China's Wasted Investment

This story has been making the rounds. There's nothing surprising about the conclusion, but hard numbers are impossible to estimate with any accuracy.

China wasted $6.9 trillion on bad investment post 2009
China wasted an approximate 42 trillion yuan ($6.9 trillion) on "ineffective investment" in the five years from 2009, with the problem worsening in the past two years, a government official and an economist were quoted as saying in the local media.

From relying too much on investment to lift the economy to supplying state firms with cheap loans that fueled unnecessary spending, the two pressed China to face up to its problem of making investment with low or no efficiency.

I've seen some people saying that China's investment wasn't wasted. The problem with that argument is that we cannot see investments that didn't take place. We can see that private businesses are willing to pay interest rates well in excess of 10%. Throw in the fact that SOEs did not invest in their core business and instead redirected money directly into real estate via newly created real estate subsidiaries or indirectly via high interest shadow banking loans. Mix in rehypothecated collateral by speculative and ponzi borrowers, a credit bubble and housing bubble......

The Economist points out that the estimates aren't losses, but lost profit: China's $6.8-trillion hole?
Sticking to Mr Xu and Ms Wang’s approach, this would mean that 21% of all investment over the past five years – 22.6 trillion yuan ($3.7 trillion) – had been wasted. That is still a lot of money to burn through, but it is almost half their headline-grabbing estimate.

That leads to the second and even bigger flaw – namely, this is a lousy method for calculating wasted investment. ICOR serves as a rough guide to the efficiency of investment. It does not, however, show how much money was been wasted, only that it is generating smaller or bigger growth returns compared with previous years.

Final verdict: the $6.8 trillion in wasted investment is not wasted investment or malinvestment. It's more of a poor measurement of opportunity cost because investment rates fall over time in the absence of major technological breakthroughs. It takes more and more investment to return smaller and smaller returns as Dr. Tainter has shown. That said, We know for a fact that China misallocated capital based on interest rates in the shadow banking system, and from common sense. The government forced banks to lend to SOEs that didn't have a need for the money in 2009. That wasn't a private market economy distorted by cheap credit, it was a step backwards towards central planning. Unfortunately, the private economy was also distorted by central bank and government policy.

Trying to estimate the wasted investment is a fool's errand. If the bill never comes due (gets socialized), then people will claim, as they have, that the investment wasn't wasted. If the bill does come due, the losses will be far higher due to systematic losses. What was the total wasted investment in the U.S. housing market next to the Global Financial Crisis?

Deposit Insurance Draft

This may be implemented quickly in 2015 if the economy doesn't firm up in the fourth quarter...

China Drafts Bank Deposit Insurance in Move to Free Rates
The government will insure deposits of as much as 500,000 yuan ($81,367) per saver at each bank covered, the People’s Bank of China said in a draft rule on its website yesterday. It didn’t give a start date or detail what premiums banks may pay, saying only that they may differ depending on lenders’ management and risk conditions. The PBOC is seeking feedback through Dec. 30.

Deposit insurance removes an implicit government guarantee behind China’s state-controlled banks and clears the way for the nation to deregulate savings rates, increasing competition for funds. That may exacerbate a liquidity shortage at smaller banks and boost their chance of failure as savings shift to the biggest lenders.


Tensions Set to Ratchet Up in Pacific

Voters punish KMT with landslide defeat in Taiwan's local election
Hit hard by a series of protests against a services trade pact signed with Beijing, a food safety scare, missteps in education reform and worries over class and income inequality in the past year, the KMT faced a tough challenge from the main opposition Democratic Progressive Party.

Campaigning on a pledge to punish the KMT for its poor performance, the DPP, which already held the southern municipalities of Tainan and Kaohsiung, made two big gains - Taoyuan and the more important central city of Taichung.

The DPP was keen to secure Taichung because it would allow the pro-independence party to expand its influence from central Taiwan to the island's north, boosting its chances in 2016.

The DPP also captured nine other cities and counties in what was viewed as its best result since its founding in 1986.

Clean Break on the Asian Dollar Index

CNY is the largest component in ADXY. Global U.S. dollar rally awaits confirmation via DXY breakout to the upside.


Real Estate Market Warming Up in Wake of Rate Cuts

Developers are cautiously raising prices in some areas after the rate cuts spur marginal buyers to jump into the market.

In the existing home market:
According to reports, on Saturday (November 22, the day after the rate cut) realtor 我爱我家 offices in Beijing, Shanghai, Tianjin, Taiyuan, Nanjing, Hangzhou, Suzhou, Wuhan, Changsha, Nanchang, Chengdu and Nanning saw traffic rise 50% or more, while those signing contracts increased by 5%.


China Raises Gas Tax, Abolishes Alcohol Tax

China raises consumption tax on oil products
More details here: 内地上调成品油消费税:汽柴每升分别0.12元、0.14元

The good news: alcohol consumption taxes are abolished, along with the automobile tire tax. 下月起取消酒精消费税等税收

Ordos Bottoms Out As Residents Refuse to Buy Homes

The bottom of a bear market is marked by a complete reversal of psychology. Frenzied activity and panic buying is replaced with complete indifference or rejection of the market in question. The Ordos real estate has now reached that stage as residents say they won't buy again.

Empty buildings are abundant in Ordos and prices are low, but no one wants to buy. Where there was once 1000 housing related companies that were participating in the bubble, now there are only a handful. It will take two to three years for the market to digest the existing inventory. At the peak, one man recounts the story of how is boss, when prices were around ¥4000 /sqm, raised prices to ¥5000 to ¥6000 /sqm. The units were quickly sold out, but the result is that investors lost a total of ¥200 to ¥300 million.

Prices moved with the dominant coal industry. Prices stumbled with the 2008 crisis, but then exploded in the wake of the ¥4 trillion stimulus. Coal prices topped a couple of years later and real estate quickly followed.

Victims are everywhere in the city. One man invested in an unfinished property that peaked at ¥8000 /sqm. This year he sold for ¥6200 /sqm, not counting the cost of furnishing the house. He still has four other properties and won't buy any more.

iFeng: 鄂尔多斯遍地空置楼房 市民:不会再买了

Real Estate Growing & Slowing; No PBOC Repos This Week

Small Shanghai apartment sells for less than 10,000 yuan per sqm because the building hit another building. 上海一小区房价大跌:63平米房子仅卖40万

First and Second-Tier Land Sales Heat Up 一二线城市土地市场有所回暖 开发商加快抢地

Banks cut off credit to Shanghai developer, 30 buildings left unfinished 一线城市某房企遭各家银行停贷 已有30余项目烂尾
Following the Shanghai Wyatt of home funding strand breaks, another named Owen Shanghai housing prices buyers are troubled funds depleted, which is located in Jinshan District of Owen County Grand twice delayed the project submitted, lay unfinished for several months .

"We also hope to settle the matter as soon as possible, in the bank stopped lending, loan pumping case, entirely on its own funds and private loans to finance development projects, it is too painful." Owen Land Company, a sales charge of Shanghai person said, after nearly six months of consultations and negotiations with a third party company basically reached a purchase agreement, the agency's Shanghai branch has agreed to disk access, only to be instructed Beijing headquarters.

China Loosens Monetary Policy Further as PBOC Scraps Repo Sales
China’s central bank refrained from selling repurchase agreements for the first time since July, loosening monetary policy further as a report showed industrial companies’ profits fell by the most in two years.

The People’s Bank of China didn’t conduct any open-market operations in today’s auction window, after cutting interest rates last week for the first time since 2012. It last suspended sales of repos, which drain funds from the banking system, in the week of July 21 as initial public offerings boosted cash demand. Guotai Junan Securities Co. estimated such share sales tied up 1.6 trillion yuan ($261 billion) this week, while maturing repos injected a net 35 billion yuan.


Oil Price Slump Bad News for China's Energy & Industrial Belt

The hardest hit provinces in China are those where coal, oil and steel are major industries. A month ago I posted Liaoning Sounds Warning on Chinese Economy. Today, the provincial real estate investment figures are out again and it shows and uptick in most of the country, but the provinces with large industrial and energy sectors remain below the national growth rate.

Here are the real estate investment growth rates for these provinces:

In June of this year, I had two post on Tianjin.

Tianjin Rebuilds Manhattan in Binhai; Has 90% Empty Ghost City in Baodi
Tianjin Industrial Growth Rate Falls to 13 Year Low in May; City Government Shocked

Tianjin's industrial production growth rate dipped into the summer and then rebounded to 9.5% in October. Looks like the real estate sector was used to pull growth higher......

Russian Ruble Crumbles

Ruble down more than 2%, oil down more than 6% and no bottom as of yet, Russian stocks down 2%, but closed before the action heated up in the oil market.

OPEC Balks

Bad news for expensive producers and poorly managed countries. Good news for a U.S. dollar rally...

Chinese Store Bans Chinese Customers

China already had its Cultural Revolution and isn't interested in angry mobs. Complaining on Weibo is fine, but that'll be the extent of it.

Beijing store sparks racism row... by banning Chinese customers
A clothing store in Beijing has sparked a bizarre race row by banning Chinese customers from the premises for being "too annoying".......the mainland had not outlawed racial discrimination, so the sign was not breaking any laws.


Trust Apocalypse Averted in 2014

Trusts are coming due and those in the real estate sector were the subject of great concern this year. As it stands today, trust firms are scheduling their final payments and are not expected to default. Apocalypse averted, at least for now. Next year will be another year of concern if the housing and credit markets don't rebound.

到期近百亿元 10月房地产集合信托兑付压力大

Local Govt Bad Debt Cleanup Continues

All is well, don't mind the bad banks behind the curtain.
China approves second batch of local asset management companies
The mainland banking regulator has approved a second batch of asset management companies tasked with cleaning up debt at the city and provincial level, bringing the number of formally approved "bad banks" to 10.

The China Banking Regulatory Commission cleared governments in Beijing, Chongqing, Tianjin, Fujian and Liaoning to set up AMCs, state-backed Economic Information said on its website yesterday. The second wave of approvals comes after Zhejiang, Jiangsu, Anhui, Guangdong and Shanghai established locally controlled firms in July.


PBOC Adviser: No More Rate Cuts Until Q4 Data

China won't consider more rate cuts or easing until fourth quarter data out: official
China's central bank will wait until fourth-quarter economic data is out and monitor U.S. and Japanese monetary policy before considering any more rate cuts or easing, a central bank adviser said on Tuesday.

The People's Bank of China surprised the markets by cutting rates last Friday for the first time in more than two years to help stabilize the world's second-largest economy. Reuters then reported that China was prepared to ease policy again.

"Regarding the next step, whether to cut rates again or take similar action, we still need to look at the fourth quarter's macroeconomic index," said Chen Yulu, who sits on the central bank's monetary policy committee. He was speaking on the sidelines of an economy and finance forum in Beijing.

"It is also important to make decisions taking into account Japanese and U.S. monetary policy," Chen said.

Reality in China: Banks May Eliminate Rate Cuts

Instead of lowering the cost of lending, banks may eliminate their 10% mortgage discounts in the wake of the PBOC's rate cut. The net result will be little to no change in rates.

iFeng: 降息后房贷利率仍可打9折 业内:折扣可能取消
However, the industry believes that the higher cost of capital in the current environment, whether it can really reduce the cost of credit is still in doubt, Wu Hao Wei Jia Anjie mortgage expert, believes that before the end of the year, the Bank may cancel the first suite of lending rates discount. "Asymmetric cuts in fact did not reduce the bank's cost of funds, coupled with the end has always been funding constraints, the bank is likely to cancel the mortgage interest rate discount, becomes the benchmark interest rate." Wu Hao think.

Kuroda Says Dump Yen, Yuan to Fall

ADXY is below 114 and DXY is on the verge of breaking out, signaling global U.S. dollar rally is ready to begin.

Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise
Bank of Japan chief Haruhiko Kuroda urged business leaders to use profits more productively, saying hoarding cash will become costly as the central bank stamps out deflation.

Yesterday, there were reports of trouble in the interbank market. Liquidity Alert? China's Interbank Market Delays Close By 30 Minutes

Also, reports that Chinese bond sales are being pulled: China’s Companies Scrap $1 Billion in Bond Sales as Yields Jump
China’s companies scrapped or delayed at least 7.55 billion yuan ($1.2 billion) of bond sales since Nov. 20 as borrowing costs jumped, flagging fundraising strains even as the central bank eased monetary policy.

The yield on AAA rated corporate securities due in three years rose 17 basis points last week, the most in a year, to 4.43 percent. The increase comes as investors held more cash ahead of planned new share sales this week, with initial public offerings to lock up at least 1 trillion yuan, according to Australia & New Zealand Banking Group Ltd.

Has the PBOC blown the devaluation horn? Survey says not so much: 人民币对美元暴跌200点 央行降息吹响贬值号角?
China Merchants Bank Head of Financial Markets analyst Liu Dongliang also pointed out: "After the theoretical existence of downward pressure on the RMB exchange rate cut, but China's current implementation of the" managed floating exchange rate system "will not allow this to happen, The central bank will not secure the exchange rate depreciation, interest rate double loose situation also does not appear, the RMB exchange rate will only be a mild correction, on the whole will remain strong, not even rule out the possibility of further appreciation. "

November 24, UBS (UBS) issued to China 2015 ~ 2016 economic outlook is expected in the context of a strong dollar, the RMB against the US dollar will be a slight devaluation of the RMB against the US dollar by the end of 2015 will reach 6.35 by the end of 2016 amounted to 6.40 , it is still possible during the periodic revaluation and two-way volatility increases.

And then there's the old economic argument for the rate cuts: News Analysis: China's interest rate cuts set to support property demand

China cannot simultaneously cut interest rates and expect the yuan to appreciate because hot money will flow out of the country. Short of igniting an economic boom, a yuan rally isn't going to happen. Since the leadership does not want an investment led boom, which is the only way the current economy would be able to deploy massive capital inflows/credit growth, the hot money will leave if rates continue to slide. The other option is to let the tight credit conditions deflation do its work. The painless short-term solutions are gone. Long-term, reforms will lift the economic growth rate, but short-term there are no painless or costless options.


TB Cows Sink Modern Dairy

This story broke two weeks ago.

China Modern Dairy Plunges as Government Probes Cow TB

Chinese investigations have turned up more evidence: many employees of the firm came down will contagious diseases from working with the sick animals, and more than 70% of the milk from Modern Dairy went to Mengniu.

iFeng: 现代牧业每年有员工被查染上布病 超七成原奶供应蒙牛

Chinese Realtors Have a New Enemy

Chinese real estate agencies struggling with the slowing real estate market turned to rental properties as a new profit center. Now this move is coming under assault as a new app helps link up renters with landlords, causing realtors to slash their fees by 50%

O2O搅局租房市场 中介费打5折能否成为常态

China Liberalizes the Healthcare Market

China has started reform of the healthcare system, with Shanghai taking the lead in the market pricing of drugs and medical devices.

Economic Observer: 新价改“闯关”

One feature of China's system is that it costs almost nothing to see a doctor, but medicine is inflated by hospitals and doctors. Market pricing will help correct these types of situations.
On the day of the State Council executive meeting, Premier Li Keqiang to the outside to release the two signals, one price reform will "accelerate", on the other hand, the core price change is "a greater degree the market pricing."

Li Keqiang at the meeting, for example in medicine prices, public hospitals, physician fee price is too low, but it still exists to hold down prices, therefore, through reform, and gradually straighten out such an unreasonable price mechanism.

Reforms are kicking off in Shanghai: 药价改革上海破冰 非政府定价药品放开

The Google translation is a bit stilted, but the message comes through: reform will take time since monopsony pressure in the bidding process will still hold down prices.
About Shanghai reforms, the majority of business people believe that the future of the pharmaceutical industry price changes will not be much. Classification of essential drugs and medicines as well as non-Medicare drug pricing drugs outside of the government, in the current pharmaceutical market structure, the implementation of the Medicare drug bidding, the bidding policy around, the prices are being suppressed, "If bidding policy does not change, drug prices changed little. "A pharmaceutical source said.

Drugs at his own expense, in the eyes of those companies, this part should make independent pricing, currently the country have set up barriers, origin price, price, etc. local provinces offer process conditions, virtually has limited business of their own products the right to decide the price.

"Fully competitive areas, such as basic drug prices will not go up, a single species may raise prices." Pharmaceutical companies believe that drug prices after the reintroduction of market prices will return to the normal rules of market economy status.

"Drug prices, and finally from a planned economy to a market-oriented economy in the form of changes in the morphology." Pharmaceutical Industry Association, one person said.
Considering the vast majority of the developed world relies on socialist economics for healthcare, it would be surprising if China implements more market reforms than the West, but for now the trend in reform favors China.

Another Chinese Developer In Trouble As Debt Collectors Swarm Stalled Project

Coastal Greenland Limited, symbol 1124 on the Hong Kong market, is caught up in a massive development called 世润. Creditors have gone to court in Shenzhen to collect debts on the shuttered project.



Liquidity Alert? China's Interbank Market Delays Close By 30 Minutes

A large Chinese bank in search of liquidity kept the interbank from closing on November 20. The Google Translation gives the gist of the situation.

21st CBH: 流动性警报?银行间市场交易罕见延时30分钟

Analysts Not Optimistic About Rate Cut Results

As said previously, China has a greater ability to shift costs in its economy, but it is not immune to economic reality. The cost of inflation and credit bubbles cannot be avoided, at best it can be delayed and shifted. Now the bill is coming due.

China's rate-cut likely to hurt banks, curb new loans to small borrowers
China's latest interest rate cut is set to dent the profitability of domestic lenders, especially mid-sized banks, which are already suffering from higher bad loans and a slowdown in profit growth.

The central bank unexpectedly cut rates late on Friday, stepping up efforts to support small and medium-sized enterprises (SMEs) which are struggling to repay loans and access credit, as the economy slides to its slowest growth in nearly a quarter of a century.

Deposit Competition Begins: Some Chinese Banks Hike Long Term Deposit Rates

Some Chinese banks are hiking their deposit rates under the new PBOC, with 3- and 5-year CD rates ticking up. Previously, the highest deposit rate was 110% of the benchmark, but now it is 120%. Since the rate cut was a smaller percentage farther out of the yield curve, this means banks could raise deposit rates. The official 3-year rate was cut from 4.25% to 4%; 110% of 4.25% is 4.675%, but 120% of 4% is 4.80%. At this time, only Bank of Nanjing and Bank of Ningbo are offering these rates.

iFeng: 央行降息存款要货比三家:10万定存5年利息差7000元


PBOC Reasons for Cutting Interest Rates Versus Reality of Deflation

According to one PBOC insider, the goal of the interest rate cut was to reduce social financing costs (TSF) and business financing costs. Others call this move another micro-stimulus effort, part of the ongoing attempt to support growth without resorting to another round of self-destructive monetary easing.

Google translation rip from the article (linked below):
"The focus of the interest rate adjustment is to play a leading role in the benchmark interest rate, targeted to guide market interest rates and social financing costs down, promote real interest rates gradually return to a reasonable level." The central bank official said.

This is central bank speak for "we are chasing the market." In De-mystifying RBA Setting of Interest Rates, Steve Keen showed how the RBA followed the market's adjustment of interest rates.
The graph shows an almost 100% cor­re­la­tion between the cash rate and the 90-day bank bill rates. How­ever the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. The data also shows that the RBA will gen­er­ally increase rates once the 90-day bank bill rate gets 50 basis points or more above the RBA cash rate. The actions on the down­side are not as tight, with decreases in cash rates occur­ring when the bank bill rate is any­where from 0 to 100 basis points below the 90-day bank bill rate. How­ever as a rule of thumb the RBA tends to decrease the cash rate when the 90-day bank bill rate is 50+ basis points lower than the cash rate.
The graph is currently down at the site. Here's EWI showing a similar pattern at the Federal Reserve: Here's How to Know When the Fed Might Raise Interest Rates. Here is an article from the Federal Reserve San Francisco Branch: Given the relatively small size of the federal funds market, why are all short-term rates tied to the federal funds rate? The article doesn't make the argument that central banks chase rates, but the chart on the page does:
Notice the Fed is following the market at turning points.

Other central bankers are the same. The ZIRP (zero-interest rate policy) of central bankers is not so much about driving down nominal rates as support to push up asset prices, thus depressing real interest rates. Central banks are keeping real interest rates low by inflating asset prices. In the absence of central bank support, asset prices would collapse. Even though interest rates would be at zero or even negative, the real interest rates would be very high. Thus stories like this one from September: Germany Sells 2-Year Debt at Negative Yield should not be seen as the central bank "winning" so much as failing. When rates go fully negative, deflation is ripping through the economy. If you are set to lose 20% holding corporate bonds, a 10% loss in treasuries is an attractive option, considering there is simply not enough physical cash to go around.

Taking all of this into account, consider the PBOC insider's statement about the central bank wanting to push total social financing costs down. Now look at this chart of WMP interest rates in China, as measured by 金牛理财.

iFeng: 央行降息有三大现实考量 (Three reasons for PBOC rate cut)

How Much Will PBOC's Rate Cut Save Homebuyers?

Chinese homebuyers with a 20-year mortgage can save 234 yuan per month for every 1 million yuan they borrow thanks to the PBOC rate cut.

Interest rates on loans of more than 5 years have dropped from 6.55% to 6.15%, or a 6% discount. Recall that at the end of September, the big news was that the PBOC would allow banks to cut their rates as much as 30% below benchmark, but the largest discounts offered in most cities was 10%.

For people tapping the public housing funds, interest rates have been cut from 4.5% to 4.25%.

Before the interest rate cuts, a homebuyer with a ¥1 million mortgage from a commercial bank would owe ¥7485.2 per month for 20 years. After this cut, it drops to ¥7251.12, a savings of ¥234.08 each month and ¥2808.96 annually.

iFeng: 央行22日起降息 房贷百万20年月供减负234元


How Do You Cry Havoc in Chinese? 发出屠杀的号令,让战争的猛犬四处蹂躏!

October was positive for the housing market as sales picked up. This story was at the top of the real estate section of iFeng today: 温州成炒房者的地狱 炒房如印钞的神话幻灭, the first part of which could be loosely translated as "house-flipper hell." Wenzhou prices have been weakening again with the rest of the country and prices are still down more than 20% from 2010. Certainly there's plenty of real estate sector folks who think rate cuts are needed, and China's retired real estate cheerleader, Ren Zhi Qiang, says this move is great news: 任志强:太乐观了.

There's a full blown recession in the industrial heartland of China. Industrial production in Liaoning slowed from negative 1.6% to negative 2.0% in October. Coal producing Shanxi province is still in recession, with industrial production rising slightly from negative 1.3% to negative 1.0% in October. No major negative shift in the economy though, not enough to warrant a surprise rate cut.

Then there's the statement from the PBOC: China’s PBOC Cuts Interest Rates for First Time Since 2012
“This interest rates adjustment is a neutral operation and doesn’t mean any change in monetary policy direction,” the central bank said in a statement on its website explaining the rate cuts. As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said.
China's economy doesn't need lower interest rates as much as it "needs" faster credit growth. China's credit crunch manifests as gray market/shadow banking interest rates that run into the double digits and rates over 20% are too common to be called rare. A cut in interest rates helps zero marginal borrowers because their problem is no one is willing to lend to them. Lower interest rates makes lenders less willing to make loans.

If the rate cut isn't about real estate, and it's not about economic growth, and it's not about credit growth, why did they cut rates? Likely answer: Japan's surprise yen devaluation. Interest rates, or rather the rate spread between two countries, has a big impact in currency markets.

No-one ever expects the PBOC
One can certainly also expect a response from South Korea and others in SE Asia (with the exception of Indonesia, given that the IDR has only just started to appreciate vs. the JPY), and a rate cut from India’s RBI (with WPI falling sharply on the back of the falling crude prices) also seems likely.

While the 1997-1998 period is the obvious precedent, the major difference is that Asian / EM central banks had only a very limited arsenal of FX reserves – total world FX reserves were less than 2.0 Tlrn and are now in excess of $13.0 Trln, much of which is an Asia. But this sort of currency war is really not at all helpful, and it is all the more ironic given that it follows Draghi’s comments earlier that “Draghi: QE in U.S.A, Japan has led to significant FX depreciation”, which is about as explicit as he can be in saying that he is pursuing a weaker Euro.

China has joined the currency wars and now all Hell can officially break loose. Cue the epic U.S. dollar rally. Keep your eye on the Asian Dollar Index, a sustained break below 114 will signal a bearish breakdown. For the U.S. Dollar Index, watch for a sustained break above 89.

As for the Chinese translation of "Cry 'Havoc!' and let slip the dogs of war," here are two possibilities: 发出屠杀的号令,让战争的猛犬四处蹂躏!and


China to End 2600 Year Salt Monopoly

A symbolic policy move, in the good sense of the word.

China to end state monopoly on salt dating back centuries
China is to end a monopoly over the production and sale of table salt, its official broadcaster said on Thursday, dismantling a system that has been in place in various guises for more than two thousand years and run by a state monopoly since 1950.

The move reflects Beijing's drive to deregulate state-run sectors to encourage greater competition among firms and tackle inefficiencies in the market.


The Fall of Germany

I came across this video looking at various problems Germany has with its economy. The part about energy starts at 25:20.

Germany, like Spain and California, is going down the tubes because instead of adding solar power along with coal, nuclear, natural gas, wind, hydro, biofuels, etc., they're replacing efficient power sources with more expensive solar. The result is rising energy costs destroying the competitiveness of the economy.

This is the latest on the boneheaded strategy in California: HUGE SOLAR PLANT LAGS IN EARLY PRODUCTION
The largest solar power plant of its type in the world - once promoted as a turning point in green energy - isn't producing as much energy as planned.

One of the reasons is as basic as it gets: The sun isn't shining as much as expected.

Sprawling across roughly 5 square miles of federal desert near the California-Nevada border, the Ivanpah Solar Electric Generating System opened in February, with operators saying it would produce enough electricity to power a city of 140,000 homes.

So far, however, the plant is producing about half of its expected annual output for 2014, according to calculations by the California Energy Commission.

.......Additional natural gas could also be needed to operate boilers when clouds thicken or to maintain output at the end of the day and extend the capability for power production, the company said.

"Because the plant requires sunlight to heat water and turn it to steam, anything that reduces the sunlight will affect steam conditions, which could damage equipment and potentially cause unsafe conditions," said the commission, which approved the request for increased gas use.

Fromer said it was surprising that so much additional gas is needed, adding that it "signals to me they have some very large problems that they are going to need to sort out."

Plants owners said they are learning on the fly to some extent.

"For some aspects of operation, the only way to fully understand how the systems work has been through the experience of operating," plant owners wrote in the request to increase gas use.
With any new technology there are bumps in the road, which is why it is insane to be replacing existing energy sources with alternatives such as wind and solar, instead of adding them. All it does is increase the use of other energy to make up for the shortfall, which in this case is natural gas. Further, the plant is most likely using natural gas less efficiently than one designed for natural gas.

October Home Sales Increase for Developers; Sales Chart

iFeng: 10月31家房企销售额环比升13.9% 连续3个月增长

This is the table from the article. On the left is the developer names. Vanke is the first on the list. The final line is the total for the 31 developers.

The six columns from left to right are: October Sales (100M yuan); MoM change; YoY change; Cumulative Sales through October (100M yuan); Cumulative YoY change; Sales Target Completion Rate.

Nothing Changes: USA Immigration

This article shows the USA of the 1950s is very much like the USA of the 2010s. The difference is that instead of only ranchers and farmers corrupting the immigration process, billionaires like Mark Zuckerburg are also pushing for cheap labor in the technology industry, and corruption reaches all the way to the top of the White House. On the other hand, if you think social mood has an impact on events, another Eisenhower-type policy reversal may be right around the corner. The USA has the most extreme immigration policy in the developed world and has continued moving in the direction of open borders even though much of the developed world started moving the other way in the 2000s. When policy switches back, it will be a shockingly fast and extreme reversal.

How Eisenhower solved illegal border crossings from Mexico
General Eisenhower.......quoted a report in The New York Times, highlighting one paragraph that said: "The rise in illegal border-crossing by Mexican 'wetbacks' to a current rate of more than 1,000,000 cases a year has been accompanied by a curious relaxation in ethical standards extending all the way from the farmer-exploiters of this contraband labor to the highest levels of the Federal Government."

...America "was faced with a breakdown in law enforcement on a very large scale," Mr. Brownell said. "When I say large scale, I mean hundreds of thousands were coming in from Mexico [every year] without restraint."

...a study by the President's Commission on Migratory Labor in Texas in 1950 found that cotton growers in the Rio Grande Valley, where most illegal aliens in Texas worked, paid wages that were "approximately half" the farm wages paid elsewhere in the state.

Profits from illegal labor led to the kind of corruption that apparently worried Eisenhower. Joseph White, a retired 21-year veteran of the Border Patrol, says that in the early 1950s, some senior US officials overseeing immigration enforcement "had friends among the ranchers," and agents "did not dare" arrest their illegal workers.

Not much different from the U.S.A. of today, where billionaires lobby the government for cheaper labor, and the near complete lack of enforcement of immigration laws.

Then on June 17, 1954, what was called "Operation Wetback" began. Because political resistance was lower in California and Arizona, the roundup of aliens began there. Some 750 agents swept northward through agricultural areas with a goal of 1,000 apprehensions a day. By the end of July, over 50,000 aliens were caught in the two states. Another 488,000, fearing arrest, had fled the country.

By mid-July, the crackdown extended northward into Utah, Nevada, and Idaho, and eastward to Texas.

By September, 80,000 had been taken into custody in Texas, and an estimated 500,000 to 700,000 illegals had left the Lone Star State voluntarily.

Shanghai FTZ Reforms Start Going National

China is expanding successful reforms from the Shanghai FTZ testing ground to the entire nation.

Some Shanghai FTZ Reform Ideas Introduced to Rest of Country
The free trade zone in Shanghai that opened in late September last year has served as a testing ground for more than 20 reform measures that are also being introduced to other parts of the country.

The measures range from looser restrictions on investment and trade to trailblazing pilots enhancing the use of yuan overseas, the Shanghai government says. As of November 1, their number is at least 22.

...The Central Leading Group on Financial and Economic Affairs, the Communist Party's top decision-making body for economic policies, sent a team to Shanghai in October to examine the progress of reform in the FTZ. The team consisted of officials from the Ministry of Commerce, the central bank and the regulators for the banking, securities and insurance industries.

The investigators focused on how to coordinate and promote measures enhancing the convertibility of the capital account, a source close to the situation said.

Northbound Flows Dominate the Stock Connect

One reason may be the financial media, which focused on stocks that foreigners would want to buy in China, rather than attractive stocks in HK.

Closer Look: Why Shanghai-Hong Kong Stock Connect Was One-Way Road
Investment funds around the world have about US$ 20 trillion to buy stocks, and even if they allocate only a small part of those assets to China, foreign investments in A-shares would soar because the QFII, the main channel linking foreign capital with the Chinese market, has allowed less than US$ 50 billion into the market, he said.

It also appears that foreign investors have more capital ready to enter the Chinese market than the Chinese have to invest overseas. Data from Chen show that the amount of QFII and RQFII (the QFII's yuan-denominated version) investments combined with overseas-listed Chinese stocks' value is 28 times that of qualified domestic institutional investors' investment into overseas-listed stocks.

"From this it can be inferred that the two sides have a gap in terms of capital strength," he said.

Financial Risk in China: Same Old Emerging Market Risk

China faces debt crunch as property values fall
One Hong Kong-based hedge fund has accumulated the prospectuses of no fewer than 250 of the trust companies that sit at the heart of the Chinese shadow banking system. These contain virtually no disclosure except on the value of the real estate that backs loans whether committed or proposed.

Meanwhile, interest rates are high. The average lending rate in September was 6.97 per cent, and the real, one-year interest rate is now 4.3 per cent – a five-year record. Moreover, the real burden of debt is becoming heavier because of deflation. Upstream producer prices have been in deflationary territory for 32 months now.

Foreign borrowings are also problematic. Chinese companies have become the largest issuers in the US dollar high yield market, having raised over $180bn in US dollar-denominated debt, according to research from Morgan Stanley.

...Moreover, the burden of repaying foreign debt without foreign revenues is growing since few borrowers anticipated the relative strength of the dollar against the renminbi.

Chinese New Home Prices See Small Bounce in October

New home prices fell 0.78% in October and they are down 2.49% yoy. The change in existing home prices was almost exactly the same: 0.84% drop in October, 2.52% drop yoy. This is an improvement from the month before and the bulk of the improvement came in the shrinking losses, with fewer large declines pulling down the average. Prices have come down quite a bit this year though, and as I point out below, some segments of the market are nearing the price levels they were at in 2010. In some areas that are already below 2010 levels. A combination of price declines and general wage increases has made housing a lot more affordable that it was back in 2010.

First tier cities are still up double-digits over 2010, but demand for housing is always strong in those cities. The main issue moving forward is the third and fourth-tier cities with massive supply overhang; they're going to have problems even if the price declines flatten out in the months ahead. Small and medium developers are still in trouble as well.

March: 4 cities saw declines in price mom, 10 cities were flat, 56 were up.
April: 8 cities saw declines in price mom, 18 cities were flat, 44 were up.
May: 35 cities saw declines in price mom, 20 cities were flat, 15 were up.
June: 55 cities saw declines in price mom, 7 cities were flat, 8 were up.
July: 64 cities saw declines in price mom, 4 cities were flat, 2 were up.
August: 68 cities saw declines in price mom, 1 city was flat, 1 was up.
September: 69 cities saw declines in price mom, 1 city was flat, 0 were up.
October: 69 cities saw declines in price mom, 1 city was flat, 0 were up.

Qinhuangdao saw prices slide 1.5%, largest on the month. Zhengzhou was flat. Overall, the range of price changes was smaller than in previous months.

70 city new home price changes by market segment: below 90 sqm prices fell 0.8% mom; 90-144 sqm prices fell 0.8%; above 144 sqm prices fell 0.9%.

70 city existing home price changes by market segment: below 90 sqm prices fell 0.8% mom; 90-144 sqm prices fell 0.8%; above 144 sqm prices fell 1.0%.

Here's a number to consider: the average price increase of existing homes larger than 144 sqm since 2010 is now 0.96%. Even for homes less than 90 sqm, the increase is down to 4.5%.

Data: 2014年10月份70个大中城市住宅销售价格变动情况


Worm Brain in Lego Robot

Are you ready for the robot overlords? Programmers mapped the brain of a worm and uploaded it into a Lego robot.

A Worm's Mind In A Lego Body
The key point is that there was no programming or learning involved to create the behaviors. The connectome of the worm was mapped and implemented as a software system and the behaviors emerge.

The conectome may only consist of 302 neurons but it is self-stimulating and it is difficult to understand how it works - but it does.

Social Mood in Europe Boiling

Next year could be a wild one. Immigration sentiment is turning negative and violence by Muslims is now being answered by violent right-wing riots as the population increasingly gives up on politicians who refuse to address their concerns. Toss in anger at the ruling classes for the state of the economy, movements to reject bailout deals, leave the euro, secede, and leave the EU, and one of these sparks may finally hit the powder keg.

Italy's immigration crisis moves from sea to streets
"Why do they have to be taken care of? It's me that needs taking care of!"

Like many of Italy's poor, 51-year-old Elvio has had enough. And the unemployed construction worker thinks he knows who to blame.

Born and raised in a rundown suburb of Rome where residents last week laid violent siege to a holding centre for asylum seekers, Elvio belongs to a strata of Italian society whose frustration is beginning to boil over after years of falling incomes, employment and hope.

And with the country struggling to cope with an influx of tens of thousands of migrants fleeing conflict and poverty in Africa, the Middle East and South Asia, that anger increasingly has a focus.

The anti-immigration sentiment in Italy is nothing compared to the Clockwork Orange underway in Sweden:

Muslim Gangs Continue To Terrorize 55 Neighborhoods, Police Powerless
Despite being a small country of less than 10 million citizens, a 2012 study showed an average of one school being burned per day in Sweden, costing tax payers upwards of half a billion SEK annually. By comparison, Greece has 11 million citizens and averages only five school fires per year.

Not even the police are safe from attacks. In May 2014, two police officers were cornered by 50 thugs in the no-go zone of Landskrona. They pulled their weapons to hold off the attackers and called for backup, but the police commander refused to send in backup, fearing escalation. One of the officers knew a few locals who intervened and convinced the gang to let the officers escape.

While such brazen aggression is rare, patrol cars are frequently pelted with rocks, and the drivers are targeted with green lasers. Blinding drivers with the powerful, hand-held lasers is a growing “sport,” where the goal is to make the driver crash. Buses, taxis, delivery companies and mailmen are also popular targets.

...Ethnic Swedes are also being attacked. Local celebrity Linda Edenström’s 12-year old son was savagely beaten. In October, he took the subway after school to give a birthday present to a girl in his class. He was unaware she lived in a no-go zone, and when he exited the station he was promptly stopped by seven grown immigrants. They declared that no whites were allowed and proceeded to attack him while hurling anti-white slurs.

Swedish law states that the incident is not a hate crime. The law does not apply to an immigrant targeting a native Swede, even if an immigrant does so while explicitly stating they are doing it for racial reasons. However, the reverse situation with a native Swede saying a slur that could be perceived as racist has severe civil and criminal charges.

How long before Sweden has an Anders Breivik?

UKIP is now getting a challenge from Tories on immigration:

Major to Europe - Cut immigration or the UK may leave
Immigration is changing character of UK schools, claims Iain Duncan Smith
Iain Duncan Smith, the work and pensions secretary, has said that non-English-speaking children are changing the character of British schools, as Ukip looks likely to gain its second MP in the Rochester and Strood byelection.

The senior Conservative said an academic report setting out the billions of pounds that EU migrants had added to the economy was “silly” because it only looks at immigration in terms of the financial benefits to the economy.

Italy's Grillo takes anti-euro campaign to Brussels
The leader of Italy's anti-establishment Five Star Movement, Beppe Grillo, has gone to the European Parliament (EP) to present his programme to get a referendum in Italy on leaving the euro "as soon as possible".

The comedian-turned-politician is aiming to collect 4m signatures by next spring.

He will then go to parliament in Rome, where many of his MPs now sit, and demand a referendum. If millions of Italians sign the petition, Prime Minister Matteo Renzi won't be able to simply brush this off.

Spanish minister warns of violence over Catalonia's secession bid
The Catalan regional government’s insistence on independence from Spain may result in widespread violence in the autonomous region, says the Spanish interior minister.

"A process of these characteristics, by its very nature, generates radicalism,” Jorge Fernández Díaz told Spanish daily, ABC, on Sunday.

“This radicalization, combined with frustration, could degenerate in violence,” Díaz added, noting that the combination is “very dangerous."

Catalonia’s President Artur Mas has pledged to pursue secession efforts following a symbolic independence referendum held on November 9.

Greek bond yield rises above 8% on election fears
Greek opposition leader calls on parties to set early election date
Greek opposition leader Alexis Tsipras on Monday called on party leaders to set a date for an early election, arguing polls must be held before the government signs any binding deals with EU/IMF lenders.

Greece's government is under growing pressure ahead of a presidential vote in February, which could trigger a snap election and bring Tsipras's radical leftist Syriza party to power.

The government is negotiating an early exit from Greece's EU/IMF bailout. Tsipras has suggested a future Syriza government would not respect decisions made without its consent.

'The far-right wants more riots'
Virchow: Right-wing groups celebrate these events as a great success on their Facebook-Pages and blogs. They were in control of the streets in Cologne, and that has not happened in a long time. Most marches had been blocked or had been accompanied by heavy police-presence.

But this time, thousands could march through Cologne without much restriction, some of them went on manhunts and some attacked journalists. In their view, that is a great success.

Not only right-wing bloggers celebrate that. On social networks, many users seemed to be happy that "finally someone is standing up against Salafism in Germany." Have right-wing extremists found a topic that proves popular?

Real Estate Great Leap Forward: Fangchenggang

This article dubs Fangchenggang, in Guangxi, as more crazy than Erdos. Over the past 5 years, this city with a population of 400,000 has seen 8.5 million sqm of property development, and if the average home is assumed to be 120 sqm, there are over 70,000 homes built. Also, over the past 5 years, 7.3 million sqm have been sold, but the population has only increased at its natural rate of less than 1% annually. Many buyers are out of town investors, looking to profit in this seaside town. Now that financing has become tight, all the problems seen in other cities are manifesting: developers aren't finishing properties, investor assets are frozen in these properties, investors returning properties, etc. Additionally, the city's steel industry is suffering due to nationwide factors, adding more trouble for the local real estate market.

iFeng: 楼市又现一新鬼城比鄂尔多斯还疯狂 遍地房子

Abenomics the Kiss of Death for Gold

This is gold and CurrencyShares Japanese Yen (FXY).

I'm not going to tell you this makes sense, I'm just going to tell you there are 100 ounces of paper gold for every ounce of physical gold.

Credit Slowdown Continues In October

All data from the PBOC. The last chart shows the FX loan-to-deposit ratio in the Chinese banking system. A down slope has been associated with economic weakness and RMB weakness in the past.


Where Have All The Aunties Gone? Shanghai Gold Trades At Discount

The gold premium in Shanghai is gone as the Chinese aunties have given up their gold hoarding efforts. Fear not, gold bugs, for they are being replaced by Indian aunties and central bankers.

iFeng: 黄金大博弈:“央妈”接棒“大妈”入场抄底

The Losses Mount and The Depositors Leave

Bank of Communications: Time for a Withdrawal?
Slowing Chinese economy prompts rise in bad loans

金融脱媒加剧 交通银行存款流失惊人 (Shocking Deposit Drain at BoC)

China's 16 listed banks saw deposits decline 2% in Q3, but Bank of Communications saw a drop of 5.9%. The steep drop is believed to be the result of the new regulations that stop banks from attracting deposits. Banks were window dressing their quarter end regulatory snapshots by purchasing deposits in the last couple weeks of a quarter, a phenomena that was very obvious in the quarters following the cash crunch in June 2013. The banks are also hitting up against their loan-to-deposit rations as depositors pull their funds.


Shape of the U.S. Economy in Q2

Gross Output for 2014Q2 is out. Prior post here: GDP Stands For Garbage Data Point.

Anyang Private Lending Market Collapse Aftermath

Three years before Handan, the private lending market in Anyang collapsed. Prices jumped more than 80% from 2009 to 2010, pulling in many investors and developers with no experience. The result is widespread losses, collapse in the private lending market, very small price gains in the ensuing three years and many abandoned buildings, some of which have become home to birds, cats and dogs.

安阳民间借贷崩盘 遍地烂尾楼成猫狗栖身地


Asian Dollar Index Nears Major Support Line

Way back in January I wrote, The Party Starts When ADXY Falls Below 114. It bounced during the year, but is again approaching support and the weak yen is probably going to be the catalyst that finally breaks support and sets off currency devaluation in Asia. The ADXY is 36.9% CNY, 11.8% HKD, 11.6% KRW, 11.5% SGD, 9.2% INR.

China's "Deepening" Slowdown, Plus News Roundup for the Week Ended November 14

The headlines were focused on slowing investment and industrial production in China this week. I posted the charts yesterday, see Chinese Investment Bounces in October. Yes, the growth rates actually ticked up in October, which is not too surprising considering the burst of optimism in the real estate sector. On a cumulative basis though, the numbers are still heading down and as you can see in the charts, the bounce in October didn't take any figures above the cumulative trend. The numbers will continue dropping into November and also December barring a miraculous reversal. Also, since the monthly figures are having less impact on the cumulative figure here, if the numbers weaken into early 2015 there could be a "shock" print in February. Stories such as China Slowdown Deepens as Leaders Said to Mull Target Cut and Weak Demand, Real-Estate Slump Signal Headwinds for China are therefore both correct, but in fact the data telling the story were out at least a month ago. More such headlines are coming in the months ahead.

Here's some stories I wasn't able to cover during a busy week.

Vanke and other developers are raising capital to pay down bank loans and reduce their cost of capital. Developers are looking towards self-financing their operations via the capital markets. iFeng: 13家房企中票融资料达千亿 直接融资大门渐开

Cash crunch for developers could intensify. The top ten developers have raised 111.5 billion yuan, only 85% of the total at this point in 2013. Two thirds of financing came from overseas, or 74 billion yuan. iFeng: 10家标杆房企前10月海外融资740亿 钱荒或加剧

A new housing rescue policy: Hubei province (capital Wuhan) will allow parents and children to access each others' housing fund money. iFeng: 湖北买房父母子女可用对方公积金 支持省内异地贷款

Only 6 developes are on track to hit their annual sales targets as of October; some have no hope. Vanke, Evergrande and Greentown are three of the developers that have already reached 80% of their targets. Firms usually achieve 40% of their target in 1H, 60% in 2H. iFeng: 前10月仅六家上市房企销售达标 部分完成目标无望

21 Risks to Be Aware of in the Shanghai-Hong Kong Connect. The article focuses on the risks for Chinese investors. Mostly deals with the differences between the markets, things Chinese investors will not know or understand about HK. 上交所沪港通专栏(十六):牢记投资风险

Central bank policy has been aimed at easing financing costs, and it has room to further ease financing costs. Some discussion from analysts about the recent dip in CPI allowing room for RRR cuts. 21st CBH: 公开市场操作不温不火 货币宽松还有更大空间


Chinese Investment Bounces in October

Fixed asset, private fixed asset and real estate investment bounced in October, but all are still below the cumulative growth trend.

Some line items that stick out in the fixed asset investment report: ferrous metals extraction up 3.8% (all numbers yoy cumulative through October); non-ferrous metals extraction down 2.2%; coal extraction down 7%; ferrous metals smelting and processing down 6%; non-ferrous metals smelting and processing up 6.1%; foreign investment down 0.2%.

From the industrial production report, these are one month changes yoy: cement down 1.1%; plate glass down 6.7%. Both are real estate related.

All data from the NBS.


CICC Predicts Home Price Recovery After 2015Q2

CICC predicts prices will recover after Q2 in 2015 and prices will rise less than 5% for the year. The forecast is based in part on falling inventories, rising consumer deposits and falling real interest rates.

Shanghai November Home Sales Off to Bad Start

As good as the October data was for the housing market, it doesn't yet signal a shift, only a potential shift that must be confirmed with improved data in the following months. Markets don't go down in a straight line and pullbacks are normal. Government intervention pulls marginal buyers off the sidelines, cannibalizing future demand. This can lead to a rebound or stabilization in the market if the policy impact offsets the trend, but it can also result in a seeming rebound that quickly fades as the larger trend reasserts itself. 

I usually ignore weekly data, but this data out of Shanghai landed at the top of the headlines today. New home sales (measured by area) plunged 48.7% from the last week of October to the first week of November. Existing home sale transactions plunged 31.8%. 

On the optimistic side, home loans in Shanghai are still expensive. On the pessimistic side, inventory in Shanghai has been trending lower.

This news made headlines because only a week or two ago, developers were talking of price increases, if not actually raising prices, confident that the market had turned. If this isn't a one-week phenomena or quirk of the data, pessimism will come roaring back as developers realize they must cut prices again to move inventory.


Trust Assets Flowing into Equities

Amid the trust and real estate slowdowns, one possible winner was the stock market. Evidence continues to show money is indeed flowing in that direction. Trust investments in basic industries tumbled and real estate was stable in Q3, while flows into financial institutions and securities markets picked up.

From Yanglee.com: 信托资金加速流入股市

Housing Prices Stable, No Crash, No Reflating Bubble

All is well as China's wise leaders engineer another economic transition. At least for October...
The story on October's real estate market: sales up, prices stable. Even Hangzhou has seen such an improvement. Many developers there are looking to reduce inventory and prices cuts are the preferred method. New properties hitting the market are coming in below their forecast prices by as much as 1000 to 2000 per sqm.

Now that the government has eased lending rules, will prices rebound? A large increase only has a small probability says this opinion piece in the People's Daily. The main message: the government wants a stable market, not a reflating bubble; and marketization can't be reversed. The bubble is deflating and local areas will have their issues. An example given is Qingdao, with one-fourth the population of Beijing, but twice the housing inventory.

Cheng Siwei says the government will not permit a collapse in the property market, you can be certain of this. “Presently, China's urbanization rate is only 52%. If each year it increases 1%, each year 11 million rural residents will move to cities; each year 7 million college students graduate, they will work, marry; these people need improved housing.

First-tier cities such as Beijing and Shanghai still have great demand for housing and existing home sales are already rebounding in Beijing. Second and third-tier cities with excess supply should encourage rural hukou holders and common people to move into the city, thereby consuming the inventory.

Mortgages are 30% of bank assets and 80% of Chinese assets are in property. If the property market falls, the banking system and average people will suffer great losses. The government hopes to keep prices from rising quickly, but they do not at all hope for a crash.

In addition to mortgages which are about 30% of bank assets (25% is individual mortgages), loans to developers makes up another 20% to 25% of bank assets.


People's Daily: Supply and Demand Fully Relaxed, Market Will Take Over

People's Daily published an article stating that where supply & demand was tight everywhere in 2011, and localities excessively tight. Now supply & demand is relaxed, with some localities seeing excessive supply. Before, lack of supply was a problem, now excess supply is a structural problem. The structure is demographic and geographic, excessive supply in a market segment (such as excess luxury homes in Baodi) or in a city. The solution is not government intervention, rather the exiting of government and the flowering of market regulation.

"Using the market to regulate the market problem is the next important step. In the next phase, the government will be inclined to use finance and tax, these types of marketization tools, and administrative methods will be used less and less." Deputy Minister of Housing and Urban-Rural Development Qi Ji said.



Textbook Credit Implosion Underway in Sichuan Province

In Sichuan province this summer, Huitong Credit Guarantee went bust. I covered it here: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust
The executives of Sichuan's Huitong credit guarantee have "lost contact" and the status of ¥5 billion worth of loans are up in the air. The offices of the executives were sealed by police on July 9. The firm is the largest privately run credit guarantee firm in Sichuan. The local government is temporarily taking over operations and has instructed the banks to continue working with the firm.

...Huitong has worked with more than 20 banks, several trust companies and even public housing funds. The largest amount of the outstanding ¥5 billion in credit is bank loans, worth about ¥4.5 billion. The rest is with other firms, as well as some loans made directly by the credit guarantee firm. If some loans backed by Huitong are to other credit guarantee companies, legal action by the banks could result in yet more falling dominoes.
Turns out there are a lot of dominoes.

A new article from iFeng (link and Google translation below) details the credit carnage. Thus far there are individual cases in the amount of ¥200 million; ¥200 million; ¥90 million (boss leaped to his death); ¥200 million; and ¥70 million. These all emerged in September and October, with the trust/ investment company bosses going missing, committing suicide or being apprehended by police.

Due to the wild growth in the private fundraising/shadow banking sector, it's expected that losses will continue emerging into the middle of 2015.

Credit growth has completely halted. From the article below:
"I'm sorry, now there is no financing available for investment projects." "Now the main task of the company is to complete existing projects, only manage the existing capital, not grow it." Reporter walked into a number of financial companies, the answer is the same.

At the office of Chengdu's (capital of Sichuan) Xida Financial Supermarket Building 3, you can still rent empty space for ¥80 per sqm. Others who moved in early are paying ¥260 per sqm; prices have collapsed 70%. The sales agent tells the reporter, "If you don't believe me, I'll show you other companies' rental contracts, but you have to keep it a secret. If you can move in before November 8, we can discuss the price further."

Rent no doubt was high due to growth in investment management/ advisory firms. At end of December 2013, there were nearly 5,000 of these financial firms, an increase of roughly 4000 from June of the same year! Sichuan's provincial government counted 509 firms involved in credit guarantees at the end of 2013, with a ¥233.8 billion guarantee balance and 730,000 households served, making Sichuan province the second largest market in the country. Central bank data from the end of June 2014 counted 326 small lending companies in Sichuan, ninth in China, with ¥59.7 billion in loans, fourth in China.

41.4% of western Chinese SMEs need credit and 57.2% of those credit needs are met with private fundraising (shadow banking). Average interest rates are 19.1%, well above the 9.7% annual rate for bank credit. Since they have no credit guarantee or collateral, 72.1% of small businesses are forced to use private fundraising. In Chengdu, there are investment products on the market today offering 15% to 18% returns, well above the 7% offered by bank trusts and WMPs.

Are you ready for the punchline? One insider estimates that 80% of this private credit flowed into real estate. Thanks to the rapid growth of the real estate industry, some developers were (successfully) paying 100% annualized interest rates and even the common people were spoiled, with investors refusing to even look at wealth product yielding under 20%.

Real estate investment has actually ticked up in the second half of the year (through the September data), but the cooling market is wreaking havoc among high interest rate debtors. I would not bet on that number holding up in the coming months.

This is a textbook credit bubble, with explosive growth right before the peak. The 400% growth in investment firms in the last 6 months of 2013 is off the charts. The major domino in the private fundraising market fell in July 2014, and the knock on dominoes started going down in September and October. Real estate investment hasn't contracted yet, but it likely will. Then it may take a few more months for the suppliers to get into trouble, later the construction equipment companies that sold cement mixers and excavators on credit may find they have bad debts on their balance sheets. This credit bust is still in the early innings......




The PBOC is keeping monetary policy tight, but not too tight.

China central bank pledges policy support as risks to growth rise
China's central bank pledged on Thursday to maintain modest policy support to help the world's second-largest economy weather increasing headwinds in the near term but stressed that it will not flood markets with cash.

Yet at the same time, the central bank also said publicly for the first time that it had pumped 769.5 billion yuan ($125.91 billion) worth of three-month loans into banks via a "medium-term lending facility" (MLF) to keep interest rates low.

The disbursement of loans was slightly more than the 700 billion yuan expected by many in the market and underscored the risks faced by China's economy, where third-quarter growth fell to a low not seen since the 2008/09 global financial crisis.

"During the process of economic adjustment, China will see rising downward pressure in its economy and increasing chances of exposure to potential risks in a certain period of time," the People's Bank of China said.

China Housing Market in October

Not a lot new here, but I see the question being asked as to whether prices are really recovering, or whether this is a case of volume picking up as prices drop. Guangzhou saw the largest increase in sales (measured by area), but also the largest drop in prices among first tier cities. iFeng: 双限松动 银十披金


Crashing Commodities

This doesn't have the feel of 2008, when the fallout from the housing crisis was looming. There were expiration dates for Fannie and Freddie, for example, and the collapse of oil in July was a clear harbinger for those in the deflation camp. Today, there's definitely a case to be made for a larger than expected slowdown in China, but it doesn't feel like 2008 yet. That said, the movement in commodity markets is not to be ignored when the U.S. dollar is one good week away from breaking out to the upside.

Global Commodity Prices Are Collapsing At The Fastest Pace Since Lehman

Another Plunging Data Point: Canton Fair Visits Down

The Canton Fair is less important these days and Ebola fears kept at least a few Africans from attending, but it might also be a weaker global economy......

Weaker orders at Canton Fair signal China export boost may not be sustainable
China's bellwether import-export trade fair showed a decline in orders year-on-year, indicating that strong external demand which helped buoy growth in the third quarter may not be sustainable in the final three months of the year.

The China Import and Export Fair, popularly known as the Canton Fair, generated 179.2 billion yuan ($29.30 billion), organizers said in a statement on Tuesday, the final day of the event that began on Oct. 15. That's 8.6 percent less than last fall's fair after accounting for currency fluctuations.

Ebola fears were blamed for keeping visitors away:
Attendance at the fair declined by a slim 1.9 percent from the same period a year earlier with worries over the Ebola virus epidemic potentially leading some to stay home. State-run China Daily quoted the fair's spokesman in mid-October saying Ebola and domestic dengue fever epidemics would likely affect attendance and that Africans would not be barred from the event.

Medical workers at the fair held in Guangzhou, the provincial capital of Guangdong province, donned full protection suits and checked visitors for signs of the Ebola virus that has killed nearly 5,000 people, mostly in West Africa.

Re Ebola: Africans in China feel scant Ebola panic

The 8.6% decline in orders was an improvement from the double digit losses in the spring. The decline in visitors picked up from the spring, but the rate of decline slowed there as well. Still, it was an absolute decline in both visitors and orders and points to slowing growth in the coming year.

Weak Yen Buys Profits; China May Hold the Line

People wonder what Japan gets for its weak yen. As pointed out by Lang Xianping this week, it buys profits.

Toyota raises FY profit forecast by nine percent on weak yen
Toyota Motor Corp raised its full-year operating profit forecast by 9.1 percent on Wednesday as a sharp decline in the yen increases the value of repatriated earnings and makes up for lower vehicle sales.

The world's biggest automaker now expects operating profit of 2.50 trillion yen ($21.87 billion) for the business year ending March 31, rather than the previously forecast 2.30 trillion yen, thanks partly to a 135 billion yen contribution from foreign exchange gains. It sees sales at 9.05 million vehicles instead of 9.10 million.

Sales down, profits up.

Japan's policies will lead to disaster, but in the near term you have to respect the way people respond to incentives. Gold is being sold off because yen printing is "bullish" for the dollar in relative terms, but it could also trigger a global deflationary crash worse than 2008. Long-run, gold is going to return to safe haven, monetary status, but it will take major pain before it gets there.

China is discussing neutrality in the currency war (see Lang Xianping link above). China did not devalue during the Asian Crisis of 1997 and re-pegged to the dollar in 2008 to avoid devaluation. It would be hugely beneficial for China in the long-run to hold the line again because it would gain a lot of credibility as a safe haven currency (while also taking some of the load off of the U.S.). It might mean crippling deflation in the short-run though, depending on how the global economy performs in the next couple of years.

China Financial Reforms Continue: Interbank Market Opens

China eases grip on capital markets
The People's Bank of China is opening the interbank bond market to non-financial firms, taking a major step towards building a multi-layered bond market with the aim of diversifying credit risk that is concentrated in the banking system.