay taxi fares and exchange electronic "red packets"—cash gifts for occasions like the New Year—through apps such as WeChat. Although many are still concerned about the security of transferring money over the phone, this fear should fade.
This. When you invest in Yu E Bao, you get an update every day of how much money you earned that day, what the interest rate was, along with a chart showing the change in interest rates, all delivered to your mobile phone.

Mood In China: If The Renminbi Devalues, Home Prices Will Fall 80%

That is headline news at ifeng. Some trader said when seeing the continually falling yuan, "If the yuan starts depreciating, first tier home prices will fall 80%......."

I would not be shocked if first tier home prices fell 80% adjusted for yuan depreciation and price decline, but this headline does not lead to a speculative analysis of how currency depreciation could accompany a bursting of the real estate bubble. It is just a throwaway line in an article about the renminbi falling for 5 straight days.

So why is this headline news? Social mood. Fear is high and rising in China.

Yuan Plunge On Tuesday; Anybody Watching the Yuan Price of Gold Besides 1.3 Billion Chinese?

Here is the recent 5-day move in the offshore yuan. It isn't a big move in the grand scheme of things, but it is important because it is happening before a crisis and at the behest of the PBOC.

ZeroHedge has coverage and speculation on PBOC motives here: Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)

Here's a list of posts dealing with yuan depreciation, going backwards in time:

Andy Xie Warns of Yuan Devaluation
Andy Xie on China's Cash Crunch
More On Yuan Depreciation, China's Great Depression
Chinese Yuan Could Devalue 50% Or More
Liu Jun Luo predicts 40% devaluation of renminbi in 2013 (He has been off by about 1-2 years on his predictions.)
PBOC can't buy a buck; talk of depleted reserves is not alarmist
Chinese foreign reserves to peak in 2014? What about within the next year?
Yuan collapse goes mainstream as Financial Times discovers the yuan can drop; exchange rate hyperinflation cometh?
Albert Edwards agrees: wider yuan band can allow faster devaluation of renminbi
Chinese yuan depreciation coming soon?

Finally, how about the yuan price of gold? The world's largest importer of gold prices it in yuan.

China's Nervous Neighbors

China rejects Indian politician’s expansionism charge
China on Monday rejected remarks by Indian opposition leader Narendra Modi that it has an “expansionist mindset”, saying it has never grabbed the territory of another nation.

“I believe all of you can see that China has never waged a war of aggression to occupy any inch of land of other countries,” foreign ministry spokeswoman Hua Chunying said at a regular briefing.

Modi, the prime ministerial candidate of the Hindu nationalist Bharatiya Janata Party (BJP) and favourite to win this year's polls, was speaking during an election rally on Saturday.

He warned China to shed its “expansionist mindset” as he toured the remote northeast Indian state of Arunachal Pradesh, an eastern stretch of the Himalayas that China claims as its own.

“The world has changed. An expansionist mindset will not be accepted. China will also have to do away with such a mindset,” Modi said.

“Arunachal Pradesh is an integral part of India and will always remain so.

No power can snatch it away from us.”

Philippines says China 'fired water cannon' on Filipino fishermen
A Chinese vessel has fired a water cannon at Filipino fishermen near a disputed shoal in the South China Sea, a top Philippine official says.

Military chief Gen Emmanuel Bautista said the incident happened at the Scarborough Shoal on 27 January.

Chinese officials did not comment on the incident when questioned during a routine briefing, but re-asserted China's claim to the waters.

It is just the latest dispute over an area believed to be rich in resources.

Spanish Government Looking For Chinese Bond Buyers

I like the bureaucratic English versus the direct Chinese, which says: Spanish Debt Issuance Plan and Economic Policy

The Kingdom of Spain’s Funding plan and Economic Policy Strategy


Technology Company Visa Fraud Exposed; Tide Continues to Turn Against Immigration, But U.S. Politicians Don't Know It

America remains an extreme outlier in the world when it comes to immigration policy. Or rather, it's leaders do, since they continue pushing for amnesty. Their attempts failed though, because social mood changed and the public soured on mass immigration. Even still, the elites are trying to push for more immigration in the form of H1-B visas.......even though they have been committing fraud under U.S. law.

So that’s how H-1B visa fraud is done!
The gist of the crime has two parts. First Mr. Cvjeticanin’s law firm reportedly represented technology companies seeking IT job candidates and he is accused of having run on the side an advertising agency that placed employment ads for those companies. That could appear to be a conflict of interest, or at least did to the DoJ.

But then there’s the other part, in which most of the ads — mainly in Computerworld — seem never to have been placed at all!

Client companies paid hundreds of thousands of dollars for employment ads in Computerworld that never even ran!

The contention of the DoJ in this indictment appears to be that Mr. Cvjeticanin was defrauding companies seeking to hire IT personnel, yet for all those hundreds of ads — ads that for the most part never ran and therefore could never yield job applications — nobody complained!

The deeper question here is whether they paid for the ads or just for documentation that they had paid for the ads?

This is alleged H-1B visa fraud, remember. In order to hire an H-1B worker in place of a U.S. citizen or green card holder, the hiring company must show that there is no “minimally qualified” citizen or green card holder to take the job. Recruiting such minimally qualified candidates is generally done through advertising: if nobody responds to the ad then there must not be any minimally qualified candidates.

It helps, of course, if nobody actually sees the ads — in this case reportedly hundreds of them.

When Mr. Cvjeticanin was confronted with his alleged fraudulent behavior, his defense (according to the indictment) was, “So let them litigate, I’ll show everyone how bogus their immigration applications really are.” Nice.
It's going to take a long time for these stories to leak out because the media is dominated by the elites. But when the public learns of all the fraud and lawbreaking done by even the supposed heroes of the American economy in Silicon Valley, the backlash will be intense. Consider that this will also occur in the midst of a recession that will be worse than 2008 with even higher unemployment rates. Not only will the U.S. slam the door shut to foreigners, it will deport those already here.

H/T: iSteve

Speaking of immigration fraud, no surprise that the masters of gaming the system have gamed the U.S. immigration system.

Asylum Fraud in Chinatown: An Industry of Lies
A Chinese woman walked into a law office in New York’s Chinatown and asked to see her lawyer. She had applied for asylum, claiming that she had been forced to get an abortion in China to comply with the country’s family-planning laws, and she was anxious about her coming interview with immigration officials.

She had good reason to be worried: Her claim, invented by her lawyer’s associates, was false.

But the lawyer, John Wang, told her to relax. The process, he said, was straightforward, and as long as she memorized a few details, everything would be fine. “You are making yourself nervous,” he said in Mandarin. “All you would be asked is the same few rubbish questions.”

“Just make it up,” the lawyer added.

The conversation, in December 2010, was secretly recorded by federal officials conducting a wide investigation of immigration fraud in New York’s Chinese population. The inquiry has led to the prosecution of at least 30 people — lawyers (including Mr. Wang), paralegals, interpreters and even an employee of a church, who is on trial, accused of coaching asylum applicants in basic tenets of Christianity to prop up their claims of religious persecution. All were charged with helping hundreds of Chinese immigrants apply for asylum using false tales of persecution.

......In fiscal year 2012, Chinese immigrants filed more than 62 percent of all asylum cases received by the federal asylum office in New York, which in recent years has received more Chinese applications than the next 10 nationalities combined.

......Though the prevalence of fraud is unknown, federal officials appear to regard the applicant pool in New York with considerable suspicion. In fiscal year 2013, asylum officers around the country granted 40 percent of all Chinese asylum requests, according to government data. In New York City, asylum officers approved only 15 percent.

......The 2012 indictments appear to have disrupted, at least temporarily, the surge of Chinese asylum applications in New York. But when asked to comment publicly about how extensive asylum fraud remains among Chinese applicants, most officials declined.

Speaking privately, however, they concurred with the prevailing opinion in the Chinese diaspora: that the problem is ubiquitous and that one high-profile case will not curb it.

......And while the Chinese asylum pool has drawn increasing scrutiny in recent years, asylum fraud cuts across all immigrant groups, officials say, cropping up among populations from societies in turmoil such as Guineans seeking refuge from political upheaval, Afghans fleeing war, Russians looking for sanctuary from homophobia and Mexicans running from drug violence.

Among the Chinese, the vast majority of applicants claim they were either forced to endure abortions or sterilization under China’s family planning laws or that they fear persecution based on their adherence to Christianity or their participation in banned groups like the Chinese Democracy Party and Falun Gong, a spiritual movement that has been labeled a cult by the government.
Most claims of persecution are overblown. There are people living in the United States under asylum or refugee status who come from countries that haven't seen a war in decades. While there are still some cases of forced abortions or sterilizations in China, most of those were coming from one overzealous county level government in Shandong province. With the relaxation of the one-child policy, the threat is even further reduced. There are real cases across the world, but Chinese making fake asylum claims are relying on a warped media presentation of life in China.

In any event, the net effect of huge numbers of fake claims will be to push the public further towards immigration restriction. The gap between the public and the elite continues to widen.

And then there are these stories, which no one is supposed to talk about: increased incidence of disease due to an influx of foreigners.

5 California Children Infected by Polio-Like Illness
These are the first reported cases of polio-like symptoms being caused by enterovirus in the United States. During the last decade, outbreaks of polio-like symptoms have been reported in children in Asia and Australia, and these infections have been associated with newly identified strains of enterovirus.

"We think one reason why these cases may have occurred in California is that we are at the western-most part of the United States, so we may have had a higher circulation of the virus that was originally identified in Asia," said Dr. Emmanuelle Waubant, co-author of the case report and a neurologist at the University of California, San Francisco Medical Center.
The point is not that there is a disease outbreak, but rather when average people raise a concern such as public health in regards to immigration, the debate shuts down and they are labeled as xenophobic. But the story doesn't go away. People stay silent as they drift further towards an anti-immigration position that ties together with their anger at the elites. When social mood swings lower, anti-immigration policies will emerge as a flash point.

Behind the Scenes in China

Fourth top aide of ex-security tsar Zhou Yongkang probed after being 'snatched by authorities'
A former secretary of ex-security tsar Zhou Yongkang is reportedly under investigation, joining three other occupants of the role who are already being probed for graft.

Shen Dingcheng, the party chief and vice-president of PetroChina International, disappeared shortly before the Lunar New Year holiday, the China Business Journal reported, citing an anonymous source.

......Zhou's power bases were in the police, the oil sector and Sichuan, and it is an open secret that he has close links with fallen Chongqing party boss Bo Xilai .

Communist Party leaders endorsed a decision to probe Zhou at their secretive annual meeting at Beidaihe in August last year, the Post reported earlier.

See The Battle For China Continues On All Fronts and Political reform in China taking place through economic channels

Gold: The Quantum of Idiocy

I've seen a lot of weak arguments for and against gold. But I've never seen one quite so......special.

Take this article, prominently featured front and center on Yahoo! Finance's homepage and which originally comes from the Wall Street Journal.

A Word of Warning on Gold: Investor Fear May Be Fading

According to sentiment indicators, investors are very bullish. Fear can fade a bit more because it increased during the January correction in stocks, but it was at multi-year highs in January. Some indicators showed the most bullish readings since prior tops in 2007 and 2000. So even this headline is wrong.

Gold is the stuff myths are made of.

Among the myths: It is a store of value, a hedge against inflation or a hard alternative currency.

Its behavior over recent decades suggests that it has been inconsistent in those roles. It has done better as something simpler: a bet on fear.
Hedge against inflation? Not unless interest rates are negative. Store of Value? Absolutely. You just need a long enough time horizon. As for alternative currency......gold is money. It represents savings and wealth, not currency. The store of value and currency aspect of gold are linked.

Gold rose on basic economic fears in the 2000s but fell starting in 2011 as those fears abated. Now fears are spreading again about waning Federal Reserve stimulus and about global growth. Gold has rebounded 11% since mid-December.
Economic fears in the 2000s? Where were there economic fears in the 2000s? Zimbabwe? Yes, gold did do very well in Zimbabwe, people were panning for it in order to find a little gold to buy bread with since the Zim dollar was worthless.

Elsewhere, from China to the U.S.A., there was a bull market in optimism. Gold went up along with all other commodities as part of a global credit boom tied to investor optimism. When gold peaked in 2011, there was certainly a lot of fear, but most of the fear was driven by expectations of inflation. People were negative on the U.S. dollar, but quite optimistic on China and emerging markets.

Experienced gold analysts are warning clients to be careful: If the fears subside, the price of gold could do the same.

"Gold goes up as an insurance policy and then it is sold at a loss when people no longer want insurance," said Rhona O'Connell, head of metals research and forecasts at Thomson Reuters GFMS, a research firm known for its work on gold.

Here we see the creation of straw idiots to knock down. Gold can serve as insurance, but against what? If you're worried about a stock market crash, you go to cash, not gold. Gold is insurance against bad central bank and/or government policy of the highest order. It is insurance against currency and wealth destruction on a mass scale when few/no other options are available. Did everyone suddenly become worried about this in January?

Gold could move higher temporarily, but Ms. O'Connell says its price is likely to have trouble making significant gains before 2016 because economic confidence has improved.
Gold fell from $1900 to $1200 based on improved confidence and no inflation from QE programs. In order for the price of gold to move lower, confidence needs to improve from where it was in Q4 2013 when everyone thought the spike in inventories in Q3 presaged a faster recovery in 2014. Thus far, confidence is falling, not rising. At worst then, your gold investment will be dead money if confidence stays strong (based on her argument).

Sameer Samana, senior international strategist at brokerage firm Wells Fargo Advisors, suggests clients use gold's rebound to sell anything they have left.

"What we have found in our work is that a broad basket of commodities is a better hedge against inflation, a greater diversification and a better hedge against the dollar," Mr. Samana said.

Gold does well "when you are very nervous about the world," he said.

He prefers copper, aluminum and zinc in a time of recovery.
Gold hasn't even rebounded $100 and this guy wants to pull the trigger and have people dump whatever they have left. Second, the strawman again. No doubt there are people out there who wrongly believe that gold is always a hedge against the dollar and inflation (gold can most certainly rise along with the U.S. dollar as it did in 2008, when gold behaved exactly as expected), but this assumes the argument. If you own gold for these reasons and these reasons alone, then by all means sell it; you own the wrong asset. For everyone else looking for long-term wealth protection, buy more as the idiots sell.

Gold does very well when fiat currencies die. To say people are nervous about the world at that time is an understatement. The entire economy grinds to a halt and if the government moves to intervene with a positive step, it's usually the step of devaluing the currency by a huge amount over the weekend. You wake up on Monday with 50% of your savings gone. When people are nervous about the existence of the currency, the government, the nation, that's when gold really shines because gold doesn't die. The currency, the stock market, the bond market, the government itself can all be wiped out, but gold will remain.

As for preferring copper, aluminum and zinc in a time of recovery.......which recovery? China is the marginal consumer of most raw materials. It is China's recovery that is important, not America's. And copper is weak right now because China is weak.

Gold differs from other investments in an important way: It isn't very useful. Some is used for rings, watches, dental implants and electronic connectors. But the vast majority is hoarded as bars, coins or, in developing countries, heavy jewelry that serves more as a protection against disaster than an adornment.

Unlike stock, gold doesn't offer a stake in a business's results. It doesn't pay dividends or interest. It doesn't grow crops like farmland or provide shelter like a building. It is useful when people are fearful and flee to it.
Everything he says is true and everything listed is exactly why gold is money. If something is useful, like silver (!) then it doesn't work well as money because it gets consumed or people who need it don't like it if you hoard it. If someone started hoarding oil, for example, and cutting off the global supply, you can bet all manner of industries and consumers would complain to the government. Hoard gold? Go ahead, you're hurting no one but yourself (don't throw me in that briar patch!). Gold is money precisely because the most widespread use for gold is storing wealth, which includes wearable wealth, aka jewelry.

To say gold is only useful when people flee to it though, implies that people are irrationally fearful and pushing up the price. Sort of like saying, bomb shelters are only useful when people are fearful of war. What happens when the bombs are dropping? You don't need to be fearful to realize it's a good idea to be in a bomb shelter. Similarly, if the central bank in your nation destroys the currency, it doesn't matter if people feared it or enjoyed it. The net result will be the same: destruction of wealth and savings held in fiat currency and preservation of wealth stored in gold because gold is not a promise to pay. Gold is itself. Gold settles the debt, gold repays the credit. This is why it survives, because it is not dependent on another person's actions. Its value does not depend on the existence of the current government.

Gold soared in the 1970s amid oil crises, runaway inflation and a volatile stock market. When the economy recovered gold collapsed.

Gold rebounded in the troubled 2000s but peaked in 2011, the year Standard & Poor's downgraded U.S. sovereign debt and stocks fell nearly 20%. Economic stability since then has put a lid on gold.

Particularly disappointing, gold has never come close to returning to its 1980 record once inflation is taken into account.

Gold futures hit a record $825.50 in New York on Jan. 21, 1980, which in today's dollars is $2,481.98. Gold's 2011 high was $1,950.15 in today's dollars, 27% short of a record. On Friday, gold futures closed at $1,323.90.

Stocks have hit inflation-adjusted records repeatedly since 1980, most recently in December and January. Gold hasn't. It is barely halfway back to its 1980 record, taking inflation into account.

Gold in that time has worked better as a speculative bet on fear than a store of value. Because Western economies tend to experience more stability than fear, gold is typically a risky holding there.
Again with the fear of the 2000s. Gold soared in the 1970s because the existence of the U.S. dollar was at stake. The link to gold was severed and people weren't sure what would happen. The Boomers were buying homes and launching a consumption boom. The Soviet Union was seen as ascendant and people believed the Soviets might win the Cold War. When inflation was killed by Volcker and confidence in the economy and military restored by Reagan, all these trends reversed.

As for stocks, they are the beneficiaries of 30-years of credit inflation. Not base currency inflation; credit inflation. Credit inflation flowed into assets such as stocks and real estate. It did not flow into gold. The flow of credit stopped rising in 2008 and it wasn't pretty. Even though the Fed more than quadrupled base money in the past 5 years, credit only increased because of U.S. federal deficits. The only clear inflation in assets has occurred where Fed money has flowed directly: into the financial system. Now the Fed is pulling back on its inflationary policy. Stocks are not a good bet.

The Permanent Portfolio, a San Francisco mutual fund that invests in bonds, gold, stocks and foreign investments, ballooned to $17 billion a year ago from $57 million in 2000. Now it is back to $9 billion.

Michael Cuggino, its president, says gold wasn't the only reason for redemptions; investors have fled bonds and other conservative investments. Some money has returned to his fund since gold began recovering in December.

Still, "when people got concerned about gold in the second quarter of last year, there were more redemptions than previously," he said. He is optimistic about gold but sees the mentality shifting. Investors, he said, are more concerned about returns than protection.

One reason for gold's recent rebound is demand in China and India, where economic worries have risen. Swiss refineries have worked overtime to recast big bars favored by Western banks into smaller ones preferred in Asia.
Last one first. Gold buying has been consistent in India and China. There are those who fear currency problems, including the yuan, but they are the minority. Most people in China are better off thanks to rising incomes. Gold is an aspirational good or a speculative investment. If fears rise and people in India and China start really buying gold for financial protection, the Shanghai market alone will break the world gold market. Premiums for physical metal will climb by hundreds of dollars over fixed and futures market prices in the West.

As for the Permanent Portfolio example, it refutes the arguments above about fear. Clearly investors are not fearful, that's why they sold gold and are now buying stocks to chase returns.

In this entire article there are zero reasons given as to why you should be confident. There are zero reasons given for rising confidence. The argument boils down to: people are less fearful now in February 2014, so you should be less fearful too. Dump your gold because it'll do badly now. What happens if people are very fearful in September 2014? What if they look at a long-term U.S. debt projections?

A bad argument against something does not mean the argument for it is right. In terms of the debate between gold bulls and bears, this article does nothing. It is a waste of time and frankly, I wouldn't fault the kooks if they thought it was an intentional piece of misinformation designed to shake some more physical gold out of investors. Maybe the Chinese Politburo has a mole in the WSJ writing anti-gold articles to keep the price suppressed as long as possible. Stranger things have happened.

China's Volatility Machine

In Michael Pettis' book, The Volatility Machine: Emerging Economics and the Threat of Financial Collapse, he argues that emerging markets are prone to volatility and collapse due to pro-cyclical financial development.

Here's how I interpret his views with a bit of Austrian economics thrown in, and then relating it to China. The economic cycle of many emerging markets is nothing more than a resource/credit boom. The poorly managed nations of the world that we often see in Africa and Latin America are trapped in the boom-bust cycle because they do not have long-term growth plans, they simply ride the cycle. Capital from developed economies is funneled into malinvestment and the bust inevitably follows. The end result is the economy gains no ground on developed economies, losing nearly all the gains made during the boom. There is no convergence with the developed world.

In East Asia and outlier nations such as Chile, an escape from the cycle of boom and bust is achieved through development—each stage of boom brings the society to a higher level of development from which the bust does not shake it. However, these nations are still greatly affected by the regional and global credit conditions: the timing of the boom is often not of their making, nor is the bust. These nations experience huge booms and busts when they develop pro-cyclical balance sheets, and weather the storm very well when they enact counter-cyclical policies. Some are leveraged to their own boom or hedged against it.

Will Globalization Go Bankrupt?

As is often forgotten during credit and investment booms, however, monetary conditions contract as well as expand. In fact, the contraction is usually the inevitable outcome of the very conditions that prompted the expansion. In times of growth, financial institutions often overextend themselves, creating distortions in financial markets and leaving themselves vulnerable to external shocks that can force a sudden retrenchment in credit and investment. In a period of rising asset prices, for example, it is often easy for even weak borrowers to obtain collateral-based loans, which of course increases the risk to the banking system of a fall in the value of the collateral. For example, property loans in the 1980s dominated and ultimately brought down the Japanese banking system. As was evident in Japan, if the financial structure has become sufficiently fragile, a retrenchment can lead to a collapse that quickly spreads throughout the economy.

Since globalization is mainly a monetary phenomenon, and since monetary conditions eventually must contract, then the process of globalization can stop and even reverse itself. Historically, such reversals have proved extraordinarily disruptive. In each of the globalization periods before the 1990s, monetary contractions usually occurred when bankers and financial authorities began to pull back from market excesses. If liquidity contracts — in the context of a perilously overextended financial system — the likelihood of bank defaults and stock market instability is high. In 1837, for example, the U.S. and British banking systems, overdependent on real estate and commodity loans, collapsed in a series of crashes that left Europe’s financial sector in tatters and the United States in the midst of bank failures and state government defaults..

China need not be an example of a pro-cyclical economy. It is a large economy that can develop a large internal market. It relied on exports for growth in the 1980s and 1990s, but a growing domestic economy could shift growth into a consumer economy less reliant on global trade flows. Instead, China built itself into a massively pro-cyclical economy headed for an historic bust by eschewing a consumer economy and relying mostly on government directed investment and a credit fueled property sector.

Global trade rises and falls with global booms and busts. As Pettis notes in the article above, and as socionomics argues, during periods of negative growth, people turn against free trade. Global trade doesn't ebb and flow with the economy, it surges at the peaks due to new trade deals and it collapses at the troughs due to protectionist policies. Trade is very cyclical by itself.

Trade is a larger portion of small economies' GDP. The United States has a large trade deficit due to the size and structure of its economy, not due to the size of its trade. If global trade were to drop to zero tomorrow, the U.S. would be among the least affected nations in the world, while highly trade dependent nations such as Korea would see their economy collapse by 50% (exports are more than half of GDP). As emerging economies grew larger in the past 15 years, they became a larger portion of China's total exports. These same nations are increasingly dependent on Chinese demand for raw materials, such as copper, coal, iron ore and oil, either directly or through the higher prices caused by China's growth. Thus a self-reinforcing (pro-cyclical) trend emerges: China relies on exports to emerging economies that grow quickly because of Chinese demand for raw materials, which causes Chinese exports to increase.......and on and on.

China still relies on trade because its currency is still mainly tied to the U.S. dollar. If China does not increase its holdings of U.S. dollars (or if it does not add some other asset such as gold), then the value of the yuan will fall.

What is driving China's growth besides exports, especially since after 2008 the European, American and Japanese economies have almost no demand growth? Infrastructure development driven by a credit boom in China, helped along by loose monetary policy in the United States, Europe and Japan. The Chinese created huge amounts of credit and built infrastructure, be it government directed investment or privately build commercial and residential real estate. This investment boom fueled another spike in commodity prices and lifted growth in emerging market economies. Additionally, China's credit creation far outstripped the amount of U.S. dollars flowing into the economy and Chinese businesses also borrowed U.S. dollars because the yuan is appreciating. In sum, China is massively short the U.S. dollar.

Meanwhile, China's sovereign wealth fund and state owned companies invested in commodities. Deals for natural resources and farmland were made all over the globe. Billions in investments in economies and sectors closely tied to China's own growth rate, fueled internally by a credit bubble of historic proportions. On top of that, when bankers began to get nervous about extending credit, they asked for collateral. That collateral often takes the form of copper, iron ore or steel—the value of which is tied to the Chinese economy. Or it is backed by real estate, the value of which is tied to the credit boom and demand from which supports commodity prices.

China Faces "Vicious Circle" As Commodity Collateral Collapses
About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.

This makes China's economy very fragile. Even without these commodity backed loans, China's economy is at risk from a downturn in commodity prices that weakens demand in emerging economies. With these loans backed by commodities in place, commodity prices are now at risk from Chinese loans souring. If these commodities flow back into the world market, it will be the very trigger event for China's own bust.

On top of all this, much of the shadow banking credit flowed into investments in coal mines and real estate, the former of which is tied to global commodity prices and the latter to China's credit boom.

In conclusion, China has experienced a very long boom phase thanks to reckless lending taking over from 2008-2013, when global growth slowed. Instead of developing an internal market and making counter-cyclical investments, China bet everything and then leveraged up in order to bet on the China/emerging market/commodity cycle.

The one big counter-cyclical asset on China's balance sheet is its vast holdings of U.S. Treasuries. It is one asset that will surge if there is a global emerging markets crisis. Gold will likely be another. Considering the Chinese are likely to devalue the yuan if a deflationary crisis breaks out, those Treasuries and gold holdings will allow China to avoid a complete currency collapse—but it still may devalue the yuan by a significant amount by the end of the bust. That will set the stage for the next great boom......

Chinese Banks Halt Mezzanine and Supply Chain Financing for Property Developers

Yesterday, in China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China I looked at stories of liquidation sales of homes, huge inventories in third- and fourth-tier cities, developments halted for lack of capital and rumors of suspended loans. Now it looks as though those loan suspension rumors have some basis in fact.

Industrial Bank Halts Property Loans, Securities News Says
Industrial Bank issued a notice before the Chinese Lunar New Year to suspend mezzanine financing and supply-chain financing in the real estate sector until the end of March, according to the report, which cited an image of the notice circulated online. China’s Lunar New Year holiday began Jan. 31 this year. A press officer at Fuzhou-based Industrial Bank said he couldn’t immediately confirm the notice.

Shares of property developers fell on concern that the curb may further limit their funding sources and push up borrowing costs as Chinese policy makers crack down on shadow banking. Industrial Bank may also restrict funding to local governments that rely on less-regulated financing, according to Huang Jie, an analyst at China International Capital Corp.

The move “is mainly attributable to falling risk appetite rather than regulatory guidance,” Huang wrote in a research note today. “We do not rule out that it will likely tighten financing related to local governments in the future.”

Curbing of property loans not a government action: Credit Suisse
The analyst in the video says that developers can still borrow money from WMPs or trusts and sell property to raise capital. However, he later goes on to mention the Hangzhou prices cuts as a potential problem for all the trusts and WMPs. It is a financial house of cards.

The cash crunch that emerged in June 2013 never ended, it only was temporarily alleviated by central bank actions.

Still No Meaningful Rebound in Trust Fundraising

First the charts. The top one is newly issued trusts, the bottom newly established trusts, as tracked by 金牛理财 and subject to revision. The blue line is the number of trusts, the red bars the amount of money raised.

The number of trusts issued in the past week mooved higher, but the money raised tumbled. Meanwhile, the number of new trusts being established sank back towards the lows for the year. There have been similar dips in activity like this before, as recently as last autumn, but those numbers were eventually revised higher.

As for WMPs, here are the spreads between big (state owned) and small/medium banks; spread between guaranteed and non-guaranteed products, and the spread between short and long duration.


China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China

Way back in October 2011 there were stories of real estate rage first emerging: Home buyers in Shanghai angry at massive price drops, smash offices. The anger was caused by a big drop in new home prices, with recent buyers extremely angry at having paid 40% higher prices than new buyers.

Now the rage is back.

The angry home owners weren't as effective in their destruction—it looks as though they only managed to topple a model, but they got the developers offices filled with police.

Although there is a sign there complaining about radiation from high tension wires, the real reason everyone is upset is because home prices plunged from ¥17200/sqm to ¥13800, a 20% drop.

This isn't the only case. After this developer began their "liquidation sale," the surrounding developments also slashed prices sparking a buying panic.

One developer slashed prices by about 12% and had to turn away people willing to pay completely in cash. (Source: 杭州楼盘狂降价脱销 开发商藏样板间怕被老业主砸) All of these developers are worried about pissing off customers who paid much higher prices, perhaps as recently as only a few days ago, but certainly within the past year to several months. Developers now have residents expecting price reductions, with 46% of people polled expecting lower prices in Hangzhou this year.

One opinion writer asks, Why Did Hangzhou Fire the First Shot of Real Estate Price Cuts? (观点时评:杭州楼市为什么打响降价第一枪?)

The main reason is that Hangzhou has a large inventory thanks to large speculation and slow sales in January. Price cuts are being made to move property.

That article also mentions the slowdown in Hong Kong as a hot topic:
Hong Kong's battle to curb property prices still on after initial success
Unknown to most, proposed tax measures had quietly but steadily deflated the bubble that was threatening to push property prices to sky-high levels after Financial Secretary John Tsang Chun-wah's announcement to rein in the market.

Property prices had jumped 80 per cent in five years, making them the most expensive across the world.

Tomorrow will be exactly a year since Tsang's announcement of doubling the stamp duty for properties worth HK$2 million and above, and prices have dropped just 4.5 per cent from the peak in March last year.

Doubling the duty was the third tax introduced by the government in less than two years to cool the market. The first two were the buyers' stamp duty and a special stamp duty, both put in place in October 2012.

Also in HK: Sun Hung Kai Reduces Riva Apartment Prices, Standard Reports
Sun Hung Kai Properties Ltd. (16), Hong Kong’s second-largest developer by market value, cut prices by 40 percent on average for some apartments at its Riva project in the city’s northwestern Yuen Long district, a move that may spur a price war, the Standard reported today.

The developer priced 156 flats, of between 466 and 1,424 square feet, at an average of HK$9,268 per sale-able square foot, the newspaper said, citing the company. That compared with the HK$15,500 price for the first 50 homes introduced last March, the newspaper said. The Riva has a total of 780 units.
The article goes on to say the new homes are now prices 10% below the price for existing homes.

Hong Kong real estate was driven by Mainland buyers. As was Vancouver. As is California:

China-themed malls a new trend in the Bay area
Developers are planning up to $300 million in building two shopping malls in Fremont and Milpitas. Both cities are targeted at Asian newcomers, particularly Chinese consumers.
Bad news for all those property markets if Chinese prices come down......

Some areas are unfazed though. While Guangzhou slides down the list, Xiamen is moving up: 71,022 yuan/sqm: New home prices in Xiamen hit record high
Following a flying start to 2014, house prices have surged to an historic high as the property market in Xiamen has continued to enjoy a boom.

Recently, the new home price of Wanke Mid-Lake Island Housing Estate, which is located at the junction of the Siming and Huli districts, hit a whopping 71,022 yuan/sqm, a price far beyond earlier market expectations.

"It's the most expensive house ever sold in Xiamen. And the price of many houses in the housing estate have surpassed 50,000 yuan/sqm,” a staff member in the company said.

"The excellent position is the main reason for the high housing price. Most of our customers are from Jinjiang, Shishi and Nan’an in Quanzhou. A businessman from Jinjiang has even bought 8 houses.”
Looks like a blow-off top in some smaller, but attractive for living, cities like Xiamen.

Developers shifted away from Beijing, Shanghai and other first-tier cities due to restrictions aimed at cooling the property market. In Hangzhou, there is finally a cooling of prices due to oversupply, while Wenzhou has been down since 2011. In Beijing and other cities though, prices are still up:

January 2014 China's Top 10 Highest Home Prices by City
城市名称Price(元/m2)Change from Last MonthChg YoY
There are more stories of weakness in the second, third and fourth tier cities though, which were supposed to provide growth, but the talk is that there will be falling prices in first tier cities such as Beijing soon.

As for those smaller tier cities, the news gets worse.

In Xiangyang, Hubei: Development stopped due to lack of capital; Advance sales halted (湖北襄阳一楼盘崩盘:资金链断裂 预售证被撤销). Due to scarce capital, the developer of the Central Park development cannot continue, hopes the government will step in and help and the government is apparently getting involved, having already revoked the firm's advance sales licenses. Real estate insiders say the firm's selling price was too high for the market and this broke the capital chain.

The failure comes after a strong year that saw home sales growth of 50% in the city, but this developer's price was too far above the average for the city.

Also, the ghost cities are continuously growing. 三四线楼市大跃进后深陷泥潭 鬼城榜单不断增加 (Third and Fourth Tier Cities After the Great Leap Forward Stuck in Quagmire; Ghost Cities Growing)

Of 100 cities tracked, 37 have seen prices fall in the past year and 34 of those are third- and fourth-tier cities. Sales volume in 25 third-tier cities has fallen for three months; in 14 fourth-tier cities, sales volume is at an 11-month low. Wenzhou (still listed above as one of the 10 most expensive cities for real estate in China) has seen prices drop for 30 months.

A city named Huai' an in Jiangsu province saw an influx of 380 developers in recent years, despite only having a population of 600,000 people. Probably 200 developers would have saturated the market. One developer developed three projects. The first sold to locals, the second to foreign investors, the third is empty and not selling, yet another addition to the growing ranks of ghost cities and ghost developments.

Stories like this are common. Inventory in fourth-tier cities continues to rise, even though the markets are saturated and prices are falling. Many developers are becoming trapped with their capital tied up in homes.

This has all fueled rumors of a halt in mezzanine financing by the banks: 房企融资收紧传言四起 多银行回应称暂未接到信号

Insiders say they're just rumors, no signs yet, and even so, it might only be one or two banks. Overall the situation is fine, all is well........

Update 02/24 1PM Beijing: The rumors of banks halting lending to property firms is a hot topic in early Monday trading. The Shanghai Composite Index is down 2% at midday.
China shares sank to a two-week low, dragging Hong Kong markets down, as property and banking counters slipped on mainland news reports that stoked fears banks have stopped extending loans to property-related companies.


The last time we saw such concern about a real estate slowdown was in 2011 and early 2012. Developers responded by moving into smaller Chinese cities. Now they are trapped. The boom in development helped power the local economy and local officials loaded up on debt. Meanwhile, one of the largest destinations for the trust portion of the shadow banking system, is real estate.

China successfully kicked the can several times, but where do they go from here? If developers are trapped in small cities (which were supposed to save the industry, not doom it) and 40% of trusts come due this year, one doesn't have to be particularly bearish or pessimistic to imagine a crisis growing out of this situation. This also raises the potential for all sorts of conflicts of interest: what if a bank sold a trust to a developer upon whom the bank is calling in its loan or refusing to extend credit because of already high debt levels? Pins are popping up all over China and the credit bubble only needs to hit one of them to start a cascade.

And don't forget, the Federal Reserve is tightening.

This all has major implications for the currency market.

At the start, I linked to a story from autumn 2011, when real estate rage first emerged. Around the same time (a little later in December actually), the renminbi weakened. As it is again.

Offshore Yuan Slides in Worst Week Since 2011 on Growth Concerns
The yuan had its biggest weekly slide since September 2011 in offshore trading after China manufacturing data added to signs of a slowdown in the world’s second-largest economy.

The exchange rate is likely to experience more volatility in the first half, China Securities Journal said in a front-page commentary written by reporter Ren Xiao. The currency isn’t entering into a depreciation trend, the paper said, adding that the yuan will get support from China’s stable growth and an economic recovery in developed nations.
And if that growth doesn't materialize? It doesn't pay to get excited about a a small move that barely qualifies as a blip. However, as this chart shows, it is out of character with the recent past. You can clearly see the autumn 2011 move as well, and do note how fast the offshore yuan fell at that time.

Even though the PBOC can control the yuan inside China, it cannot control it in Hong Kong. The strength of the feedback mechanism is debatable; China obviously isn't as exposed to currency markets as say Turkey, but the exposure is more than zero and I suspect far higher than most economists, investors or financial analysts believe. The PBOC follows the Hong Kong price in order to maintain credibility and it is really an unknown what would happen if the price collapsed. Would China devalue to match the market price, or try to maintain two different prices? If a Chinese exporter has U.S. dollars and could get, as an extreme example, 8 yuan in HK or 7 yuan in China, they have no reason to bring in their U.S. dollars. There would also be Chinese citizens taking out U.S. dollars in China at the low exchange rate and traveling to HK to exchange them. China would have to go back on reforms and tighten currency controls if it wanted to fight the market and prevent its currency reserves from shrinking. In the extreme cases then, China's currency is already exposed to the market. It's the limited cases where the PBOC still wields great power. They can stop a short-term move and manage volatility, but they cannot prevent a systematic crisis or a full fledged currency crisis.

If this keeps up, we may soon hear about a dollar shortage in China, which happened last time the yuan spiked. Also, after the 2011 drop, forex reserves fell. (China's Q4 forex reserves down from previous quarter

It will only take a small marginal change in the economic trends to create a hurricane force in the financial markets. Once the market moves the other way, the shift will be swift and brutal because everyone is on the other side of the trade. How many people out there have puts on the yuan and expect China's reserves to start falling?

The previous real estate incidents and bankruptcies seen in the past few years were blips, with slowdowns concentrated in single cities and the can kicked before it spread. There was more debt to be created and more projects to finance. It appears they are out of projects now, with even small cities saturated with homes. A widespread slowdown may be underway this time with no easy solution, and that will lead to a larger yuan depreciation than we've seen before. A weaker yuan is natural given the amount of credit created, even without a crisis, but a crisis could lead to panic selling. More yuan devaluation is coming this year, and it is unlikely to be orderly. The main question is whether it is brief and the can is somehow kicked again, or if this is the big one.

Update on yuan depreciation: China rates fell, RMB depreciated
First, the Renminbi depreciation was largely triggered by the PBOC instead of the market, so why does the PBOC keep lifting CNY fixing? One plausible theory is that the offshore market players made decent money in January by pushing USDCNH lower which could trigger some speculative inflow. In order to tackle it and make the two-way move happen in the onshore market, the PBOC deliberately depreciated the currency. It also shows that the PBOC does not seem afraid of triggering an expectation of currency depreciation or capital outflow.
If the currency is headed lower, might as well make it central bank policy.