CREIS: New Home Prices Rise 0.4% in January; Shenzhen Out of Control

New home prices climbed 0.4% mom in January according to CREIS' 100-city survey. This is down from December 2015's gain of 0.74%.

Shenzhen prices increased 5.24% on the month; 45% yoy.

100 City Survey: 2016年1月中国房地产
Google Translated: January 2016 Home Prices

It's Happening: China Plans For 500,000 Unemployed Steelworkers

This is a large migration of 500,000 people.

It is not the spring, but the process is difficult, the wide geographic scope of China's economic future far-reaching effects, no one dared to underestimate.

Chi Jingdong Chinese iron and steel enterprises with the current per capita productivity per ton, roughly calculate this figure. Vice president of the China Iron and Steel Association said, according to the target recompression crude steel production capacity of 100 million to 150 million tons in the January 22, 2016 the State Council executive meeting of China's steel production per capita steel, 300 tons of steel round to capacity means that there will be about 500,000 steel workers facing adjustment or a new choice.

This guidance 500,000 migratory programmatic document entitled "Guidance on the steel industry turnaround", has received State Council approval, or will be officially issued after the Spring Festival. At the same time, eight specific policy documents and supporting documents related to, or is about to complete the drafting of the relevant departments in charge of these policies are related to financial support, the Banking, environmental protection, safety supervision, land and so on.
Difficulties do not end with 500,000 resettled workers. There's also bad debts to settle.
There are bad debt problems. So far, the outside world can not be estimated liabilities dependent on the size of 100 -150 million tons of steel production capacity, as well as partial risk of possible hidden risk. An industry source said, according to data, 1 billion tons of steel production capacity has 3 trillion debt, you can roughly estimate 100 million ~ 150 million tons of production capacity should have at least 300 billion to 450 billion in debt behind it.
EO: 这一次从钢铁开始


Four Strategies for Merging and Reorganizing SOEs

China is going to pick the winners in industry consolidation.
In fact, the Chinese building materials in recent years has been planning the cement industry. According to Song Zhiping, chairman of China Building Materials introduced, China's building materials in the field of cement, through large-scale consolidation and reorganization, since the formation of United Cement, Southern Cement, Northern Cement, cement southwest four cement companies that make the country's cement industry concentration is greatly improved, increased from 16% in 2008 to the current 53%. This time, if the Chinese building materials Sinoma successful reorganization, is bound to become a true cement industry giant.
Any questions?

The four methods of merger and reorganization and likely industries, according to Ping An:
For the next central enterprise integration, Ping An Securities predicts that the central rate of merger cases from the typical case of an existing point of view, the central enterprises mergers and acquisitions there are four main types: First, the industry merger and reorganization. Shipbuilding and military industries such consolidation probability. Second, mergers and acquisitions within the industry. Steel and building materials industries such operations likely. Third, the integration of upstream and downstream industry chain integration. Optimistic about the integration of this type of non-ferrous industry. Fourth, the central enterprises overseas mergers and acquisitions. The focus will be on the equipment manufacturing industry, including high-speed rail, electricity, communications, engineering machinery, automobile and aircraft manufacturing and electronic assembly processing industries.
iFeng: 央企合并成去产能新招 未来聚焦四大类型(名单)

Wonders of Socialism on Display Once More

WaPo: Venezuela is on the brink of a complete economic collapse
The only question now is whether Venezuela's government or economy will completely collapse first.

The key word there is "completely." Both are well into their death throes. Indeed, Venezuela's ruling party just lost congressional elections that gave the opposition a veto-proof majority, and it's hard to see that getting any better for them any time soon — or ever. Incumbents, after all, don't tend to do too well when, according to the International Monetary Fund, their economy shrinks 10 percent one year, an additional 6 percent the next, and inflation explodes to 720 percent. It's no wonder, then, that markets expect Venezuela to default on its debt in the very near future. The country is basically bankrupt.

That's not an easy thing to do when you have the largest oil reserves in the world, but Venezuela has managed it. How? Well, a combination of bad luck and worse policies. The first step was when Hugo Chávez's socialist government started spending more money on the poor, with everything from two-cent gasoline to free housing. Now, there's nothing wrong with that — in fact, it's a good idea in general — but only as long as you actually, well, have the money to spend. And by 2005 or so, Venezuela didn't.

...Venezuela's government has tried to deny economic reality with price and currency controls. The idea was that it could stop inflation without having to stop printing money by telling businesses what they were allowed to charge, and then giving them dollars on cheap enough terms that they could actually afford to sell at those prices. The problem with that idea is that it's not profitable for unsubsidized companies to stock their shelves, and not profitable enough for subsidized ones to do so either when they can just sell their dollars in the black market instead of using them to import things. That's left Venezuela's supermarkets without enough food, its breweries without enough hops to make beer, and its factories without enough pulp to produce toilet paper. The only thing Venezuela is well-supplied with are lines.

Although the government has even started rationing those, kicking people out of line based on the last digit of their national ID card.
The lesson of Venezuela isn't socialism though, it's that it relied on oil. At least that's what the Bernie Sanders voters say in the comments below.


Stock Market Related Debt Blowups Start Showing Up

When the tide goes out, you not only see who is swimming naked, but who has engaged in fraud and corruption.

Bloomberg: China Citic Bank Uncovers $147 Million Bill 'Risk Incident'
China Citic Bank Corp. recently uncovered a “risk incident” involving 969 million yuan ($147 million) in relation to its notes business, the unit of the nation’s largest investment conglomerate said late Thursday.

...Earlier, people familiar with the matter said that an employee at the bank’s branch in Lanzhou city allegedly conspired with other people between May and July to fake documents that were used as collateral to obtain a bankers’ acceptance. That was later sold several times at discounted prices, said the people, asking not to be identified as they aren’t authorized to speak publicly on the matter. The proceeds were invested in stocks, and the fraud was uncovered after Chinese equities slumped, one of the people said.
iFeng: 中信银行爆9亿元票据案 因股市下跌暴露出来

Another case is in Shanghai. ZH: China's 3 Trillion Yuan Margin Call Time Bomb Is About To Explode
We cite a recently reported example involving the controlling shareholder of Guangxi Future Technology. According to articles by Securities Times (Jan 19) and 21st Century Business Herald (Jan 20), in December 2015 Pudong Development Bank set up a WMP called Tebon Huijin No.1 Asset Management Plan to fund the shareholder's purchase of its own company's shares. Essentially, the WMP buyers, as the senior tranche investors, lent money for the shareholder to buy their own stock. Similar to other structured WMPs, this product has a stop-loss clause, and the company's share price dropped below the stop-loss level on Jan 18. As the controlling shareholder did not put up additional margin, Pudong Development Bank liquidated all stock in the plan (equivalent to 2.13% of the company's outstanding shares). This is the first case of forced liquidation by such products but in our view there could be additional cases given how sharply the market has declined in recent weeks.
Yesterday the estimate on bad debts backing zombie industries was estimated at 5.4 trillion yuan. Compared to bad debts in the late 1990s, the situation didn't look as bad, but as the above news shows, there's plenty more types of bad debt to uncover in 2016.

Beijing Homes Sales Start Strong, Existing Sales 6.6 Times New

released data show that as of January 27, Beijing this month, new houses and existing housing contract volume was 3165 units and 20916 sets. With the beginning of cold weather in stark contrast to the warm winter Beijing real estate market has continued to the end of January, the results are at record levels. Industry forecasts, in the central repeatedly stressed to the inventory trend, is expected to further policy easing, high turnover last year, a large number of land after another into the market, the Beijing real estate market can be expected to return to a high level.

..."From the beginning this year, the property market can be seen in the case of Beijing, less supply, the higher end of the market down trend is gradually stable, high-end projects this year, Beijing will continue to increase the proportion of transactions likely, while new housing began to shift to the suburbs , the same location of residential transactions compared to the previous two years, there have been significant relocation. "Centaline Dawei, chief analyst said, 500 million to 10 million high-end new homes, for example, in 2013 the proportion of transactions within the Fifth Ring of 56.4 %, while the proportion dropped to 30% last year, this year the proportion may be further compressed. In addition, second-hand housing turnover continued to outpace new house heat has also become a new mainstream, "Of course, the rise in price of secondary housing still can not catch up with a new house." Dawei said.
iFeng: 北京楼市开门红 二手房成交量为新房6.6倍

Japanese Manufacturing Stocks Getting Hammered By China Slowdown

I've been looking around for bargains lately, looking at Japanese advanced manufacturers. Some of the stocks are off by 10% today alone, but the Nikkei is only down 0.5%.

Reuters: Japanese shares slip ahead of BOJ, Fanuc tumbles on poor earnings
Fanuc shares fell 12 percent after the robot maker unexpectedly cut its earning forecast, helping to push down the Nikkei share average 0.4 percent to 16,973.01 while the broader Topix dipped 0.1 percent to 1,391.21.

...The impact of weak demand in China hit Fanuc, which on Thursday cut its operating profit estimate for the year to March by 3.8 percent.

Omron Corp shares fell 15 percent after the machine maker cut its earning guidance, also citing weak demand for parts for smart phones and other products in China.

Bank of Japan Cuts Interest Rate to Negative, May Cut Further

Yen still weaker, but the Nikkei actually gave up its gains and hit a new low on the day following the news.


Four Zombie Industries Have ¥5.4 Trillion in Debt

Four of the industries loaded with overcapacity and zombie firms have 5.4 trillion yuan in debt. Of that, 2.8 trillion is bank loans, 1.6 trillion is bonds, trusts and other non-standard credit is 1 trillion.

Haitong Securities asks, what can we learn from 1998? Back then there was 2 trillion yuan in industries with overcapacity. NPLs rose from 1.69 trillion at the end of 1997 sharply to 3.68 trillion at the end of 2000, which means an increase of 2 trillion which was the debt from clearing out overcapacity. This cleaning up of overcapacity led to a banking bailout.

Removing the overcapacity caused the NPL ratio to rapidly increase. 1994-1997, China's commercial banks non-performing loan ratio, although an upward trend, but the range is limited, about 2% per year. 1998 to begin clearing overproduction, the NPL ratio rise significantly increased, and the absolute level of non-performing loan ratio reached 55 percent, historic highs. In this regard due to corporate debt ratio being too high, a lot of corporate debt is higher than the assets, there are many companies even without any assets; on the other hand, enjoy a stop when merging party undertake debt, interest-free dividend policies, leading to debt repayment rate is too low.
The debt shifted to the banks:
However, increasing non-performing loans of commercial banks is only the first step in the processing of debt. For bankruptcies and mergers of enterprises, nominally its debt default process, but the actual burden by state-owned enterprises are turning to the commercial banks. Without peeling, 2000 commercial banks' bad loans of up to 3.69 trillion, which was equivalent to GDP of 40%. In order to maintain the financial stability of the system and prevent the outbreak of systemic risk, the capacity to gradually completed, in 1999 open to commercial banks non-performing loans in the government-led process.
Important point: this debt was easily solved by a rapidly growing Chinese economy and low government debt levels. This time, debt levels are high and growth is slowing.
Ministry of Finance to issue special treasury bonds, commercial bank funding. First, the Ministry of Finance issued 270 billion yuan of special treasury bonds on Aug. 18, 1998 for a period of 30 years, coupon rate of 7.2%, only for the China Industrial and Commercial Bank of China, China Agricultural Bank, Bank of China and China Construction Bank directed issue, not to social marketing, the funds raised earmarked for bank capital above will be subsidized, thereby enhancing business the ability to deal with non-performing bank loans.

However, the actual process is limited non-performing loans, mainly due to write-off up to 120 billion yuan of bad loans is not. When this special treasury bonds, the four major banks in the carrying amount of the assets there is also a 120 billion yuan of bad loans are not written off, and thus part of special treasury bonds will be used to deal with bad debts. The remaining amount is used to deal with bad loans only 150 billion yuan, accounting for about 10% of the debt to be treated 2 trillion, which means also the need for other forms of non-performing loans for processing.
And then came the distressed debt firms:
MC turned out to be debt deal with the main force. In 1999, the Ministry of Finance were invested 10 billion established the Great Wall , Cinda, Huarong and Orient four financial asset management companies, when that is stripped owned commercial banks non-performing assets of about 1.4 billion yuan, accounting for an approximately 2 trillion of the debt 60%.

Directional bonds to replace non-performing assets of commercial banks burden substantially reduced. Popular terms, AMC stripped NPLs of commercial banks, namely commercial banks to sell non-performing loans to AMC. Commercial Banks sell bad assets, while AMC pay the consideration, which is the main form of payment directional bonds was taken. Thus after the release, the commercial bank non-performing loans of nearly 1.4 trillion 820 billion yuan convert fixed-rate bonds and 570 billion yuan in cash (from central bank refinancing).
The new growth industry for China over the next 5 to 10 years.

So how does 2016 line up? Haitong says its not so bad:
Risky debt as a percentage of GDP lower. In 1998, the annual GDP is only 8.5 trillion, while debt defaults as high as 2 trillion, accounting for up to 24% of GDP. In contrast, when the current round of production volume to China's economy has been greatly improved, 67.7 trillion annual GDP in 2015, even a conservative estimate of GDP growth for 2015 was 6.5%, GDP will rise to 72.1 trillion, risky debt accounting for only 7% of GDP, in the face of debt treatment, the economic strength of the country stronger.

Risky debt to fiscal revenue is also lower. When the annual revenue for the reference index, this feature more prominent. 98 years, the national public revenue only inadequate trillion debt default of its two-fold. At present, our country's public revenue has risen to 14 trillion, in extreme cases, the state's financial aid to 5.4 trillion national debt, the size of only about 40% of public revenue.
The difference today is a slowing economy with already high debt levels, and inflationary solutions will cause the yuan to devalue. There's no easy solution this time. It's solvable if they act swiftly and boldly, but the costs will be higher.

iFeng: 四大产能过剩行业负债5.4万亿 98年有什么经验?

Balding on Capital Controls: Won't Work

Bloomberg: Capital Controls Aren't the Answer for China

He goes into much more detail here: Follow Up on why Capital Controls Isn’t a Good Idea for China. The post is very long, but hits a lot of good points.

The one area I might quibble is there are some folks arguing hot money is in play, something Balding dismisses, although this isn't the typical form of hot money: Why the Yuan Must Devalue: $700 Billion in Short-Term Loans Betting on Yuan Appreciation & Rate Arbitrage; One-Third of Reserves Is Hot Money. That said, capital controls cause more problems even in this case.

An overlooked reason to oppose capital controls is the impact on the people. As Balding points out (and even the hot money argument argues) the capital outflows are driven by Chinese, not foreigners. Capital controls will be perceived as terrible news by Chinese citizens who think they should have more economic freedom, not less, who believe the renminbi is gaining in international acceptance. Particularly when you consider the most recent propaganda push was to have the yuan added to the SDR basket.

HSBC Avoiding Risk: From Govt or Borrowers?

Is HSBC worried about capital controls or the ability of borrowers to repay, or both?
Reuters: HSBC curbs mortgage offering to Chinese citizens in U.S.
Europe's biggest lender HSBC will no longer provide mortgages to some Chinese nationals who buy real estate in the United States, a policy change that comes as Beijing is battling to stem a swelling crowd of citizens trying to get money out of China.

...HSBC's pivot away from lending to some Chinese nationals abroad comes as other international banks clamor to lend more to wealthy Chinese.

Yu Yongding on RMB Depreciation

An English article summarizing his 21st Century Business Herald interview is up.
Yu Yongding: A Floor for the Renminbi
The People’s Bank of China (PBOC) faces a dilemma. After nearly a decade of trying to curb expectations of continued currency appreciation (spurred by China’s current- and capital-account surpluses), it finally succeeded in the first quarter of 2014, when its forceful market intervention drove down the renminbi’s exchange rate to discourage carry trades. Now, however, the PBOC is facing an even more difficult challenge, as seemingly irreversible depreciation expectations undermine economic stability at a moment when China can least afford additional uncertainty.
Read more at https://www.project-syndicate.org/commentary/stemming-renminbi-depreciation-expectations-by-yu-yongding-2016-01#H7yBvUp0MhSexVL3.99

I covered the Chinese interview here: Yu Yongding: Don't Fear the Devaluation

Who Wants to Be Long Over Spring Festival?

ChiNext analog points to a new low and bounce, but if no one want to be long over Spring Festival, selling could commence early.

Whatever happens in the next couple of trading weeks, the analog points to trouble in March and not ending until at least early summer. Given the scale of forecast decline, it will likely be global in nature, possibly another drop in the yuan.

Socionomics Alert: Zika Panic

Brazil has been suffering a bout of negative social mood for several years and it has expressed itself in the economy, politics and now health.

Socionomics Institute: Social Mood, Epidemics — and the Threat to 2016 Olympics
One of the most effective epidemics charts I’ve ever presented shows four London Cholera epidemics which followed sharp declines in the FTSE All-Share Index in the mid-1800s (Fig. 1).

The lesson from the chart is simple and clear: hygiene is largely maintenance, and maintenance gets neglected in bear markets.

Today, Brazil is sadly following that classic path: negative mood is fostering unsanitary conditions that produce health threats.

Figure 2 shows Brazil’s social mood as reflected by its benchmark Bovespa Index, which topped in 2008, rallied to a lower high and has steadily trended lower since.

Socionomic theory proposes that long periods of negative mood produce a number of conditions that make society increasingly susceptible to infectious disease.

It would be hard to find a better article that links disease with negative mood than “Spreading Virus Adds to Brazil’s Woes,” in the December 22 issue of The Wall Street Journal. The article describes the Zika virus, a mosquito-borne pathogen that has been around since the 1940s and is now spreading rapidly in Brazil. It has been linked to “an explosion of cases of microcephaly, an extremely rare condition in which babies are born with shrunken skulls because their brains aren’t growing properly.”
A depressed individual doesn't take care of their health, appearance, etc. Societies are similar. Additionally, depression is generally linked with being more susceptible to disease. Laughter may not literally be the best medicine, but it is good medicine.

The fear over Zika is also a sign of negative mood around the globe. There has been a pandemic fear once every three years or so since mood peaked in 2000. SARS, bird flu, swine flu, ebola, now Zika.

BBC: Zika virus could become 'explosive pandemic'


JD Discounts Apple Again

Apple products are on sale at Jing Dong (JD.com).

ZH: Cupertino, We Have A Problem: China's JD.Com Just Cut Prices On Apple Products By 17%
Five months later, Tim Cook was forced to finally admit the truth when on last night's conference call he said that "we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong."

...According to Brightwire, one of China's top online vendors, JD.com, has just cut the prices of Apple products by "as much as 17% in sale ahead of Chinese New Year" or precisely the time when there should be no need for heavy discounting.

As Brightwire adds, "JD.com cut prices of Apple products on the internet marketplace by as much as 17%, according to information on the JD website. Customers can also purchase Apple products in 12 monthly installments with no interest charges and no downpayment."

Here's the JD site with the discounts that last until February 5: Apple产品 年终盛典. There's a chart showing JD prices for the iPad Air, showing this isn't the first discount, but it is the lowest price this year.

Urbanization Logic: Must Prevent People From Moving to First-Tier

If urbanization is to rescue the lower tier cities, the government must prevent people from moving to the upper tier cities because the youth population is already in decline.

Shanghaist: No more! In five years, Shanghai's population will be capped at 25 million, Beijing's at 23 million
Government officials say that by 2020, Shanghai will see its population capped at 25 million. Meanwhile, Beijing's population will be regulated to just 23 million.
Related: Migrant Population Falls, First Time in More Than 30 Years; Urbanization Strategy Highly Limited

Developers See Decent 2015 Overall

China Daily: One third of real estate developers suffered a loss in 2015
Among 50 mainland-listed property developers, 23 reported profit decline in 2015, said Beijing Times on Tuesday.

Fifteen Chinese real estate companies projected a loss, accounting for nearly 30 percent of the developers that have released their preliminary earnings report.

HSBC: A Share Premium Signals More Selling

HSBC in Hong Kong and China Equity Research, Sun Yu of China equity strategy director, said the Hang Seng AH Premium Index at least five times last year issued a sell signal.

Hang Seng China AH Premium Index tracks H shares A share price gap between the pair. HSBC's head of strategy said that with the Shanghai and Hong Kong market linkage effects increase, the premium investors can observe the signal to determine the future trend of the A shares.

If the premium indicators meet or exceed 140-145, A-share market will have a high probability of a short-term adjustment. He said the answer inquiries by Bloomberg News last week, since last June, the index is given at least five times a sell signal. The AH Premium Index level so far this year show, A shares are still adjusting the period.

Hang Seng China AH Premium Index January 21 was up 1.5 percent to 148.84, the highest since July 2015 a new high, indicating that the A-share nearly 49% more expensive than the Hong Kong stock prices. The index has closed at more than 140 since the 14th of this month, only fell to 139.65 points at yesterday's close. During this period, the Shanghai Composite Index fell 15%, which yesterday fell 6.4%.
iFeng: 汇丰:中国股市下跌有前兆 这个指标发出五次卖出信号

Cities With Largest Population Outflows and Inflows During Spring Festival

As part of an article on real estate during the Spring Festival holiday, is this list of cities that see the largest population outflows and inflows.
iFeng: 人口密码背后的房价:新人口迁徙难缓地方楼市
But the reality is not optimistic. Research a number of organizations noted that despite the urbanization process in full swing, but in the case of uneven distribution of city resources, demographic trends in first-tier cities to second-tier cities and core flow, fear is difficult to change in the short term. And because of the gradual disappearance of the demographic dividend, third- and fourth-tier pressure will not be lifted in the short term.


Li Keqiang Rebukes The Bears

Li Keqiang said that China is still a developing country, the future will continue long primary stage of socialism. To say China caused fluctuations in international markets, has "overvalued" us.

Li Keqiang reason for anger, due to investment Soros in Davos and will be accepted after January 21 interview with Bloomberg News, he said China's economy may face a stiff breeze insurance. Soros said that China's economy may face the risk of a "hard landing" in. It was not his intended result, but by observing the conclusions.

...Li further explained, various economic indicators, "Government Work Report" developed in 2015, almost all completed on schedule, only one exception is the import and export growth. "This one has us on the world trade slump last year, commodity prices fell sharply underestimated the reason. But then, this is precisely the description of the Chinese economy by the global economic downturn."
iFeng: 李克强怒了:“唱空”中国经济 这是哪家的道理?

More SAT Cheating Exposed

Asian test scores broke away from the pack and showed a steady rise starting in the early 2000s. The explanation is quite simple: cheating. First the Koreans were busted, now the Chinese. Cheating is also spreading worldwide, and is also being imported into the U.S.

Wapo: SAT canceled in some Asian test centers because of security breach
The SAT scheduled in many international test centers on Saturday, Jan. 23, is being canceled at some of sites in China and Macau because of an exam breach, the College Board says.

...Cheating at international sites has been a problem for years; for example, the College Board canceled the entire May 2013 administration of the SAT and SAT Subject tests in South Korea because of a leak of questions. Breaches are reported in every administration of the test in Asia, and some test scores are withheld by the College Board, which says it investigates. Students found to have cheated have their scores canceled, but the schools to which they apply are not notified, so they are free to take the test again with impunity.
Barron's: SAT Integrity Falls Victim to China Cheating Scandal

Offshore Renminbi Deposits Fall, Demand Deposits Share Rises

Source: HKMA Monthly Statistical Bulletin

Capital Controls Slowly Return

From last week. Caixin: PBOC Said to Tell Banks to Limit Multinationals' Yuan Outflows
China is limiting the outflow of yuan funds that multinationals can send out of the country – a move apparently aimed at influencing the exchange rate in offshore markets by tightening supply.

The People's Bank of China told banks providing yuan cash-pooling services for multinational corporations to limit outflows so the firms do not send more funds overseas than they bring in, people with knowledge of the matter said.

People's Daily Laughs: Fight the Yuan! Heh Heh!

The People's Daily has called out the renminbi shorts, specifically George Soros. This will be as effective as laughing at someone who bets $1 million that a bowling ball dropped from 10,000 feet will fall to Earth, and it could backfire since everyone now knows there's a deep pocketed sucker at the table.

The central bank has far less power than Nature. The Law will not be broken. If the PBoC fights the Law, the Law will win.
From last year to this year, the "financial predators," said Soros, the man of the hour for two consecutive years as one of the World Economic Forum in Davos the most interesting. Last year, he used the platform to announce the "permanent retirement", no financial investment involved in the political arena and instead focus on its so-called "political charity"; this year, is also on this platform, he was open to China "declaration of war", claiming that We have generous short Asian currencies. Because of his influence, fluctuations in the international financial markets has intensified already existing Asian currencies obviously feel greater pressure speculative attacks.

However, Soros challenge for the renminbi and the Hong Kong dollar is unlikely to succeed - this, no doubt.
The party mouthpiece doth protest too much.

People's Daily: 党报:索罗斯对人民币和港元的挑战不可能成功, original headline: 向中国货币宣战?“呵呵”

ChiNext Analog Still Looks Good


Estimate For Worker Layoff Fund Climbs to 46 Billion Yuan

Estimates were running about 30 billion yuan, now there's an estimate of 46 billion from SYWG.

Xinhua: Fund to help those made redundant by overcapacity cut
A large number of coal workers are expected to be affected by future capacity cut, although the State Council did not specify the scale.

To deal with looming redundancies, an "industrial restructuring fund" was initiated on Jan. 1, pooling money from factories across the nation based on their power consumption.

Brokerage Shenwan Hongyuan Securities estimates that the fund could draw in 46.8 billion yuan (7.2 billion U.S. dollars) a year.

"As required by the State Council, related departments are formulating rules on the use of the industrial restructuring fund," said Jiang Zhimin, vice head of China National Coal Association.

"As far as I'm concerned, the bulk of the fund will be allocated to redundant workers," said Jiang.

Michael Pettis on China's Supply Side Reforms; China's Path Forward

In a very long article up on his site, Michael Pettis asks: Will China’s new “supply-side” reforms help China?

Well worth the read for anyone interested in the Chinese economy, particularly those wedded to mainstream, orthodox economic models.

This comes very close to my view on depreciation of the renminbi, which is based on China's previous credit growth, a monetary easing cycle, a U.S. dollar rally and mismatched capital flows in the past (anyone who wanted to invest in China could do so, only some who wanted out could move capital abroad).
Contrary to some of the muttering out there, I don’t think Beijing is planning competitive devaluations in order to strengthen the tradable goods sector, in the hopes that surging exports will revive growth. Certainly if the PBoC ever were to stop intervening, and to let the RMB depreciate to some imagined fundamental “equilibrium”, we would quickly see that there is no such equilibrium level. In a speculative market, the market does not tend towards some stable value, with self-dissipating movement in any one direction reducing pressure for further movement in that direction. Price movements instead are self-reinforcing, and can quickly overshoot fundamentals.

Beijing is more likely to believe that the economic slowdown was caused by been weakness in domestic real estate and infrastructure construction, and not because exports are weak, and the latest trade data confirms the relatively strong export performance. Although manufacturing overcapacity is certainly a problem, much of it is in areas in which global demand has simply collapsed, and isn’t coming back, and so a cheaper currency would have little impact beyond temporarily reducing excess inventory, which is not enough of a benefit to justify the many costs of a weaker currency. Production facilities would still have to be closed down.
The final reason to expect devaluation, amid a crisis, would be as a last resort to stop deflation.

I will argue that most economists have an incoherent understanding of China’s rebalancing needs, and for this reason many if not most of the reform proposals of the past few years, about which economists widely agree and even celebrate, are in many if not most cases largely irrelevant. This is going to be a long post, so for those who want the 9-point summary:

China’s economic growth is not decelerating as a natural consequence of the aging of China’s growth model. It is decelerating for three reasons. The first reason is the reversal of the growth process by which China’s imbalances have reached their systemic limits.[1]

The second reason is that during the phase of rapid growth, China’s balance sheets, as occurred in every similar case, evolved to become highly inverted, and just as this automatically caused growth to be higher than expected during the expansion phase, it must cause lower-than-expected growth during the contraction phase.

Finally, the economy must shift, one way or another, from one of rising leverage to one of declining leverage, and with rising debt the only thing propping up growth levels, deleveraging cannot help but cause growth to drop.
This means that regardless of trends in underlying productivity, growth must slow sharply, and it will, either smoothly and continuously, or in the form of higher growth early in the adjustment period and a collapse in growth later.

The growth deceleration can be temporarily countered by rapid increases in debt, but ultimately this will only increase future deceleration, with a rising chance that the shift will be disruptive. Every growth miracle in history has been followed by an unexpectedly difficult adjustment, and it is unreasonable to have expected that China would be any different.

The only way to minimize the costs of the adjustment is to take steps to speed up the rebalancing of demand and the repayment of debt. This must be the direction of reforms if Beijing is going to reduce the costs of adjustment and the risk of a disruption.

Repaying debt simply means allocating debt-servicing costs, either directly or indirectly, to specific sectors within the economy. This will either occur in ways targeted by policymakers, or if postponed for too long, it will occur in unpredictable ways determined by circumstances. For example default allocates the costs to creditors, inflation allocates the costs to household savers, economic collapse and high unemployment allocates the costs to workers, etc.

By far the most efficient ways for Beijing to minimize the adjustment costs for the economy and reduce the risk of a debt-related disruption is to allocate debt-servicing costs to local governments by forcing them to liquidate assets directly or indirectly to pay down debt, and to increase household wealth by transferring wealth directly or indirectly from local governments to the household sector. Successful reforms must be consistent with these two goals.

Beijing has already tried to address its growth problems by implementing the productivity-enhancing reforms beloved of orthodox economists, but while these might be a good idea in normal times, they will have almost no effect on reducing the cost of China’s economic adjustment.
Later he goes on to quote Say's Law and comments:
According to Say and his followers, policymakers should never worry about inadequate demand as the source of depressions. They should only worry about policy distortions that cause the market to create the wrong mix of goods and services.
Lots, lots more at Pettis' site: Will China’s new “supply-side” reforms help China?

China is suffering from debt-fueled malinvestment. It has a large amount of debt backing overvalued assets (capital goods) which are in the wrong industry or location in the case of real estate. The fear of default and lost jobs kept capital flowing even when it was obvious these firms were zombies. Even if the debt could be wiped out by a magic wand, there's still the problem of malinvestment, of these assets being in the wrong industries.

In the short-term, the total capital and labor in the economy is relatively fixed. When there is a large amount of capital and labor in the wrong sector due to political intervention or money printing by the central bank (or both), it leads to a deviation from the natural or free economy. Entrepreneurs and consumers are not responding to market signals, they are responding to artificial signals such as artificially low interest rates. Eventually, these artificial signals or forces cannot be maintained and there is a bust; the size of the bust is proportional to the boom before it.

My simple model of the Chinese economy is that it could achieve a lot of growth with central planning because a lot of basic growth involves governments, and China was way behind. Even in the free market West, roads, airports, subways, hospitals, schools and industrial parks involve some government insolvent in most cities and towns. Furthermore, these projects are relatively straightforward in terms of implementation, and when you're starting from a very low base, almost any project is going to positively increase GDP and also be profitable an investment. By the mid- to late-2000s, however, China was heading for the middle income trap. It was running out of easy low hanging fruit. If you'd been in China in the past decade plus, you might be familiar with huge empty highways and empty cities such as Pudong that later filled up. It didn't take a rocket scientist to see the infrastructure investment was running ahead of the economy. Eventually, some areas of China would be stuck with no infrastructure needs for a couple of years, or it would be saddled with pure malinvestment, buildings and roads that would never be used due to slowing population growth and migration out of the area. Instead of rebalancing in 2008 when the economy was hit with a shock, the government doubled down on the old model. Huge debt was run-up an infrastructure development sprang into overdrive at the worst possible moment. China is only now dealing with the cleanup, having spent several years gently applying the brakes.

As Pettis notes in the piece, one big way the government can ease the transition is to shift state assets to the people. Andy Xie and others have called for this as well, in Xie's case with the government transferring SOE shares to the people (which could be done directly or indirectly). The key stumbling block is government officials who profit from economic control. To take a political turn, as part of the economic transition the CCP should focus more on politics, and not as much on economics. They do not need to increase democracy or engage in any type of political reform, instead the government should be exiting areas where its control is weak, such as the economy. No government can tightly control the economy and break the middle income trap, and governments can never fully control market forces. Trying to control the economy sets up a government for failure. There is a role for the state in setting tax policies and dealing with the transition, but on the other side the private economy should emerge with a greater role in the economy, if only because capital is transitioning out of state dominated sectors and into more privately directed sectors.

Large governments become weaker as they grow larger because they focus and power diminishes the further away from the center. As the Chinese saying goes, the mountains are tall and the Emperor is far away. In contrast, small governments can be extremely powerful because they focus on a smaller range of issues. Ideally for the CCP, China would emerge from the transition with more economic freedom, but a more powerful central government with a tighter focus on political issues.

In conclusion, China has a lot of supply, but in the wrong places. It needs to increase the supply in other sectors, which will be accomplished most efficiently by the private economy. The economic stumbling block is a large amount of debt which could cause a financial crisis. The bill must be paid one way or another, politically determined if the government moves in time, by the market otherwise, with a big currency devaluation as the last resort. The political stumbling block is insiders who joined the CCP to get rich, or who want the CCP to maintain economic control. The former are more likely to engage in corruption and many were swept up in the anti-corruption campaign (Pettis Says China Has 2 Years to Adjust; Xi Must Consolidate Power), but there will still be ideological resistance to shifting economic power to the people.

Premier Li: VAT Will Bring Big Tax Relief for Business

Increase the speed of reform and accelerate tax reform.
January 22, Premier Li Keqiang chaired a forum to study fully open camp changed to increase, speed up tax reform, further significantly reduce the corporate tax burden. Li stressed that the current financial revenue and expenditure pressure, should respond to practical challenges, and promote long-term development and implementation of reforms to tackle more closely together.

On the other hand, he said, fully open camp changed to increase, speed up tax reform should be conducive to play the enthusiasm of both central and local. Fully open camp changed to increase, speed up tax reform should focus on mobilizing the main market development initiative. Camp changed to increase deepen fiscal and tax reform as the highlight of the pre-pilot has achieved positive results, this year to fully open, and further reduce the corporate tax burden more substantial. Meanwhile, we should urge the push fiscal reforms to support economic growth, gradual reform.

...This year-round open camp changed to increase and increase the portion of input tax deduction heading efforts that will bring massive tax cuts, the central and local governments should take steps to put in place. To grasp the rhythm, and steadily push forward, take an incremental, gradual approach promoting reform, avoid financial allocation pattern changes affect the economy running smoothly, effective as soon as possible to ensure that the relevant reform measures.

Li stressed that the current financial revenue and expenditure pressure, should respond to practical challenges, and promote long-term development and implementation of reforms to tackle more closely together. All departments and local talk overall, general account, get rid of barriers interests, in unity to promote the reform, with new results and write a new chapter of development reform.
iFeng: 李克强:全面推开营改增改革 减轻企业税负压力

Police Detain Man for Making "Two-Wife Policy" Spoof Headline

No Onion for China.
The website of Yangjiang Daily reported on January 22 that police in Yangjiang, Guangdong Province, detained a man for "spreading rumors" because he created a mock front page of the state-run newspaper.
Caixin: Police Criticized for Holding Man over 'Two-Wife Policy' Fake News

5.3 million sqm Ghost Pentagon in Shanghai

It is 90% as large as the Pentagon and mostly empty.
Daily Mail: Welcome to the Department of Emptiness: The £150 million knockoff Pentagon that has been built and abandoned in Chinese city


Anybody Wanna Start A Vulture Fund? Buy Bank Shares on Taobao

FT: Investors rush online to ditch stakes in China rural lenders
Shareholders in China’s rural commercial banks have been offloading their stakes on Taobao, the biggest online Chinese auction site, in a sign of the increasingly desperate steps being taken by cash-strapped investors.

...The backdoor methods for cashing out of the banks reflects a new urgency among shareholders to leave the sector amid dwindling returns and mounting bad debt.

...Investors snatched up about Rmb42m in shares in four small lenders from public auctions on Alibaba’s Taobao site in December and January. Since April, investors in more than 11 banks have cashed out via such auctions on the shopping platform better known for Korean cosmetics than financial holdings.
More at the link.

Related: China GDP scepticism upends trading strategies
However, Nevsky might be the first to say out loud that China, in large part, has made the whole business model unmanageable. Nevsky wrote a letter to clients explaining itself, beginning with a recap of the investment process it has used throughout the fund’s 15-year life: top-down forecasting of macroeconomic variables combined with bottom-up forecasts of company earnings. It is a process that has required, among other things, transparent "and truthfully compiled" data at a macro and company level, and logical decision-making by policymakers.
The best markets are those with the least information, that's where the largest profits are to be made.
Nevsky says data releases have become less transparent and truthful, and that as China and India have grown in importance, the problem has been exacerbated. Nevsky doesn’t believe either country’s stated real GDP growth. "This obfuscation and distortion of data … makes it increasingly difficult to forecast macro and hence micro as well," it states.
You might notice there hasn't been a lot of discussion about Chinese equities here. I actually lean towards fundamental analysis when buying stocks. There's a reason I've focused on macro and my biggest trade on China for several years was to be short industrial metals.

Shenzhen Banks Feel Pressure to Reign in Lending Amid Home Price Bubble

Shenzhen sales by area increased 65% in 2015 and prices rallied 46.8% according to the NBS. Lending also boomed. 91.2% of home buyers took out mortgages, and increase of 3.9 percentage points over 2014 and an all-time high. The average loan-to-value was 64.6%.

Bank credit isn't the only source of funding. Some real estate investors are using privately borrowed cash to fuel investment in the city, repeating the housing boom behavior that helped fuel real estate blow ups in numerous cities around China. As a result, banks are wary and starting to tighten credit standards.
Buyers should be aware that the current first-tier housing boom is completely reliant on easy credit, once the credit expansion slows slightly, the highly leveraged stampede will be quite terrible.

Shenzhen property market "abnormal prosperity" also makes banks feel the pressure, and they have begun to tighten.
Banks are raising credit standards on agents buying property, raising the down payment to 40%.
Many Shenzhen developers and industry insiders said that Shenzhen's rapid rise in house prices makes banks concerned, including in particular the "crowdfunded house flippers", and the great risk of short-term house flippers losing funding, banks have begun to prepare for this possible risk.
iFeng: 深圳楼市“另类繁荣”危机:银行感到压力开始收紧

Confirmation: No RRR Cuts Coming

In case you didn't believe Listen to Xi, Li and the PBoC, which said there would be very little in the way of RRR or interest rate cuts this year, now there's a leaked memo for confirmation.

SCMP: Leaked memo reveals China central bank’s dilemma in battle to keep yuan stable
The People’s Bank of China is reluctant to further reduce the required reserve ratio for fear of such a move resulting in the weakening of the yuan, according to a leaked document.

The information, reportedly leaked from minutes of Tuesday’s meeting between the central bank and commercial lenders, was shared widely after it was published on major mainland online portals including Sina.com and Netease.com.
One of the reasons why I've been predicting a much weaker yuan is the market reaction to loose monetary policy. Back in 2014 I summed it up in Kuroda Says Dump Yen, Yuan to Fall
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.


Pension Funds Shrinking in 21 Provinces, Some County Govts Not Even Paying Wages, Borrowing To Meet Pension Obligations

This is what happens when you grow old before you grow rich.
In the last of 2015, at least 21 domestic provinces on the basis of pension growth rates negative, but these provinces can still rely on the accumulated surplus to survive. However, the balance of payments situation in parts of the county pension fund bear greater pressure.
Normally the local governments can subsidize shortfalls, but some county governments aren't even paying wages due to a lack of revenue according to a source at the Ministry of Finance.
Not long ago, MoF organized a national survey.

"We slice the country to conduct research, divided into eastern, central and west, northeast of the four pieces to conduct research." The agency official, "focused on the county level." Survey results are not optimistic.

"We discovered the pensions in some places was gone." The source said, local governments will also be very difficult, "found some of the county's have no money to pay wages."

The pension fund in case of income over expenditure, and often rely on local finance, but local governments will also be very difficult, "rigid demand is growing."

According to "China Pension Development Report 2015", in 2014 Shandong urban and rural residents basic old-age insurance fund balance was 10.902 billion yuan, while there was only 61 million yuan in Xinjiang military pension fund.

Compared with 2013, current balance Shanghai decreased by 859.02%, 291.36% reduction in Jiangxi. Statistics show that there is negative growth in 21 provinces.

It is reported that the relevant departments of the central statistics show that after 2014 the basic pension insurance fund corporate deduction for financial assistance, current income doesn't meet expenditures in 22 provinces.

But it's still rate to have a situation where pension funds are completely spent.

"China Pension Development Report 2015" Data show that in provincial units, each province's cumulative surplus urban workers basic pension insurance is still positive. The accumulated surplus is smallest in Qinghai Province, but the accumulated surplus is more than 8.4 billion yuan.

However, the Chinese pension funds nationally are relatively low, so most provinces rely on financial subsidies.

The aforementioned sources said, "Now the one hand, more and more rigid expenditure;? On the other hand the economic downturn, a significant decline in tax revenues, and that in this case how to do"

"The central economic work conference just concluded, or tax cuts in 2016, after the tax reduction will be under more financial pressure on the deficit if we do, we can not be maintained by debt deficit next fiscal sustainability? It is the financial risk. "
Some places are borrowing money to pay pensions.
It is said that the National People's Congress Working Committee budget survey also found that, in some places they are meeting pension obligations through borrowing.

For example, more than one-third of Japan's fiscal expenditure is pension expenses, and taxes are insufficient to cover these expenses, can only meet obligations with debt, Japan's debt more than 200%, ranked the highest in the world.

The aforementioned MoF insider said, "I went to Japan to explore with them, say how Japanese debt is so high there is no problem, it seems very good, is not the government will be able to rely on borrowing to maintain indefinitely? Nobody in the world can now explains a theory The Government will be able to rely on borrowing to maintain your expenses is growing, or to rely on debt to maintain the pension, it is clear that the risk is great, the Japanese are also very worried, maybe one day his high debt station a crash, it means that the entire country disaster."
This is not a problem only for the poorer provinces. Even wealthy Shanghai and Zhejiang province are spending 90% of pension revenues:
"And from all the provinces of expenditure to income ratio, we see so much of the next financial subsidies, the expenditure of income than in most provinces is very high, Shanghai, Zhejiang has 90 percent, meaning that close up the money basically all spent out. "Central China Normal University Social Security Discipline leader Professor Sun Yongyong representation.


Housing Inventory Now Estimated at 700 million sqm, Lower Tier Sales Stagnant

January 19, 2015 the National Bureau of Statistics released the national real estate development and sales data, in 2015, the national real estate development and investment 9.5979 trillion yuan, up for sale in the area of ​​718.53 million square meters, compared with the end of 2014 an increase of more than 100 million square meters, an increase of 15.6 %, the highest in history.

According to the National Bureau of Statistics, as of the end of 2015, the national housing sales by area was ​​452.48 million square kilometers, an increase of 11.2% over 2014, accounting for 63% of the real estate inventory. Other aspects, office stock amounted to 3276 square kilometers, representing an increase of 24.7%. Commercial space inventory of 14,664 square kilometers, an increase of 24.6%.

Southern Reporter found that people in our country because of the current state to urban mobility, residential demand is relatively strong, so the real estate industry has always been for the bulk of commercial housing, the high proportion. However, the current economic downward pressure, the purchase needs of consumers restrained, housing stock remains high, housing prices become the body burden.

..."The current Chinese real estate market is not absolute glut, but local surplus." Feng Jun, secretary general of China Real Estate Association, told reporters that the case of the south.

From a regional perspective, 2015 first-tier cities housing prices are rising, sales also achieved good results, which are driving the stock continue to digest and updated. Meanwhile, the third- and fourth-tier cities prices fell, market transactions have also been deserted. Around the property market can be described as being of mixed. The third- and fourth-tier cities have yet to come out from the real estate winter.

..."Because of the slow population growth in third- and fourth-tier cities, low income leads to lack a of purchasing power, reducing demand. Plus real estate agency inventory in the third- and fourth-tier cities is increasing, the accumulation of too much inventory, and now find it difficult to digest." Radius Deng, chief real estate analyst Hiroshi interview with Southern reporters said that stocks in some cities has reached 20 months, 30 months or even more, supply is much greater than demand. Therefore, government and housing prices this year, the focus will be placed to the stock four-tier cities, and actively promote these cities to digest the stock.

And recently, Wanda Group Chairman Wang Jianlin analysis Financial Forum in Hong Kong assertion, four-tier cities in China property stocks may take four to five years time to digest.

Due to the high cost of land, real estate investment risk first and second-tier cities high. Wanda real estate and investment mainly in the second and third tier cities of the commercial real estate. Wang Jianlin that "real estate sales are highly concentrated in first- and second-tier cities, 36 cities accounted for three-quarters of the country's total sales, so the proportion of third- and fourth-tier cities is very low, as long as they slowly begin to reduce inventory, it there will be no problem."
Bifucation is now total. The first-tier cities are trying to boost land sales and increase housing inventory, while third- and fourth-tier cities are desperately trying to reduce inventory. Location, location, location.

iFeng: 7亿库存:三四线城市销不动 北上广深补存量


China's Dilemma

Two big problems: overcapacity and leverage. The dilemma is how to reduce overcapacity and supply overhangs while avoiding a financial crisis?
Zhou Jintao believes that China's economic transition must face two major problems, the first one is the current economy is still suffering from high leverage problems, balance sheet repair process is a painful process; the second is the early accumulation capacity overcapacity remains an important factor in China's economic inelastic.

He pointed out that from the perspective of risk factors, China in 2016 is twofold risk. The first risk is that the weight of global economic crisis ahead of the arrival, which occurred in the United States and the world are more serious recession, which is the first important risk that the cycle - Risk (8 10 years) level; the second is that although the risk weight there is no risk in the world economy and the level of occurrence period, China is also trying to open new short period (40 months), but the open procedure will be of great twists and turns.

He also mentioned that since the opening of the new cycle on, each round of the inventory cycle up and running on departure are full of twists and turns since the 2008 financial crisis: the first round of the inventory cycle departure, brought a lot of inward investment growth in the economy has been from "overheating" to the "stagflation" of distress; upward in the second round of the inventory cycle, primarily due to the interest rate because the management and liquidation of the debt caused by the shadow banking sharply upward problems, while the Federal Reserve to raise interest rates for capital outflow of interference will be a variable plagued China to reform and steady growth. Looking to the future, in the third to start the process of inventory, due to the contradictions of the current economic system, should be aware of the financial risks of interference should be the most important factor in a third of the inventory cycle.
iFeng: 中国经济转型期必须面对两大问题 当前矛盾是什么?

Over 90% of Coal Firms Losing Money in China; Govt Funds For Workers, Not Companies

In this regard, China Coal Industry Association Statistics and Information Department Director Chen Yang was told, "First Financial Daily" reporters, the current coal prices cause a loss for more than 90 percent of the industry. At the end of 2015, the Bohai Sea thermal coal price index dropped to 370 yuan / tons, if the prices remain a year, the entire coal sector will certainly be losing money.

...It is noteworthy that, as of the end of 2015, the Bohai Sea thermal coal price index fell to 370 yuan / ton, but early 2015 is 525 yuan / ton.

As Kang Ji said, this is a gradual process of decline until after October 2015, coal was dropped 380 yuan / ton, to 370 yuan / ton. "But if coal prices continue to fall, or it stays at 370 yuan / ton, we believe that in 2016 the industry will face a bigger problem" he said.
Will production be meaningfully cut?
In fact, cuts to the production capacity has been going on. According to Chen Yang was introduced, "12th 5-year plan" period, the national total of 7,250 coal mines and eliminate backward production capacity of 560 million tons; in 2015 the country only eliminated 1340 backward coal mines, backward production capacity of about 90 million tons. Up to now, the number of coal mines has dropped to 9624 nationally, completed the "12th 5-year plan" goal to reduce the number of coal mines to less than 10,000.

To this end, the authorities will set up special funds to capacity. January 12, the National Development and Reform Commission Secretary-General, spokesman Lee Park Min on macroeconomic conference to iron and steel, coal and other industries, strive through a period of efforts, a breakthrough in terms of resolving overcapacity, while the central government will set up special funds to local governments and enterprises to resolve the overcapacity were awards complement.

But how to spend the capacity of special funds has become the focus of attention, naturally also a hot topic year 2015 Development of Coal Industry press conference.

Kang Ji told the "First Financial Daily" reporters, Prime Minister Li Keqiang held a forum in Taiyuan, has made the central government will set up special funds, but how much, how to spend, this we are studying. But the prime minister has told us, this (special funds) is primarily for the placement of personnel." Kang Ji said.
iFeng: 煤炭业告急!行业亏损面超90% 哀鸿一片

PBoC Liquidity Injections Nearly Double to ¥1.5 Trillion on Thursday

iFeng: 央行五日放水超1.5万亿(表)

Only yesterday I posted PBoC Injects ¥790 Billion Over 6 Days.

This is the Chinese New Year cash demand surge. In the article below, one Chinese bank estimates the demand at 2 trillion yuan.

Bloomberg has more: PBOC Turns on the Liquidity Firehose in New Policy Approach
Having spent years outlining the move toward a price-based monetary framework and away from directly channeling credit, the People’s Bank of China is turning to market-based liquidity measures to ease a pre-Chinese New Year cash squeeze and offset capital outflows stemming from its support for the falling yuan. Net injections totaling more than 1 trillion yuan ($152 billion) since mid-January add about the same as a 1 percentage point cut to banks’ required reserve ratios -- the traditional way to boost liquidity.

The difference: RRR cuts are lasting, while injections via reverse repurchase agreements and new lending tools have set time periods. That gives the PBOC more power to manage liquidity by choosing whether or not to roll over funds as they come due.

The newer liquidity tools also carry varying interest rates depending on the time period attached, helping create a yield curve the market can use for pricing other securities. That’s important for a central bank balancing the need to avoid a short-term cash crunch with longer-term plans to rein in the pace of debt expansion.

ChiNext Analog Still on Schedule

ChiNext did not make a new low yet, but by the analog, we're a couple of days into a 20 trading day bounce period. This will be interrupted by the Chinese New Year.


Devaluation Talk at Davos

Bloomberg: China Must Give Up Peg on Dollar, Ex-Central Bank Adviser Says
A word of warning from a former adviser to the People’s Bank of China: Free the yuan from its dollar shackle and “clearly” inform the market of your exchange-rate policy to avert more damaging rounds of depreciation.

“It’s meaningless to peg the yuan against the dollar,” Li Daokui, currently a professor of Tsinghua University, said in an interview at the World Economic Forum in Davos, Switzerland on Wednesday. “The world is not in need of another currency that’s pegged against the dollar, it needs a relatively stable currency that’s pegged against a basket of currencies.”

Migrant Workers Leaving Cities as Factories Close

This will be a common story in 2016.

NYTimes: His Factory Job Gone, a Chinese Migrant Worker Returns Home
“I worked my way up from a basic worker to a department head. And my career basically ended today,” Mr. Liu said on the train leaving Guangdong.

Factories in Guangdong have been hit hard by the slowing economy, and many of them have closed, including the shoe factory where Mr. Liu worked.

Bitcoin Killer: PBoC to Launch Own Digital Currency

The PBoC convened a digital currency summit today, with representatives from Citibank and Deloitte. PBoC Governor Zhou attended, as did Deputy Governor Fan. Relevant research institutions, major financial institutions and advisory bodies of experts also attended the meeting.

PBoC: 中国人民银行数字货币研讨会在京召开

English coverage: China Set to Develop its Own Digital Currency
The PBOC justifies this decision with a variety of reasons. First, it will eliminate the cost of fiat circulation. Exactly what this cost is in China is unclear – the nation is notoriously cagey with these kind of numbers – but to get an idea we can compare with the equivalent cost in the US, which comes in at close to $500 million a year for coins and a little over $800 million for paper notes. Second, and assuming effective implementation, it will virtually eliminate money laundering, tax evasion and forgery. Finally, it will promote settlement efficiency and, in turn, reduce the cost to all parties involved in any transaction.

That’s where things stand at the moment. The PBOC has now tasked its research team with putting together a plan to cover design, implementation and maintenance. In short, the bank has decided it is economically viable, and is now moving forward with execution.
The key technologies of Bitcoin is the blockchain and the open ledger. Bitcoin is supposed to be anonymous, but since the ledger exists for all time, if you were to use the same Bitcoin address or linked financial account and if someone could connect a person or organization to an address, anonymity quickly turns into a totally open book.

If you are the PBoC in China, there's no right to privacy in financial transactions. The citizen ID number could be their address. The PBoC could sit at the center and run the blockchain, while keeping track of the open ledger. All financial transactions will be open to the PBoC and government. No one would need a bank account to transfer money, it could be passed from ID to ID. Criminal fraud (as we know it today) could be quickly detected through the transaction chain.

The really big reform, as if this won't be a major change by itself, would be if the PBoC took complete control of money creation. Fractional reserve lending could be abolished. The PBoC, or any central bank, seeking to inflate the currency could proportionally credit all accounts in the system simultaneously.

Listen to Xi, Li and the PBoC

Here's me commenting on leadership comments in May 30, 2014: One More Time: No Stimulus
The Chinese leadership has been extremely consistent in saying there will be no stimulus. I can understand if investors think there will be a stimulus once there are obviously problems in the economy, but the leadership has said it will not repeat 2008.

If there is a crisis in 2014 or 2015, it will be worse than 2008 because by nearly every measure (except the stock market) is at an elevated level: more debt, more real estate supply, higher home prices, greater inventory, etc. If the government is saying it won't repeat 2008, then I take them at their word and assume they will not launch a massive stimulus program to save the economy until it is too late, and even then, they may decide it is too late and decide instead to see a real recession through to the end.

In the People's Daily Overseas Edition, the point about no stimulus was driven home yet again and it specifically addresses the investment banks that are saying China will cut the reserve requirement ratio (RRR) or make other adjustments to aid the economy. Short of banging them on the head with the latest 5-year plan, I'm not sure what else it will take for people to get the message.
I went on:
They go on to say that the slowdown is structural, not cyclical. In other words, the slowdown is a result of the rebalancing. China's leaders clearly do not want to screw up their reform efforts by hitting reset and reinflating up the sectors that need to shrink relative to the overall economy. They would like to avoid a full blown recession in which these sectors decline rapidly, but if their goal is ultimately reform, I don't expect they will do much of any rescue effort directed at sectors such as steel, cement or real estate, if any type of rescue at all even arrives in time. Most likely, the economy will tip into a major slowdown, with a full blown recession still a possibility.
The only thing to change in there is that the reforms didn't really take hold. We're at the start of 2016 and only now is the real effort to rebalance about to begin because now there is no way out. Now the market is going to force a major adjustment if the government doesn't.

Here's a post on Li Keqiang from September 2015: NNo Large Scale Stimulus or Money Printing? No Need To Rush Into Housing
One week ago, I did a longer post touching on the topic: Li Keqiang: No Stimulus Coming.

A Chinese blogger explains the PBoC's message (iFeng): 别等降准了!央行说得很清楚了 (Do not wait for RRR cut! The PBoC has spoken clearly!)
First, the exchange rate issue. Some time ago yuan swings, and a certain degree of devaluation, under the central bank to turn the tide began to gradually stabilize. If you choose this time to cut interest rates or RRR, the exchange rate will depreciate again. The central bank wants to give everyone a forecast, in the near term no devaluation, it wants stablility.

Second, structural adjustment problems. Although economic growth is falling, but that does not need to take the old road of stimulus. Proposed supply-side structural reforms will be implemented, of course, also need stimulation. Late last year, some analysts said, this year's protagonist is not monetary but fiscal [government policy], the central bank will slow down the pace of interest rate and RRR cuts, to slowly adjust.
No more kicking of the can. We'll know very soon if the reforms begin in earnest or not, if actions match the talk, but the message from the leadership couldn't be clearer.

PBoC Injects ¥790 Billion Over 6 Days

China always has a cash crunch ahead of Spring Festival. This year could also see the bankruptcy/factory closing/zombie removal wave begin.

iFeng: 央行再释流动性 六天已注水7900亿(表)

More coming.
CER: PBOC injects RMB600bn into banking system ahead of Lunar New Year

Fed Nightmare: Core Inflation Rising, Financial Markets Crashing

CNBC: US Consumer Price Index down 0.1% in Dec vs flat reading expected
The Labor Department said on Wednesday its Consumer Price Index slipped 0.1 percent after being unchanged in November. Despite the drop last month, the CPI increased 0.7 percent in the 12 months through December, the biggest increase in a year.

The rise followed a 0.5 percent gain in November. The year-over-year inflation rate is rising as the oil price-driven weak readings in 2015 drop out of the calculation. The boost from the so-called base effects could, however, be limited by lower oil prices, which are near 12-year lows.

...The so-called core CPI, which strips out food and energy costs, edged up 0.1 percent after rising 0.2 percent for three straight months. In the 12 months through December, the core CPI rose 2.1 percent, the largest gain since July 2012, after climbing 2.0 percent in November.
The Fed wants inflation in a range from 2% to 3%. With oil prices plummeting and a strong U.S. dollar, core inflation is already at the bottom of the range. Most important component? Housing, coming in at about one-third of the CPI. It increased 3.2% in 2015. And then there's the joke of medical care under the "Affordable" Care Act, which can, in some cases, run almost as high as shelter as a percentage of income. Deflation is unfolding in the financial markets and should spread into prices eventually, but at the same time, for those betting on a rosier scenario, the only thing missing for an inflation shock is rising oil prices.

Chinese Companies Loaded With Dollar Debt, Have Little to No Risk Management

Chinese companies loaded up on USD loans either to arbitrage interest rates and earn financial profits when the industrial economy was slowing or they used FX loans (USD, EUR, JPY) to cut their financing costs, since credit was cheaper abroad. In either case, they had no idea of the risk they were taking on, and thus no strategy to deal with it. If this is your wheelhouse, you may find many consulting opportunities in China.

This article is by a for Bank of China trader currently working at an investment consulting firm.

This is mainly reflected in six aspects: First, rigid preservation concept. Enterprises in the arrangements for foreign currency loans, without considering the corresponding exchange rate hedging, the lack of hedging derivatives products and the corresponding understanding and awareness, did not advance in the institutional hedge prepare accordingly. Changes in the market makes companies struggling to cope with the rush.

Second, the subjective judgment and decision making. For the exchange rate and interest rate changes, a lot of enterprises according to the lack of objective research and analysis, and more vulnerable to the impact of market changes in exchange rates and interest rates, thereby affecting the normal business activities of enterprises.

Third, the lack of understanding of financial products. We saw some enterprises, especially large state-owned enterprises, financial derivatives there fear, lack of proper understanding of the product. Therefore reluctant through derivatives to hedge currency and interest rate risks.

Fourth, we have speculation. Because the exchange rate and interest rate fluctuations, foreign currency liabilities of some companies appear book loss. At this enterprise is not reasonable to consider how to use hedging strategies and tools, on the contrary hopes to gamble with the market, trying to greater exposure to loss of fishing back.

Five is one-sided understanding hedging costs. In the study of hedging products and strategy, companies do not want to bear the cost of hedging foreign exchange forwards, foreign currency options and interest rate swaps that hedge miss the favorable opportunity, and therefore had to bear and hold the exchange rate and interest rate risk exposure, so that more passive in the hedge management and strategy development.

Finally, the neglect of non-US dollar currency fluctuations. In addition to the US dollar, euro and yen currency business finance low-interest currencies also keen. But it is worth noting that the international foreign exchange market, the euro against the dollar, the dollar annualized volatility of the yen in more than 10%. When the market changes, the risk of non-US dollar exchange rate of foreign currency loans faced much higher than dollar loans.

...A large state-owned enterprises is our risk management consulting client, has a large dollar debt. Under our assistance the company gradually formed a risk management system and risk management operational processes, while together with the enterprise combing the exchange rate risk facing the future. In an accurate understanding of the basis of the exchange rate risk, by comparison with the cost and effectiveness of risk hedging products, the risks are locked, to avoid the adverse effects of exchange rate fluctuations to the enterprise. At the same time, we have business-related personnel training system to help enterprises build a business specialization in financial risk management team.
Few companies in China still have no idea what they've gotten themselves into, but how many have yet to develop a sound strategy to deal with rapidly increasing risk?
EO: 汇率大幅波动,外币负债企业如何应对

Migrant Population Falls, First Time in More Than 30 Years; Urbanization Strategy Highly Limited

China's urbanization strategy cannot work because the people needed to grow the economy don't exist. They were never born. The population flowing into the cities has begun to fall, the percentage gains will fall with increasing rapidity as the population drops and the urban economy grows.
Most people on the 2015 estimated annual statistics released today, are not concerned about a change in the flow of population data. In fact, this is a very interesting data. Because the GDP growth rate hit a new low in 25 years, in fact, have a great relationship with the reduction of migrants.

...In fact, the reason is very simple, China's working-age population (16-59 years old) from 2012 began to decline, 2015 is the fourth annual decline, the cumulative reduction of more than 13 million. And 15 years and the first time to reduce the phenomenon of migrants, which should be 30 years for the first time . The so-called floating population, refers to the city of residence and domicile isolated population.
Here's the chart I posted in 2011 in Labor costs soar in China. The entry level workforce has been shrinking each year since the start of the decade.
I remember 2013 and 2014, migrants increased more than 8 million per year, a total of 253 million, but in 2015 actually decreased 5.68 million. Migrants are mainly migrant workers, which means that the number of migrant workers into the city in 2015 turned out to be declining.

In 2010, when the number of migrant workers going to cities was more than 12 million, after then drop by about two million every year, then by 2016 is reduced to zero. I did not expect to see the city's population negative growth a year ahead of schedule. Estimated resident population of Shanghai, Beijing in 2015 is declining, the country's congestion will improve over time.

Working-age population and migrants at the same time reduced, which should be 30 years of reform and opening up the first occurrence. Labor are the three factors of production is the most important factor, so that economic growth is actually the demographic phenomena. Reduction in labor supply, will inevitably bring about a decline in economic growth.
And here it is in a nutshell if you're still hazy on the implications:
Official data show that in 2015 China's urbanization rate increased by 1.6%, although the number of migrant workers shows negative growth. But that does not mean the Chinese economy also can rely on urbanization and has huge potential. Because regional economic growth in many cases is driven by immigrants.
China cannot rely on urbanization for growth because movement from rural to urban is too small a number. This is highlighted by the fact that many areas hope to drive growth by attracting migrants, but there aren't enough to go around.
iFeng: 30多年来首次出现流动人口下降,这意味着什么?


At Least One Hedge Fund Manager Has It Right

Bloomberg: Hedge Fund That Called Subprime Crisis Says Yuan Should Fall 50%
Mark Hart, the hedge fund manager whose bets against U.S. subprime mortgages and European sovereign debt proved prescient, said China should weaken its currency by more than 50 percent this year.

A one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

“There wouldn’t be anything underhanded about a sharp devaluation,” Hart, who runs Corriente Advisors from Fort Worth, Texas, said in an interview on Real Vision, a subscription video service targeting Wall Street. “Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?"
China is boxed in politically and economically by its delay. Reform should already be underway and the currency should already by depreciated. Now they have a perfect storm of needing to unleash major reforms and allow a depreciation amid the most populist U.S. election in a century, if not more.

China and Russia Add Treasuries in November 2015, Japan Still Selling


Yu Yongding: Don't Fear the Devaluation

Yu Yongding says the creeping depreciation of the yuan has many defects and the country should strengthen capital controls. He says it's not time to argue the pros and cons of renminbi depreciation, but to discuss how to prevent a market panic, to keep the market from overshooting, to minimize the fallout. He also says the currency should be allowed to float in a wider trading band.

He said the change in trend was back in early 2014 and that as reserves are drawn down, the central banks credibility will decline. Since the first devaluation in August, the yuan has been accumulating depreciation pressure, not dissipating it. He notes that most countries are reluctant to allow a currency depreciation, which leads to a crisis that necessitates currency depreciation.

Ultimately, he sees the risk of a massive depreciation as small due to China's reserves, but it should move quickly to end the pressure by allowing a larger depreciation.

A one-off depreciation has been the recommended policy here (due to expectations of a market depreciation) as well as the forecast given modern Chinese economic history.

Translation note: Google Translate seems to randomly alternate between depreciation (market driven) and devaluation (government choice). In nearly every case he means depreciation.
Plunge RMB devaluation pressure is suddenly set free

  "21st Century": the central bank since 2015, "8.11 exchange rate reform", the RMB against the US dollar appeared plunge. How you analyze the reasons for renminbi round plunge?

  Yu Yongding: RMB exchange rate trend change began in the first quarter of 2014. At that time China's current account, the capital account (including net errors and omissions) are surplus, but the depreciation of the yuan against the US dollar of around 3%. During this period, foreign exchange reserves increased by $ 125.8 billion, indicating that the first quarter of 2014 as a result of devaluation of the renminbi against the central bank to intervene in currency markets arbitrage trading. But after the second quarter of 2014, capital account deficit emerged in China. If you take into account the outflow of capital under the item "errors and omissions", in addition to the second quarter of 2015, since the third quarter of 2014, China has been in a state of balance of payments deficit. In other words, after the devaluation pressure from the market.

  Since China's central bank holds large foreign exchange reserves, the market believes the central bank to control the exchange rate. Thus, despite the international balance of payments caused by devaluation pressure, but the devaluation of the yuan did not appear large.

  Depreciation pressure either from the fundamentals, it can also come from the devaluation expectations. August 11, 2015, the central bank allows the exchange rate depreciated by 1.9 percent, the market for central bank policy is expected to safeguard stability shaken, devaluation is expected to soar. Depreciation is expected to soar over the existence of market reaction components. Devaluation of the renminbi is expected to accelerate capital outflows itself, thereby increasing the downward pressure. So the central bank and the market has been fighting to break the market expected devaluation.

  Since last August, the central bank's management of the exchange rate, many foreign investment banks are called "crawling peg." Bank of hope in this way to break the devaluation expectations. But it can only break the recent devaluation expectations, unable to break the medium and long term devaluation expectations, because the long-term depreciation is expected to be determined by the fundamentals, even if these expectations is a fundamental misinterpretation formation.

  Part of the capital depreciation of exchange rate stability can be suppressed by the expected impact of the outflow (outflow hiding in the current account in some), but may also be affected by another part of the accelerated depreciation of the expected impact of capital outflows. For example, the RMB exchange rate stability can fight short selling activity, but a stable exchange rate has reduced the cost of capital flight, and even encourage capital flight. Thus, the results of the exchange rate stability maintenance is likely to increase rather than decrease the devaluation pressure.

  If there is no improvement in economic fundamentals, while yet before the devaluation of the yuan to transfer funds more and more people will become more serious capital outflows, devaluation pressure will be increasing.

  Since last November, the central bank began to let the yuan depreciated slightly, after mid-December, the rate of depreciation have accelerated. Market began to speculate the central bank may allow a greater exchange rate devaluation, dormant for five months or so of depreciation is expected to re-active. Short offshore markets, other forms of capital outflows also with active, pressure increased sharply devalued.

  If central banks do not want to turn on the water, it must strongly intervene. In fact the central bank to do so, the yuan has stabilized. But this probably have to spend a lot of foreign exchange reserves. December 2015 China's foreign exchange reserves by more than $ 100 billion.

  So far, China and three more than one trillion US dollars of foreign exchange reserves, the central bank on the exchange rate still has a strong ability to control. But the central bank, if not August 13, 2015 after the exchange rate policy adjustments, if there is no significant improvement in the economic fundamentals, the market can not hear more "good story", with the reduction of foreign exchange reserves, the central bank holding stability credibility With the decline will be, capital outflows will be more fierce momentum. Over time, serious consequences.

  In short, the RMB is the sudden release of this round plunge since August 13, 2015 accumulated depreciation pressures. If devaluation pressure can not be released at any time, the yuan fell round is not the first, nor the last.

  Capital controls are an effective way to stabilize the financial markets

  "21st Century": In the presence of the expected depreciation of the RMB, the monetary authorities what measures can be taken?

  Yu Yongding: The consumption of large quantities of foreign exchange reserves to stabilize the exchange rate is not a good idea. First of all, 10 years, we have been emphasizing the strengthening exchange rate flexibility, an important part of China's financial reform is to let the market play a decisive role in the allocation of resources. Secondly, in order to maintain the independence of monetary policy, we must make a choice between capital controls and exchange rate fluctuations (of course, there is a matter of degree). Finally, exchange rate stability maintenance consume a lot of foreign exchange reserves, the cost is too high, there are also questions on sustainability.

  Faced with the current situation, in the exchange rate policy and institutional aspects, in theory, there are three choices: let the yuan float completely free (general national practice), announced that the RMB peg to the dollar does not depreciate (1998 Chinese practices during the Asian financial crisis), managed floating (including the "crawling peg" peg to a basket of currencies, etc., and pegged to a basket of currencies there are many different specific practices).

  Apart from adjusting the exchange rate policy, exchange rate regime, another very important measure is to strengthen capital controls. Many "crawling peg" defects, should be abandoned. The central bank research department with reference to a basket of currencies. This may be a better way, but I do not know the details of difficult comment. I and several colleagues presented some of their ideas, the basic idea is to increase the flexibility of the exchange rate as possible. The specific approach is to let the yuan pegged to wide fluctuations of the currency basket. We have published an article on January 18, which has done a more detailed discussion.

  Given that many of the current system defects, capital controls is an effective way to stabilize the financial markets. After vigorously publicize and promote capital account liberalization for many years, to re-strengthen capital controls is regrettable. But we may not have a better choice. A series of regulatory measures currently taken by the central bank, to comment on the details. Bank of the situation and strengthen capital controls direction is correct. But for the existing rules do not change easily, it is important strictly enforce the existing control measures.

  How to avoid the offshore market becoming a speculator's paradise?

  "21st Century": the central bank has taken various measures to intervene in currency markets, particularly the behavior of short offshore renminbi market. How do you evaluate this?

  Yu Yongding: short selling activities offshore renminbi market active. In a large number of central bank intervention to maintain exchange rate stability, the short sellers profit is lost nationals, short selling activity itself will increase the downward pressure on the yuan.

  Some things that happened during the Asian financial crisis, Hong Kong is now being repeated. Then speculators "short selling" Hong Kong dollars, the Hong Kong monetary authorities of Hong Kong by allowing inter-bank lending interest rates soared to punish speculators, to defend Hong Kong dollars. The central bank should learn from the successful experience of Hong Kong that year. If maintaining exchange rate stability as a prerequisite for the central bank to do so is entirely logical. How things will develop, look up the history of Hong Kong that year to roughly clear. China already has large foreign exchange reserves, plus some now essentially measures to strengthen capital controls, the central bank has made to counter this victory is no problem. However, if China's economic fundamentals have not fundamentally changed, the central bank still perform exchange rate stability maintenance policy, speculators even temporarily toys, the future will come back.

  In the offshore market with financial institutions abroad by Chinese renminbi to buy the same, reducing the supply of offshore renminbi market, improve the RMB borrowing costs are an effective way to suppress the offshore renminbi devaluation.

  But do not forget that, since 2009, the central bank has been trying to promote the development of the offshore market. If, as the mass market, "China's central bank has issued a notice on the part of foreign banks, to suspend its overseas renminbi business to participate in the line of cross-border renminbi business purchase and sale until the end of March next year." Future development of the offshore market will be affected is not hard to imagine. In addition, the side effects of these practices in place, whether you can continue deserves further study. There will be "press the gourd, dipper float" phenomenon worth studying.

  Offshore market turmoil, again, China must solve the economic reform, financial market reform, exchange rate system reform and other issues, the RMB internationalization can be sustained and healthy development of the offshore market can really help China Financial Asset Allocation optimization rather than become a paradise for speculators. Now many of the issues on the offshore market is actually pushing ourselves too eager RMB internationalization and capital account liberalization caused. In this turmoil is likely to be the process of internationalization of the RMB will enter the low tide mark.

  Currently, reports on the offshore market in Hong Kong more. Such as China Taiwan, Singapore, the situation of how we should be concerned about in other places. In addition, the offshore renminbi market interest rates rose through what mechanism shore money market interest rates and other market influence, as well as two markets will affect each other and other issues caused by the need for further research. I am not in the first line, the inconvenience of the operational details to make further comment. But we should be highly concerned about the central bank's short selling activities offshore renminbi suppression measures would HK and what impact the financial stability of Hong Kong.

  Overcome the "devaluation phobia"

  "21st Century": Some people asked devaluation will promote increased exports, may I ask how you look at the pros and cons of RMB devaluation?

  Yu Yongding: Any country large depreciation of the exchange rate will bring four issues: inflation, corporate debt burden (in yuan terms) increased, Bank currency mismatch (RMB assets, US dollar liabilities) and sovereign debt.

  The market is generally more concerned about corporate debt issues. Over the past year, Chinese enterprises to actively deleveraging. Corporate debt pressure should have been reduced. In addition, other problems are not serious now, and some simply do not exist.

  Everyone seems to have a sense of fear devaluation. In fact, in other countries, exchange rate fluctuations are commonplace. Currency devaluation is certainly an adverse impact on China's stock market and other capital markets, would cause panic and overshoot at the beginning, but as the currency depreciation, asset prices cheaper, the money will flow back.

  As long as the fundamentals have not a big problem, the exchange rate depreciation, and even a big depreciation will not cause the financial crisis and the economic crisis. On the contrary, in many countries was the result of the crisis, largely due to the reluctance to devaluation. A crisis erupts and the currency has no choice but to devalue.

  China is a large manufacturing and exporting countries, the benefits of the devaluation on exports is not self-evident. Of course, we should not exaggerate this benefit. 2016 China's monetary policy will be further relaxed, if maintaining exchange rate stability, capital outflow is inevitable, the central bank would be difficult to implement loose monetary policy, even if the central bank can hedge, but still difficult to solve the classic Mundell trilemma problem.

  Then we need to overcome the "fear of appreciation" and now we need to overcome the "fear of devaluation." Given China's economic fundamentals are still relatively good, it is difficult to envisage a substantial devaluation of the RMB will. Even "overshoot" occurs, China has capital controls that last barrier to maintain financial stability in China.

  Now need to be discussed, not devaluation of the pros and cons, but how to avoid devaluation led to panic in the market, overshoot, minimize the negative impact of the devaluation.

  Devaluation, may indeed lead to a strong international response, some countries may even attack China launched the "currency war." We must explain confidently, devaluation is the result of market forces, not the central bank manipulation of the results of China's attack is completely unjustified. China should not only patiently explained his policy, but should actively participate in regional or global financial and monetary cooperation, strengthen coordination with other countries, macroeconomic policies and exchange rate policies.

Sina: 余永定:汇率管理爬行盯住缺陷多 应加强资本管制