The Defense of Seven Escalates

CNBC: Chinese central bank to issue bills in Hong Kong for the first time
China's central bank said on Wednesday that it will issue a total of 20 billion yuan ($2.87 billion) of bills out of Hong Kong next month, its first issuance in the former British colony, the world's biggest offshore yuan clearing center.

The People's Bank of China (PBOC) said it will issue 10 billion yuan in three-month bills and 10 billion yuan in one-year bills in Hong Kong on Nov. 7.

Authorities say the issuance is aimed at expanding the range of yuan-denominated products of high credit rating in Hong Kong and improve the yuan yield curve. The issuance will also help the PBOC manage the yuan's liquidity in the offshore market and guide market expectations.

The onshore yuan ended domestic trading on Tuesday at 6.9613 per dollar, the weakest such close since May 20, 2008. The Chinese currency has lost more than 6.5 percent of its value to the dollar since the beginning of this year.

"While the volume is quite small — 10 billion yuan at the 3-month tenor and 10 billion yuan at the one-year tenor - this clearly signals that China's central bank is very keen to stabilize its currency especially at 7.00 hurdle," said Zhou Hao, senior emerging market economist at Commerzbank in Singapore.

By soaking up yuan funds in Hong Kong, the issuance of PBOC bills can help increase interest rates in the offshore yuan market and the cost of shorting the yuan.
iFeng: 刚喊话完人民币空头,央行“稳汇率”新工具下周将面世
This is the first time that the central bank issued a central bank bill in the offshore market. With the renminbi approaching the key “psychological position”, it has a strong signal meaning of stabilizing the foreign exchange market.

Previously, the central bank has repeatedly stated that it has and will continue to actively adopt macro-prudential policies and other measures to stabilize the foreign exchange market expectations, and is “experienced” and “sufficient tools” in this regard.

...Looking into the future, the industry believes that there may be a time course for the RMB exchange rate to stabilize effectively. However, the direction is clear. With the support of fundamental support and counter-cyclical adjustment, the RMB exchange rate will not be out of control, and it is only time to stabilize. The problem, the market should also take a rational look at the phenomenon of the appreciation and depreciation of the renminbi.

Short and Long Term Cycle Convergence Signals Major Top for Chinese Real Estate

iFeng: 楼市大拐点已至:三大红利消失,三大背离出现
The three deviations of the industry, from the supply and demand side to the capital end to the business end, from the outside to the inside, from the macro to the micro layer, appearing layer by layer, reflecting the near-inflection point of the small cycle of supply and demand. But this time the cycle inflection point is different from what we said before in China's real estate three-year cycle. This cycle turning point not only reflects the small cycle inflection point of short-term supply and demand changes, but also superimposes the big turning point of the industry life cycle. -- Because from a fundamental perspective, the three major dividends that support the rapid growth of the real estate industry are disappearing.

...In summary, the demographic dividend from the long-term, financial dividends from the medium-term, policy dividends from the short-term, the three fundamental factors continue to converge, and finally overlapped when the three major deviations emerged, forming a synergy, leading the real estate industry began to step into the next A life cycle stage - maturity.
The authors don't see a winter for the market though, only a change into a mature period:
After the real estate industry enters the maturity period, some "barbaric" problems facing the rapid growth period will gradually disappear, but it will not be like "winter is coming" as some pessimists think. “Live” is more about the test of the capital chain, and it is a correction of the barbaric expansion model in previous years. The arrival of this real estate turning point is not a turning point in the industry's life and death, but the industry has entered the autumn from the summer, and the winter will not come.

Global Asset Inflation Fueled By Chinese Investors Avoiding Yuan Devaluation

In a utopian, free market system, credit inflation doesn't show up in prices. Credit is used for productive purposes and production repays the debt. Humans in this utopia do not exhibit herd behavior. They are all independent individuals pursuing profit in very different ways. Credit rises with the economy in a relatively consistent ratio with GDP. In reality, even a free market has bubbles because people herd. Everyone wants in on the most profitable sectors. Many loans are made for consumption. Governments intervene in the credit creation process or themselves borrow and finance via the central bank. The end result is a transfer in wealth from savers to borrowers while credit expands, followed by a reversal of this transfer (or destruction of it) in the bust.

The worst examples are states such as Venezuela or Zimbabwe that print money as the economy implodes. But what if instead of economic incompetents running the show, the guys in charge are swapping their "strong" currency for all sorts of real assets? What if they're strategically funneling credit creation into their own pockets? What if Gordon Gekko owned the central bank?

I've sometimes imagined Chinese activity this way, especially when firms such as HNA went on their buying sprees. Although it wasn't a straight line, they were effectively funneling Chinese "QE" overseas. HNA and other firms were shut down because of maturity mismatches. They were borrowing at 1 to 2 years and buying long-term assets such as prime real estate. If they ever ran into a funding crisis, the whole thing blows up. But what if HNA could call up the PBoC and ask for a little more credit at any time? It would never go bust. Moreover, imagine HNA was intentionally "shorting" the Chinese yuan (borrowing it) because it planned to let it depreciate. Prop up the yuan while buying assets, then guarantee a positive return by devaluing your own debt.

I used this thought experiment as a way of simplifying and understanding China's impact on the world stage. Whether you think China is doing it purposefully or as an unintended consequence of monetary policy the impact is the same. Whether its coordinated and the CCP orders assets home to defend the yuan or if the yuan devalues first and overseas assets avoiding devaluation come back, the impact will be a deflationary shockwave around the globe.

Deep Throat: When will Xi click the "SELL" button?.....
So what exactly does the USCC report say that I fundamentally disagree with? Again, the report hits on the main issues, but, for reasons we'll discuss shortly, badly misses the scope and magnitude of the problem. The report fails to recognize the global scale of the "Ants Moving House" phenomenon, treating all Chinese off-shore/tax-haven money as independently managed, when, in reality the world should be treating these assets as one gigantic China Inc. "Blob" of PBOC/SOE directed Assets Under Management, subject to the will/whim of the CPC.

We must think of China Inc. as the equivalent of several thousand Warren Buffetts working in concert as a well-oiled machine. Could you imagine what might happen if the world gave this incredible team of brilliant Warren Buffetts the ability to print their own currency? Providing instant, virtually unlimited financing? And finally, what if the world's bankers based their participation and "partnering" with China, Inc. on ludicrous, incomplete, concocted and contrived financial information, in exchange for a small commission, just to get the deals done?

No need to imagine what might happen, it already has. The only thing to ponder is how the world will eventually recover from it.
China likely has invested substantial sums in U.S. assets.
Further note, as I mentioned, that the page 93 chart also lists an interesting figure, that the third largest issuer of FPI's [Foreign Private Issuers] is "Tax Havens". The "Tax Haven" FPI's listed have a Market Cap of roughly $900 Billion. So, humor me here, what if the lions share of this money is actually Chinese money anonymously invested in US Stocks and FPI's through "Tax Haven" Shell Corps.? So now we're talking about roughly $2 Trillion (Amazon AND Apple) worth of Chinese influence on US Stock Markets. Can we say that if $2 Trillion in Market Cap disappeared overnight, the equivalent of both Amazon and Apple going under simultaneously, it would be just a minor market hiccup....can we really say that?
Chinese money could be far greater than believed because it is passing through tax havens:
So now let's take a look at another Tax Haven, most specifically, Luxembourg. Although the Caymans model is generally the blueprint for the China Inc.'s global effort, i.e.) set up Offshore Shell Corps. and "buy cool assets", the scale of what's gone on in Europe is incredible as well. A few years ago (2014) PWC issued a document entitled Where Do You Renminbi?, which I've referenced in prior posts, promoting Luxembourg as "the" EU financial center for Chinese Investors. More recently (2017) PWC issued a follow up report, Luxembourg-A location Ideally Suited to Chinese Investors, again intended as a marketing piece to attract Chinese money to Luxembourg.

When we look at where we are today we can see that PWC and the government of Luxembourg were remarkably successful and prophetic in their projected appeal of Luxembourg to Chinese Investors. The flow of funds into Luxembourg is described in the FSB Report. OFI Assets have increased to $14.6 Trillion in 2016, up 46% from 2015. An astonishing rate of growth given the relatively stagnant European economy. Again, there is no data or source I am aware of which would describe the origin of the gigantic increases in these assets, but, based on what we've seen in the Caymans, it wouldn't be much of a stretch to think that a big chunk of this increase was from Chinese funding as well.
And then there's real estate:
To get a feel for what's going on at street level, so to speak, we need look no farther than.....drum roll....Quontic Bank in Queens NY! For years Chinese home buyers were showing up in NYC and buying homes and apartments in all cash deals. Those "Crazy Rich Asians! But once the CPC put the clamps on capital flight after the 2015 RMB hiccup, clever Chinese buyers were forced to start looking at alternatives to get the deals done. From The Real Deal:

"As a result, the Chinese investment market in New York City, which for years was defined by splashy all-cash purchases, has morphed into one grounded by more traditional financing. The shift offers a growing opportunity to a handful of lenders such as Quontic, HSBC, Guardhill Financial, Cathay Bank and Abacus Federal Savings Bank."

Because of the ever creative US Banker and the ability to package and securitize mis-rated risk, the deals didn't slow down. According to the National Association of Realtors, Chinese individual purchasers remained the #1 foreign purchaser of US residential real estate in 2018.

NAR’s 2018 survey results suggest that Chinese buyers were not as adversely affected by rising prices and dwindling inventory when compared with other foreign buyers. Note, that the NAR survey includes individual purchases only and does not include "Shell Corp" purchases, the preferred structure for more expensive deals. Here are a few of my favorite lines from the March 2017 "The Real Deal" article along with a pithy Banker-Speak-Translation (BST). I'd invite you to read the entire article:

In the days that followed, numerous callers told Ho, a senior loan officer at Queens-based Quontic Bank, that they were unable to get their money out of China to finance real estate investments in New York. “They’re saying, ‘What’s the max I can borrow?’ and they’ll figure out other means [for repayment] later,” Ho said.

BST Comment: That's just what I'd want to hear right before I make someone a loan.

Most large retail banks don’t lend to foreign buyers because it’s harder to comply with “Know Your Customer” regulations, but also because they already command so much market share. Sensing an opportunity, smaller banks have made lending to nonresident – especially Chinese – buyers their specialty.

BST Comment: Yup....totally agree....just another example of government red tape keeping really smart business people from making a buck.

Astoria-based Quontic will finance 65 percent of a purchase if the buyer has a green card. Without a green card or passport, the figure drops to 50 percent and the bank requires employment documentation and proof of local funds. To mitigate the bank’s risk, Quontic also requires foreign buyers to open an account holding at least six months worth of mortgage payments. Ho said he recently had a client who was prepared to pay more than $700,000 for an apartment in Flushing, but had to slash her budget by $200,000. She still wound up borrowing 60 percent. “She wasn’t able to get that much [money] over, so getting a mortgage was her option,” he said. “Unfortunately, it was her only option.”

BST Comment: This is an outrage!.....bankers are forced do extra paperwork to make six figure loans to illegal aliens? (no passport or green card)....and they must ask if they have a job and/or any money in America? I had no idea that mortgages were so tough to get and that bankers were under such duress. Things have changed a lot since I got my last mortgage....I thought it was a moral victory when I was able to negotiate my way out of the cavity search,

Some banks, like First American International Bank, founded by Chinese immigrants in Brooklyn in 1999, have begun to offer what they call “portfolio loans” to grab new customers. Those mortgages don’t require tax returns or pay stubs, and instead the bank requests a letter from the borrower’s employer certifying how much the applicant makes. Buyers are required to put down 40 percent. The bank had $382 million in residential mortgages on its books as of Sept. 30, 2016, up from $296 million a year earlier, due in some part to such loan programs. “People pay; it’s a tremendous thing,” CEO Mark Ricca told The Real Deal last year.

BST Comment: Absolutely right again. It is "a tremendous thing"....people will always pay....until, of course, they can't/don't/won't.....I'm getting pretty scared right now.

Social Credit Systems Coming to the West

Telegraph: Pick up poo or we take the dog: Chinese city rolls out 'social credit' system for pet owners
Chinese cities are launching a scoring system for dog owners where anyone found failing to care for their pets could be forced to pay a fine - or even have their dog confiscated.

The credit system is already being enforced in the Chinese city of Jinan, and requires anyone with a dog to register with the police - with only one dog permitted per person.

The licence starts with a dozen points and is embedded as a QR code on a dog’s collar.

Points are then deducted for various infractions, such as walking a dog without a leash or tag, not cleaning up poo, or being reported for a disturbance. Owners are docked three points if dogs are walked without a leash, for example, which must be less than 1.5 metres in length and under the control of someone at least 18 years of age.
Animal rights activists would love to implement that system, as would anyone who regularly sees dog poo on the sidewalk. And of course in California, they have to deal with human poo too, but luckily for them Silicon Valley is already demanding and developing Western-style social credit systems, not to mention Google's development of a digital panopticon for the Chinese government.


Fake News: Rumor Mill Says China Will Lift Buying Restrictions

The real estate market's topping process is underway and already there are rumors that buying restrictions will be lifted. Only months ago the government and analysts alike were saying restrictions were here to stay for years and would probably even intensify in lower-tier cities in the second-half of 2018. The rumor may have contributed to a rally in property sector A-shares last week.

21st century: “取消限购”传言下的楼市生态:市场神经紧绷 价格博弈正酣
Recently, a rumor about the “cancellation of the purchase restriction” was rapidly fermented in the industry. According to rumors, according to the "Notice on the Regulations on the Protection of Property Rights and the Cleanup of Regulatory Documents" issued by the State Council in May this year (the "No. 29 Document"), by the end of October this year, the State Council and local governments have Relevant documents on the protection of property rights will be cleaned up, including the “restriction order” issued by various places.

The rumor was quickly proved to be a rumor because of insufficient arguments and logical loopholes.

However, the impact of the news on the market can not be ignored, in addition to being widely spread, in recent days, the real estate sector of A shares and Hong Kong stocks have seen a big rise.

Analysts pointed out that this reflects a tension in the real estate market. Since the beginning of 2016, the nationwide property market regulation has continued for more than 30 months. Affected by this, housing companies frequently adopt price promotion strategies to maintain cash flow. The price of the second-hand housing market is equally fierce.

Some real estate developers bluntly said that under the pressure of policies and markets, "the nerves between the supply and demand sides are highly tight." Any change in policy may break the balance. This is also the reason why rumors can be fermented quickly.
Zhang Dawei explains why the rumor is "fake news."
Regarding whether or not it includes a “restriction order”, Zhang Dawei, chief analyst of Zhongyuan Real Estate, pointed out that the document is not about the real estate sector, but the notice of the General Office of the State Council on the clean-up of regulations and normative documents involving property rights protection. Therefore, it has nothing to do with the “restriction order”.

He also stated that the basis of "No. 29 Document" is the "Opinions on Perfecting Property Rights Protection System and Protecting Property Rights According to Law" promulgated by the State Council in November 2016. This opinion is an important document in the protection of property rights, but it is also irrelevant to the “restriction order” in the real estate sector.

Zhang Dawei said that the news of canceling the "restriction order" is "fake news."
Analysts believe the rumor boosted Mainland property shares:
Although falsified, the aftermath of the news did not subside. In addition to the massive spread of news, on October 26, in the case of the market continued to fall, the A-share real estate sector rose 2.17 percentage points against the trend, becoming the leading sector. Among them, six stocks, including Wolong Real Estate, Huaye Capital and COFCO Real Estate, have daily limit.

Chinese property stocks in Hong Kong stocks rose sharply on October 25, but by October 26 they have returned to calm.

Market participants generally believe that in this round of real estate stocks, the rumors of “cancellation of purchase restrictions” played a key role. Of course, the impact of "first-home loan interest rate reduction" and "speeding up mortgage loans" can not be ignored.
There have been a few signs of loosening policies, but these are small outlier moves thus far.
According to the 21st Century Business Herald, some cities have recently seen the phenomenon of “relaxation” in price control. For example, Beijing recently issued a pre-sale permit for a number of luxury home projects with a unit price of more than 100,000. Xiamen has also relaxed the conditions for the establishment of college graduates, skilled workers, and returned overseas students.

However, most respondents believe that this does not mean that the property market regulation will be substantially loose. On the contrary, Zhang Dawei believes that the content of the regulation and control policies for the upgrading of the property market will continue to emerge, thus consolidating the effect of the regulation of the property market and avoiding the diminishing marginal effects of policies.
Beijing also sold a plot of land without attaching affordable housing requirements.

China is unlikely to loosen real estate policy because it would unleash a flood of capital back into housing. Officials want investment flowing to SMEs and other sectors of the economy, not another housing bubble. Even a small loosening will create a huge shift in expectations and hamper those efforts.

Finally, a corollary to Chinese housing rumors are Federal Reserve rumors in the United States. Already people are talking of the Fed stopping QT and slowing or halting rate hikes. Since 2008, both Chinese and American investors are used to being bailed out at the first sign of a serious slowdown, but this time is different. Policymakers view unsustainable asset bubbles as a threat. Preventative bailouts are over. It will take a lot more pain to get a shift in policy.


Breaking 7

A critical period for the Chinese yuan is about to arrive as USDCNY approaches 7.00. The market expects USDCNY to break 7.00, but speculators aren't piling into bearish yuan bets yet. Yuan depreciation expectations remain subdued. Financial market participants generally understand that USDCNY can go through 7.00 solely because of U.S. dollar strength. Talk of trade war and "weaponized" yuan persists, but there aren't massive bets on it yet because it's widely believed the PBoC will step into the market to prevent a rapid depreciation following a break of USDCNY 7.00. The PBoC has guarded reserves with draconian capital controls. Official statements are increasing the odds that speculators will turn their attention to the yuan and put those capital controls to the test.

Reuters: Guarding stability, China likely to slow yuan's slide to 7 per dollar - sources
China is likely to use its vast currency reserves to stop any precipitous fall through the psychologically important level of 7 yuan per dollar as it could risk triggering speculation and heavy capital outflows, policy insiders said.
If the dollar bulls are right (myself included), the red line will come back to bite China. A move through USDCNY 7.00 is inevitable if the dollar keeps advancing. Should DXY clear 100 and march higher, a red line risks triggering reflexivity in the market. The market will see a falling yuan as evidence of PBoC failure, the renminbi will fall if only because it must as euro and EM currencies depreciate, this will attract hot money betting on depreciation, and the PBoC will face escalating pressure that accelerates its reserve burn.

Another red line for China was $3 trillion in reserves. It's unknown where the next red line resides, but economists estimate China may need somewhere north of $2 trillion in reserves. I agree that China needs far less reserves in most situations, but crises don't occur most of the time. They're rare, fat tail events. When push comes to shove, officials will quickly pull the plug on defending the currency. Even with a conservative target of $2 trillion in reserves as the final line in the sand, if reserves start falling as they did in 2015/2016 (or faster despite capital controls), China will have only months before it hits the line in the sand.
Two sources involved in internal policy discussions, but who are not the final decision-makers, said that a defense of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn’t allow a runaway market.

“If the yuan falls through 7, there could be a rapid depreciation of the exchange rate”, said one policy insider. “In order to avoid such a passive situation, the authorities are likely to step in the market to stabilize the yuan.”

The second source was certain the central bank would make a stand, rather than allow any sudden break through a psychologically important level to feed pessimism among investors.

“The central bank will intervene - intervene directly or indirectly. It’s necessary. The central bank has many policy tools. We cannot let the yuan fall past 7, as it would have a psychological impact on people,” the second source said.
Individual Chinese investors have trillions of yuan in savings, money markets, and WMPs looking for returns. Tight capital controls have kept their assets onshore. A rising real estate market soaked up capital, but the market is topping. The stock market holds no attraction at this moment. Poor price action has kept them from piling into gold, although the recent devaluation in the yuan and stable gold price has lifted gold's return to positive for the year. China has import quotas on gold as part of capital controls. Should money start flowing into the barbarous relic, the Shanghai gold premium could quickly become a signal of depreciation expectations.

The Starting Gun

The game is not yet afoot, but Chinese officials have signaled the game begins at USDCNY 7.00. That's when ordinary Chinese and speculators alike are expected start selling yuan in size and the PBoC is expected to step in and stop them.

I view the yuan decline (to this point) bearishly because it was not driven by depreciation expectations. The dollar was responsible for the drop until now. Instead of having a room for depreciation, the PBoC will start fighting depreciation pressure with its back to the wall. Any slip, or even letting the yuan follow the euro and EM currencies lower versus the dollar, will invite more yuan selling. Mistakes break in favor of the speculators.

The Chinese View

The Chinese government has cracked down on financial media amid the slowing economy, topping real estate market, depreciating yuan, bear market in stocks and depreciating yuan. Still, the financial media remains relatively open. Articles warning of accelerated depreciation are showing up again. Phoenix Media's (iFeng) financial news division, which was put on ice for a month, returns with an "all is well" regurgitation of PBoC talking points.

The articles below are presented in chronological order.

Sina: 专家看人民币贬值:这件事比“保7”更加重要
This year, the renminbi volatility against the US dollar has significantly increased. The pessimistic recovery of the market's depreciation of the RMB exchange rate, the "breaking 7" theory revived. However, many experts have indicated to Zhongxin Jingwei that it is better to look at the essence through the phenomenon rather than paying attention to whether it is “breaking 7” – paying attention to the RMB against the US dollar.Economic phenomena reflected in exchange rate changes and differences in trade systems between countries. At the same time, many experts stressed that the reform of the exchange rate system should be further promoted, the flexibility of the exchange rate system should be strengthened, and the market floating exchange rate system should be realized as soon as possible.
What is the impact of “Breaking 7”?

  Previously, there were voices on the market saying that if the exchange rate of the renminbi against the US dollar is lower than 7, it means that the renminbi exchange rate is still in a controlled and stable scope; once broken, it means that cross-border capital flows, imports and foreign reserves will have different degrees of shock.

 Is there a reasonable range of RMB exchange rate fluctuations, what happens once “breaking 7”? In the view of Xiao Lizhen, chief macro researcher of Pacific Securities and deputy researcher of the World Economics Institute of the Chinese Academy of Social Sciences, when the RMB exchange rate approaches 7, there will be a large amount of short-term capital influx into the foreign exchange market to short the RMB exchange rate. If the situation at home and abroad is more serious, the short-selling funds will use the "breaking 7" signal to guide the depreciation of the RMB exchange rate.

  Xiao Lizhen also pointed out that after repeated shocks and the RMB exchange rate approached 7 again, if there is no large amount of short-term RMB exchange rate funds in the market, the impact of “breaking 7” will be small.

...Yu Yongding, a member of the Chinese Academy of Social Sciences, recently wrote that “it is difficult to imagine that the renminbi will fall to the extent of triggering the financial crisis.” He also stressed that even if the exchange rate falls below 7, it must adhere to the non-intervention policy.

  Yu Yongding called for "don't panic." For market participants, “don't panic” means avoiding large-scale capital flight; for monetary authorities, “don't panic” means even the dollar against the yuanIf the exchange rate falls below 7, it must also adhere to the non-intervention policy. "With this kind of patience, the reform of the exchange rate system may eventually be completed." Yu Yongding said.
wallstreetcn: 人民币贬值对经济有提振作用吗?
We find that the depreciation of the RMB exchange rate has a better correlation with the growth rate of industrial products (PPI). As can be seen from the figure below, the horizontal axis is the RMB exchange rate, and the vertical axis is the PPI year-on-year growth rate. There is a clear linear relationship between the two. After a simple fitting, the results showed that the RMB depreciated by 1000 points, the PPI increased by an average of 1.16 percentage points year-on-year, and the fitting R square was 0.428, which was basically available.
We have some intuition to explain the positive correlation between RMB depreciation and PPI. For example, the depreciation of the renminbi will bring about input inflation and be transmitted to industrial products. For another example, the depreciation of the renminbi will increase the international competitiveness of Chinese products, thereby stimulating demand and transmitting demand to prices.

Then the PPI rebounds year on year, first of all, it will improve the profit performance of industrial enterprises. As can be seen from the following figure, the growth of PPI has a significant positive correlation with the profits of industrial enterprises. Then, when the profit of the industrial enterprise is repaired, the investment will be restarted. The author believes that there has been a rebound in manufacturing investment this year, which has a greater relationship with the year-on-year rise in PPI and the high growth of industrial enterprises.
Then another important role of the PPI recovery is to promote the growth of the nominal growth rate of the economy. As we can see from the chart below, there is a strong positive correlation between the growth of PPI and the nominal growth of GDP in the secondary industry. The nominal growth of the secondary industry's GDP is the only driving force for the nominal growth of the current round of GDP in 16-17.
So how do you view this wave of depreciation since the end of May this year? As can be seen from the chart below, although the RMB has had a large depreciation trend since the end of May, the PPI has not yet recovered. The main reason is that the depreciation to PPI has a certain lag, and it can be expected that the recovery of PPI and the repair of corporate profits will be expected soon after.
However, it remains to be seen whether the PPI recovery and profit recovery will effectively stimulate corporate investment and thus prevent the economy from continuing to decline. If the economy still has downward pressure, then it is also the righteousness to continue to depreciate. This is still the role of the economy's self-regulating function, without excessive panic and interpretation.
JRJ: 离岸人民币见两年新低!持续贬值下资本外流压力加大
With the continued depreciation of the RMB against the US dollar, capital outflow pressures have reappeared.

  On October 25, the State Administration of Foreign Exchange announced the September bank settlement and sales data show that the bank's settlement and sales deficit in September was 120.2 billion yuan, the largest deficit since June 2017. Among them, the settlement of foreign exchange settlement and sales was 110.3 billion yuan. It is the largest since February 2016; combined with the September foreign exchange reserves and foreign exchange holdings data released in the previous period, both indicate that the cross-border capital outflow situation is deteriorating and the pressure on RMB depreciation has increased.

On the day of the data release, the spot exchange rate of the RMB against the US dollar also performed poorly. Onshore, the RMB exchange rate against the US dollar closed at 6.9498, which was the lowest since January 3, 2017, down 97 points from the previous trading day. Offshore fell even more, once fell below the 6.96 mark, refreshing the latest two-year low.

Bank of China International Finance researcher at the Institute for Wangyou Xin brokerage China, told reporters that although China cross-border capital flow situation remained stable, but since the third quarter as the global financial market turmoil, the rapid devaluation of the RMB exchange rate is increasing the rusk of a sudden reversal in short-term cross-border capital flow, which in turn will increase the pressure to devalue the yuan.

...Often, bank brokerage settlement and foreign exchange payments are often seen as effective indicators of cross-border capital flows. In September, the bank's settlement of foreign exchange settlement and sales was 110.3 billion yuan, the largest since February 2016, a deterioration of 47 billion yuan from the previous month.

  The bank's discount on the settlement of foreign exchange settlement on behalf of customers reflects the increase in capital outflow pressure. The expansion of the scale of the month's deficit was mainly affected by the apparent deterioration of foreign bank receipts and payments. In terms of sub-projects, the current account deficit was 104.1 billion yuan, and the deficit was expanded by 28.2 billion yuan. The difference between capital and financial projects was reversed to -6.2 billion yuan, down by 18.7 billion yuan from August. In September, the long-term net settlement of foreign exchange reached 1.8 billion yuan, which has been converted from net sales to net settlement.

  “In September, the bank’s foreign exchange payment deficit widened by 160.6 billion yuan to 191 billion yuan, which was obviously worsened. Both foreign-related foreign exchange receipts and RMB cash flows were not performing well.” China Merchants Securities macroeconomic research director Xie Yaxuan said.
Finally we get to the culprit: the U.S. dollar.
It is worth noting that the reason for the apparent deterioration of foreign exchange payments on behalf of customers is that there is a new external factor change that is worthy of vigilance. In the bank's foreign exchange payment in September, the capital and financial sector turned from a surplus to a deficit, which significantly deteriorated by 136.1 billion yuan. Among them, securities investment projects have become a major drag.

  Xie Yaxuan explained that the sharp rise in US bond yields has had a significant negative impact on global asset prices and capital flows, and China is no exception. In September, the scale of foreign-funded bond purchases showed a significant contraction, showing a 93% drop from a month earlier.

  More importantly, the above negative effects may continue to ferment in the coming months. "The long-term spread between China and the United States has now dropped to a historical low of around 40bp, and the exchange rate factor is also unfriendly. In the context of both negative factors turning negative, the size of foreign debt purchases in the coming months will likely The decline has a certain negative impact on China's capital flow situation, the RMB exchange rate, and the performance of the bond market,” Xie Yaxuan said.
Analysts believe the People's Bank of China started intervening in September (also possible, the bill for intervention in late June came due). Marketwatch, back on June 27: China's central bank steps in as yuan tumbles. If China used 3-month forward contracts, the bill would have come due at the end of September.

As for reserves and net outflows, the risk right now isn't that dollars start flowing out in larger amounts, but that dollars stop flowing in.
All kinds of signs indicate that the pressure on China's current cross-border capital flows is increasing. Wang Youxin said that although the current situation of cross-border capital flows in China remains stable, the risk has risen with the rapid depreciation of the RMB exchange rate since the third quarter. This is mainly reflected in the following three aspects:

  First, the difference in the settlement and sale of bank valet in the last three months has once again been reversed, and the scale of bank foreign exchange receipts and payments has expanded. Since the third quarter, the bank's valet exchange rate has also fluctuated as a whole, and the willingness to settle foreign exchange has declined. In the same period, the bank's foreign exchange payment deficit has gradually expanded.

  Second, the net inflow of non-reserve financial accounts has declined rapidly, and the third quarter may be reversed. The net inflow in the first quarter was close to $100 billion, and the second quarter quickly fell back to $30 billion. Since mid-June, the depreciation of the RMB exchange rate has accelerated, and cross-border capital flows will be subject to more severe challenges. The non-reserve-type financial accounts in the third quarter are likely to show a deficit again.

  Third, the short-term cross-border capital inflows under the securities investment increased. In the context of increasing global financial volatility, the future may become a potential risk point.
Unless fundamentals change, everything is pointing to renminbi depreciation:
"If the narrowing of the spread is carried out along the line of 'China-US spread narrows - capital inflows into the US - the dollar strengthens and the yuan weakens," this will mean that China's capital will likely further outflow. Capital outflows will increase. This means that the renminbi demand is weakening, and the pressure on the RMB exchange rate is increasing.” Ming said that given the current downward pressure on the domestic economy , monetary policy may be further loosened. Correspondingly, the probability of tightening the currency exchange rate is small.
Liu Shijin , a   member of the central bank's monetary policy committee, recently pointed out that he should face up to the dynamic adjustment of the exchange rate equilibrium level and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. Whether it is "breaking 7 theory" or "guarantee 7 theory", it is important to ignore that equilibrium is dynamic. The equilibrium level of the renminbi is not static. It should adapt to the dynamic adjustment of the renminbi equilibrium level, enhance the flexibility of the exchange rate, give play to the fundamental role of the market's automatic equilibrium, and maintain the basic stability of the renminbi at a reasonable and balanced level.

  "In response to the social concerns about the depreciation of the renminbi and the idea of ​​holding a 'gate', we believe that the important thing is not the specific 'point', the key is that the exchange rate mechanism should be correct. As long as the mechanism is correct, it is not afraid that the 'point' will not come back. Liu Shijin said.
Liu Shijin is right, but officials are sending the opposite signal.

Finally, here's the latest from iFeng, the top article in their out-of-the-penalty-box finance section: 一度逼近十年汇率低点!央行喊话人民币应声回升
Yesterday, Pan Gongsheng, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, stressed at the briefing of the State Council policy that the fundamentals of the Chinese economy are stable, the macro leverage ratio is basically stable, and the financial and financial risks are generally controllable. Generally balanced, sufficient foreign exchange reserves. These factors provide fundamental support for the RMB exchange rate to remain basically stable.

"We have the foundation, ability and confidence to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level." Pan Gongsheng said.

...Pan Gongsheng said yesterday that the recent changes in the RMB exchange rate are mainly reflected in market supply and demand and international exchange market fluctuations. The depreciation of the renminbi is the result of a combination of factors such as the US dollar interest rate hike, the US dollar index, international financial market disruption and trade friction.

...Pan Gongsheng pointed out that the People's Bank of China has actively taken some measures to stabilize expectations, such as constantly improving the mechanism of the RMB exchange rate marketization and maintaining the flexibility of the exchange rate. At the same time, it has also been and will continue to actively adopt macro-prudential policies and measures in response to the procyclical behavior of the foreign exchange market. Stabilizing foreign exchange market expectations.

"We have the foundation, ability and confidence to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level." Pan Gongsheng said.

In response to exchange rate and foreign exchange market volatility, he stressed that the People's Bank of China and the foreign exchange bureau have accumulated rich experience and policy tools in recent years, and will take necessary and targeted measures in the future according to changes in the situation.
Everything to this point has been phase one of a global cyclical turn. The drop in U.S. equities represents the end of the beginning as U.S. markets play catch-up. Round two involves breaking major multi-year trendlines such as multi-year support on major equity indexes (in some cases back to 2008 or earlier) and key resistance levels for exchange rates, including the multi-year high on the U.S. Dollar Index. The renminbi will be front and center as this transition unfolds.


Another Small Fed Reduction Sets Up Big Drawdown Next Week

The Federal Reserve reduced its balance sheet by $2.38 billion in the week ended October 24. This small reduction leaves nearly all of October's reduction to the last week, as I wrote last week:
It still has $50 billion total and $30 billion in treasuries to go. It's already behind the curve, needing to reduce $39 billion in treasuries to catch-up. It will fall behind again this month because only $23 billion in treasuries mature.
Big Fed balance sheet reduction days have typically sent stocks lower.

On October 31, $23 billion in treasuries will mature, all of which should roll off the balance sheet. The Fed should reduce treasuries $30 billion this month and it has reduced zero. Since it will not sell treasuries, it will fall behind by $7 billion. Since the Fed has also barely reduced MBS, it should reduce by around $18 billion. This would make for the largest single weekly balance sheet reduction by a long-shot.

The market should experience a healthy dip at least one day between now and Wednesday. Given the already high volatility, it could take the market to new lows for the year.


Bearish Engulfing Candle on the Market Top Chart

This is one chart of a market top that I track. It is a price ratio of the DJIA and the 30-year Treasury bond price. A rising ratio indicates stocks outperforming bonds. It is now sporting a big bearish engulfing candle. The best case scenario is the 1998 correction. I've discussed the similarities with the late 1990s before. While I wouldn't draw too tight a correlation, it can't be ruled out yet. Looking at EMs, it's more likely this is 1997 than 1998, that is, even if a higher high is coming in stocks, there's probably a lot of pain between now and then for global markets. Even if the bull isn't dead, bears with a global and multi-asset class focus probably have years of opportunities ahead.

I don't take this chart as gospel, but use it in conjunction with others. I've seen different versions (such as SPY/10-year yield) and it also shows a topping formation. I look for confirmation from many different sources and only consider this one piece of evidence.

Cover AMD

On September 27, I wrote: AMD Topping Patterns

AMD closed at $32.59 that day. It is $17.56 after hours as I type this, down 46 percent. I missed the post earnings drop because I already covered earlier in the day.

2018 Midterm Update: Early Voting Surge

Not much changed over the past two weeks which is bad news for Republicans. There should be a closing in the polling gap and its not happened yet. On the positive side, they don't need a big gain to wreck Blue Wave hopes. A move of 1 to 2 percentage points could all but kill a Blue Wave. Tee only scenario that has the Dems taking the House is a monster wave election similar to the 2010 GOP Tea Party wave, but with a 7.7 percent generic ballot lead that looks highly unlikely.
538 gets ridiculed a lot, but their forecast is very similar to my simple model. The difference is they think the polling advantage will not only hold this year, but they think the generic ballot lead will expand to 9 percent. I assume if the election was held today, the final generic ballot would close to around 4.5 to 5.5 percent.

538: Forecasting the race for the House

The wildcard, as always, is turnout. That's doubly true in midterm elections because Republicans typically are more reliable voters. Early voting is up 7-fold this year though, from around 1 million in 2014 to more than 7 million.

WaPo: Will a surge in early voting help or hurt Republicans? Nobody knows the answer to that question because until Election Day, we won't know if this is driving turnout up or cannibalizing Election Day turnout. If total turnout rises, Democrats have a better chance of hitting their generic polling advantage.

Finally, an extra wildcard this year is the migrant caravans. Immigration benefits the GOP. Democrats have told their candidates not to discuss the issue at all because it hurts them. Supposedly the GOP will run immigration ads: President Trump and GOP unleash anti-immigrant onslaught, as Democrats keep focus on health care ahead of midterm elections
Candidates and organizations have spent more than $150 million this year on televised immigration attack ads, spending that has skyrocketed fivefold since the 2014 midterm elections, according to Kantar Media/CMAG data confirmed by CNBC.

The GOP has dominated the ad space on immigration. In August, 26 percent of ads from Republicans mentioned immigration, compared with only 5 percent of ads from Democrats, according to the Wesleyan Media Project. In overall 2018 campaign advertising, one-eighth of Republican commercials discussed immigration — more than double the share for Democratic ads.

"Republicans are doubling down on anti-immigration ads in this election. They are tapping into public safety fears, and using fear-mongering as a political strategy," said Ali Noorani, head of the National Immigration Forum, a nonpartisan advocacy group that favors immigration reform.
Immigration should be 25 to 50 percent of GOP ads. The media is giving the GOP free advertising by covering the migrant caravans though.
As I discussed in Immigration Issue Set to Explode in America; Prepare for Political Volatility
UKIP's reason for existence was to get the United Kingdom out of the EU. There are many issues that fall under the control of Brussels, such as economic regulations, but the big issue that voters wanted to hear about was immigration. UKIP realized immigration was the big issue and it focused on that issue, turning it into a shock electoral victory.
The was after the 2014 European Parliament elections. For ideological reasons, most reports of UKIP's victory spun the story as UKIP cooking up the immigration issue, playing on voters fears/bigotry/racism etc. That it was cynically manufactured. The opposite was and still is true. It was after talking with voters and hearing voters bring up the immigration issue that they did what any good businessman would do and gave the people what they wanted.

The ad above was launched during Brexit and given the margin of victory, it's as good an explanation of the win as anything else. The GOP could have gained seats in the House if they ran on hardline immigration policies. They did not. Still, the caravan stories should move the needle on the generic ballot. I expect the Democrat generic ballot lead will shrink in the next week.


Indebted Private Companies Sell Low to Govt

SCMP: Is Chinese capitalism in crisis, as stock market rout drives private companies into the state’s arms?
At least 32 companies listed on the Shanghai and Shenzhen bourses sold controlling stakes to the Chinese state as of October 17, six of them to the central government, while 26 were taken over by provincial or city-level agencies, according to data by Shanghai Wind and China International Capital Corporation (CICC).

Call it privatisation in reverse, or re-nationalisation, as Chinese capitalism lays in crisis.
Almost every listed company or its major shareholders have loaned shares.
All but 13 of the 3,491 companies listed on China’s two stock exchanges have pledged their equities as collateral for bank loans, according to data by the China Securities Depository and Clearing Corporation, with the total value estimated at 4.5 trillion yuan, equivalent to the world’s 21st biggest economy and more than Hong Kong’s gross domestic product.

...Chinese Vice-Premier Liu He entered the fray on Friday, speaking in an interview with the Communist Party’s mouthpiece People’s Daily newspaper to calm nerves. The Chinese government is helping private companies get over their financial difficulties, extending the kind of financial aid that underscored the coexistence and cooperation between the public and private sectors, he said.

“It’s a good thing,” Liu said. “The state can divest, when businesses at the private companies improve.”

...The bailout is not unlike the US Troubled Asset Relief Programme (TARP) signed into law during the George W. Bush administration, which spent US$475 billion to bail out Chrysler, General Motors and 16 other indebted US corporations.

...The shrinking of China’s private sector had been written in official economic statistics since June 2017, when contributions to GDP was first surpassed by the state sector.


The Dollar Doom Chart

Trade weighed U.S. dollar versus all currencies. I expect the DYX will eventually move, but first emerging market currencies will lead the way down. If emerging market currencies remain more volatile and DXY hits 100, the chart below will hit a new two-decade high.
Dollar bears are looking at a 4 to 5 year H&S pattern forming with the right shoulder ready to descend towards the neckline. That's the effect of the euro. The overall elevation of the index comes from EM weakness.

New Rage Wave: Chinese Homeowners Protest Shoddy Construction

Zhang Dawei of Centraline, the go to guy for quotes on the real estate market, recently said buyers should avoid recently build properties because of shoddy construction.
Zhang Dawei, chief analyst at Centaline Property, warned that not only were the overall sales dropping, but poor construction quality could also be a cause for more violence. “Try not to buy homes built in 2018, because while the developers were short of money, the same is the case with contractors,” he said.
SCMP: ‘Fix our flats, or give us back our money’: buyers protest against Vanke build quality
Angry homebuyers who protested outside housebuilder China’s Vanke’s headquarters in Beijing last week, have dismissed the company’s claims it had been fully transparent during the sales process at a development in the capital, and have vowed to continue to fight for justice.

...“The homes are so shabbily built that I was appalled when I saw them,” said one new owner Liu Meimei, a Beijing accountant.

“The ceiling in the loft is so low that I have to bow my head to get inside. The kitchen and bathroom are so small that I can’t extend my arms. The hood above the cooker is like a toy.

“The project is well-located near a subway station and a park. I had planned to live there with my parents and kids. But I am protesting because the flat I bought is unlivable,” Liu said.

“I feel cheated out of my hard-earned money.”
If buyers know what they're getting, why do they complain?
“It’s a perennial problem in China,” Chen Lei, an analyst with Beijing property listing firm zhuge.com told the Post.

When prices rise, even if there are grave problems, will you complain?” he said, meaning only when prices fall do buyers become intolerant of issues.
There will be more rage and complaints if prices remain in a downtrend, and history says the very emergence of real estate rage signals a downturn is underway. Real Estate Rage Spreading As Developers Grab Golden Week Opportunity, Will 2019 Be the Year of Defending Rights?

No Trade Deal in Near Term

Axios: "He wants them to suffer more": Inside Trump's China bet
What we're hearing: "He wants them to suffer more" from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have.

Why this matters: Trump's trade war with China is at the "beginning of the beginning," according to a source familiar with Trump's conversations. And his team doesn't expect much from the tentatively planned meeting between Trump and Chinese President Xi Jinping on the sidelines of the G20 summit in Buenos Aires next month.

The Trump economic team has done no substantive planning so far for the bilateral meeting's agenda, largely because the purpose of the meeting is for Trump and Xi to reconnect, eyeball each other, and feel each other out amid their escalating trade war.
"It's a heads of state meeting, not a trade meeting," a source with direct knowledge told Axios.
Trump is again right for the wrong reasons:
Behind the scenes: Trump has privately boasted that his China tariffs have driven down the country’s stock market. Experts say the trade war has hurt market sentiment, but the stock market has never been a reliable barometer of Chinese economic strength.
A-shares are not a good measure of Chinese economic sentiment, it's housing. In order to crack the housing market, however, Trump would need to inflict more pain for longer, to the point where China can't contain the fallout and home prices start sinking 1 or 2 percent per month.

Trump is pursuing the right strategy for his intentions, even if he isn't watching the right signals. Or maybe the stock market comments are for public (and China's) consumption.

Socionomics Alert: Struggling Hollywood Hits Horror Jackpot

Deadline Hollywood: ‘Halloween’ Scares Up 2nd Best October Debut With $77M+
Universal is calling Miramax/Blumhouse’s Halloween at $77.5 million after a $27.2M Saturday, making it the second-best opening ever for the month of October behind Sony’s Venom ($80.2M). As we’ve known since Thursday night, Halloween is the best domestic opening ever for John Carpenter’s 40-year old franchise...
The first wave of horror films hit in the early 1930s during the depression. Those were the classic monsters: Dracula, Frankenstein and werewolves. The next wave of horror films hit in the late 1970s and early 1980s. Werewolves and vampires returned along with Freddy, Jason and Michael Myers (Halloween). And the third wave came in the 2000s and its never let up, with horror box office receipts growing over the past two decades as social mood remains in an overall downward trend.
Resuscitating horror franchises had become passe at the box office recently, and in the previous post we dive into what was key in bringing Halloween back to life, namely having the original creator Carpenter around as EP, Jamie Lee Curtis reprising her survivor role of Laurie Strode in #MeToo times, and fresh oxygen breathed into the property by David Gordon Green and Danny McBride.

We hear that Halloween played best in the East and the South, but overall it was excellent across the board with six out of the top 10 runs coming from the West Coast; a $200M final killing for the movie stateside is definitely within grasp.
CNBC: 'Halloween' is a massive box office contender in this new era of blockbuster horror
In 2017, horror movies made more than $1 billion at the U.S. box office alone, that's up considerably since 2014, when horror films raked in $255 million.

...This was particularly evident following the success of the original "Halloween" in 1978. While there were a number of horror films produced in the '80s and '90s that went on to cultivate cult audiences, the majority of films were panned by critics and the category was soon thought of as inferior compared to other genres.

However, that all changed in the early 2000s, according to Rick Worland, professor at Southern Methodist University and author of "The Horror Film: An Introduction."

"With 'The Ring' in 2002, there really started to be some attention to atmosphere when making horror films. [Filmmakers] weren't totally giving up on violence or gore, but were also adding this suspense element," he said.

With the release of movies like "The Ring" and "The Grudge," Hollywood discovered that younger audiences, particularly young teenage girls would go to these films they weren't too gory, Worland said.

Movies like "The Orphanage," "Paranormal Activity," and "The Conjuring," would soon follow, dialing back the gratuitous violence in favor of creating moments of prolonged tension and dread.
I believe the Federal Reserve was able to lift stock prices with QE, causing the stock market to diverge from social mood. If I'm right, stocks will have a long way to fall before they catch down to prevailing mood.


Chinese Home Prices Rise 1 pc in September

While there were some cases of real estate rage in late September and early October as developers took advantage of holidays, the topping process is still producing rising prices. New home prices rose 1 percent nationally in September. Only three cities saw falling prices: Shanghai, Shenzhen and Jinhua. Shenzhen saw the largest drop of 0.2 percent. On the other side. Xi'an led with a price increase of 6.2 percent.

Existing home prices showed a larger decline with only 59 cities rising and 7 declining. The average increase was 0.9 percent.


Federal Reserve Tiny Balance Sheet Reduction Last Week

The Fed's balance sheet declined $1.4 billion last week, none of it treasuries. The Fed hasn't reduced anything in October yet. It still has $50 billion total and $30 billion in treasuries to go. It's already behind the curve, needing to reduce $39 billion in treasuries to catch-up. It will fall behind again this month because only $23 billion in treasuries mature.

Liu He Wants to Help SMEs Too

Liu He joins Li Keqiang in his support for SMEs.

21st Century: 刘鹤:采取精准有效措施 大力支持中小微企业发展
According to the Chinese government network, the second meeting of the State Council Leading Group for Promoting the Development of Small and Medium Enterprises was held in Beijing on October 17. Liu He, member of the Political Bureau of the CPC Central Committee, Vice Premier of the State Council, and leader of the State Council's Leading Group for Promoting SME Development, presided over the meeting and delivered a speech. Previously, the leadership team made adjustments in June this year and held its first meeting on August 20.

"In less than two months, the leading group held another meeting, which not only has important economic significance, but also has important political and social significance." Liu Junhai, director of the Institute of Commercial Law of Renmin University of China, said.

"On the one hand, the conference promotes the high-quality development of small and medium-sized enterprises' prescriptions; on the other hand, under the turmoil of capital market and the pressure of international trade, the conference released policies to optimize the business environment for SMEs and the private economy. Signal." Liu Junhai told the 21st Century Business Herald reporter.

The meeting stressed that it is necessary to adhere to the basic economic system and give full play to the important role of small, medium and micro enterprises and private economy in China's economic and social development. We must attach great importance to the outstanding difficulties faced by small and medium-sized enterprises, and adopt precise and effective measures to support the development of small and medium-sized enterprises.
Social security and financing costs are top of the list.
"At present, the more pressing and prominent problem is how to deal with the unified collection of social security fees. The State Council executive meeting stressed that before the reform of social security collection agencies is in place, all localities must maintain the existing collection policy unchanged, which requires a study on the appropriate reduction of social security rates. To ensure that the overall burden is not increased," Wen Bin, chief researcher of China Minsheng Bank, told the 21st Century Business Herald.

“At the meeting, entrepreneurs’ representatives reported some common problems in the development of SMEs. I personally think that it is more difficult to raise financing difficulties.” Yang Lin said.

The meeting stressed that it is necessary to further deepen the research and study of policies and measures to support the development of small and medium-sized enterprises in reducing the burden of taxes and fees, solving financing problems, improving environmental protection, improving scientific and technological innovation capabilities, and strengthening international cooperation, and promoting the high-quality development of small and medium-sized enterprises.
Zhang Wenhong introduced that at the end of September 2018, the balance of small-scale micro-loans (including small and micro-enterprise loans and individual industrial and commercial households and small and micro-enterprise main operating loans) with a single-person credit of less than 5 million yuan was 7.73 trillion yuan, and the balance increased year-on-year. 18.1%, the growth rate is 8.3 percentage points higher than the end of the previous year. In September 2018, the average loan interest rate of newly issued small and micro enterprises was less than 6.25%, which was 0.17 percentage points lower than the first half.
Maybe one day there will be a policy to help SMEs. Maybe.


September Investment Data on Cruise Control

A-Shares Bear Casualty: First Delisting for Trading Below 1 Yuan Imminent

If a stock trades below par value for 20 consecutive days, it will be delisted from the Shenzhen Stock Exchange. Zhonghong (000979) has traded below 1 yuan for 19 days cannot climb back above 1 yuan per share because of the daily limit of 10 percent.
21st Century: A股首例:中弘股份“脱仙”无望退市几成定局
If there is no accident, Zhonghong shares (000979.SZ) will be a big probability in the near future to become the first A-share listed company that has been delisted because its share price continues to be lower than 1 yuan/share (ie “penny stock”). the company.

On October 17th, Zhonghong shares, which was once hoped to be "protected by the shell", were suddenly seen to collapse at the end of the day and closed at 0.82 yuan per share. According to statistics, this is the 19th consecutive trading day of Zhonghong’s share price lasting below 1 yuan/share.

At the same time, this also means that even if on October 18, Zhonghong shares closed limit up, its stock price would still be only 0.9 yuan/share, which is still a “penny stock”. According to the relevant regulations of the Shenzhen Stock Exchange, Zhonghong shares may be terminated.

...According to the relevant regulations of the Shenzhen Stock Exchange, the closing price of the listed company's stock for 20 consecutive trading days (excluding the trading day in which the company's stock is suspended throughout the day) is lower than the stock's face value, and the Shenzhen Stock Exchange terminates the company's stock listing and trading. In August and September, Zhonghong’s share price also lasted below the face value of 1 yuan, but the closing price of the 16th trading day briefly rebounded to 1 yuan/share, thus temporarily defusing the risk of delisting.


China TSF Adjustment: Local Govt Debt Added

In the prior post on the latest credit and money supply data, I noted there was a big jump in total outstanding TSF, one likely accounted for by adjustments.

The PBoC added local government debt into the figures. The revision comes a month after a similarly large revision.

ZeroHedge: China Changes Definition Of Aggregate Financing To Disguise Sharp Credit Slowdown
However, this being China, there was as usual a big footnote with this latest credit data: starting this month, the PBoC further adjusted its definition of aggregate financing by including net financing through local government special bond issuance - just two months after it added asset-backed securities (ABS) and non-performing loan write-offs into this measure - and the same LGFV source of debt which yesterday S&P said could contain as much as $5.8 trillion in off balance sheet debt.
I haven't seen revised numbers yet, so here's the chart with only the September number revised to show the magnitude of the change.

M2 Growth Faster Than Expected in Sept

Reuters: China Sept new loans rise to 1.38 trln yuan, above forecasts
Chinese banks extended 1.38 trillion yuan ($199.25 billion) in net new yuan loans in September, more than analysts had expected and up from the previous month.

Analysts polled by Reuters had predicted new yuan loans of 1.35 trillion yuan, up from 1.28 trillion yuan in August.

Broad M2 money supply grew 8.3 percent in September from a year earlier, central bank data showed on Wednesday. Analysts had expected M2 to rise 8.3 percent, compared with 8.2 percent for August.
CNBC: China total social financing rises to 2.21 trln yuan in September
China's total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 2.21 trillion yuan ($319.08 billion) in September from 1.52 trillion yuan in August, data from the central bank showed on Wednesday.
Looks like another statistical adjustment was made since the PBoC claims TSF stock rose 106 percent yoy, but the reported figure of 197.3 trillion is more than 13 percent higher than year-ago figures.


Chinese Debt Risk Rising

China has 179 trillion in M2 money supply ($26 trillion). There are $3 trillion in currency reserves, about 11.5 percent of M2.

M2 is a conservative measure of money supply because it doesn't include off-balance sheet items that might eventually end up in money supply should the central bank monetize it.

Bloomberg: China May Have $5.8 Trillion in Hidden Debt With ‘Titanic’ Risks
“The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves.

...Even with the central government’s shift toward stimulus, however, S&P sees Beijing determined to “bring discipline to the financing practices of local governments and their LGFVs.” That ultimately may mean local authorities aren’t fully able to keep LGFVs afloat, however, and the bottom line is “the default risk of LGFVs is increasing.”
There's no evidence of fiscal discipline yet. All previous attempts failed. China works hard to avoid private bond defaults. Authorities might make an example of someone, but it will not allow widespread defaults. The debt will be rolled over, eventually monetized (directly or indirectly) by a bailout.

Currency Devaluation Fears Come to China: USDCNY 19.77 Goes Viral

Most fake news stories online represent either a real, factually-based counter-narrative (i.e. something truthful) or it is purely a counter-narrative. I occasionally do posts on suspected rumors out of China because, despite the likelihood they're false, the very fact that they went viral is a sign of something underneath, a fear or belief that causes a "Fake news" story to be readily accepted.

Chinese authorities are now dealing with a viral story whipping through Chinese social media: CNY should devalue 65 percent, to USDCNY to 19.77. The forecast isn't solid, but the fear of Chinese citizens is now exposed to the world and explains why draconion capital controls are in place.

SCMP: US$1 for 19.77 yuan? How a bogus social media rumour reveals fear that China is printing money
The theory surfaced in a number of social media accounts as long ago as June, but has been spreading rapidly since September after appearing on Zhihu, a Quora-style question-and-answer website, and Tianya.cn, an online bulletin board.

According to the theory, the fair exchange rate between the yuan and the dollar can be calculated solely using the respective GDP and total money supply of China and the United States.

The US had a GDP of US$19.36 trillion in 2017 and money supply, or M2, of US$13.92 trillion, resulting in a M2/GDP ratio of 0.719. Applying the same ratio, China’s US$12.24 trillion economy should have had US$8.8 trillion of money supply at the end of 2017. Instead, China’s actual money supply was 174 trillion yuan (about US$26 trillion at the current exchange rate), meaning – going by the M2/GDP formula – the actual value of a US dollar should be 19.77 yuan.
Here's one site posting this theory back in June: 1美元等于19.77元人民币?! It compares the money supply (red) sand GDP (green) of the US and China, along with the UK, EU and Japan.
This story is going viral and a former official from SAFE stepped in to refute it:
While this argument has fundamental flaws – such as assuming the US and China should have the same M2/GDP ratio – its simplicity has helped it to gain popularity on Chinese social media platforms including WeChat and Weibo, and stirred debates involving reputable economists.

Guan Tao, who works for a think tank and is a former senior official with China’s State Administration of Foreign Exchange, which is in charge of China’s foreign exchange policies, wrote an opinion piece in the Securities Times newspaper last week to dismiss the theory as sensationalist and without academic or empirical foundation.

“This theory is just another form of the argument that China has printed money excessively and the yuan is set to devalue,” Guan wrote.
The officials doth protest too much. A very easy way to bury a story is to ignore it. That's how governments and established powers keep a topic off the table. Now that there's an "official" response to this viral story, there's an opening for more plausible currency valuation theories. Instead of putting the issue to bed, authorities have opened themselves up to a game of whack-a-mole. And if they decide to censor new currency depreciation theories, that will tell the public the government believes it.
However, Zhao admitted the fear about excessive money printing in China was real.

“It shows that people are worried the central bank has pumped too much money into the economy … and shows panic and fear about the yuan’s exchange rate,” he said.

Professional foreign exchange traders are expecting modest yuan depreciation but few are forecasting it to tumble like Argentina’s peso or the Turkish lira.
Price controls are also coming back to bite Beijing:
At the same time, Zhao said Beijing’s rigid control over the exchange rate had instilled mistrust in the official prices, enabling outlandish theories and wild guesses to flourish.

“One of China’s problems is that the yuan was not allowed to float freely,” he said.
It's why CNH is the real exchange rate and why China is open to speculative attack on the yuan. China must prevent CNH from falling, and from CNY diverging from CNH, because CNH is the real price. See: The Informational Power of the Offshore Yuan Exchange Rate
When the market is operating under normal conditions, everything seems to indicate yuan strength and China has tight controls on inflows to slow yuan appreciation. But if the market is not normal— if there are no bidders for yuan, but instead a growing demand to hold dollars both onshore and offshore— the offshore yuan is free to tumble. And if CNH tumbles and the financial system sees a dollar shortage, the PBOC has to follow CNH lower to bid the dollars back or it has to spend its dollars (or let them be spent by banks and citizens) to halt the decline in CNH.
Depreciation fears are bottled up by capital controls, but Chinese can sell yuan for other assets. With stocks and real estate looking unattractive here, gold could step into the role of safe haven asset if it can establish a bullish price trend in CNY (or even better, CNH).

Here's Guan Tao's article: “1美元=19.77元”?这个判断不靠谱
His defense of the yuan doesn't exactly inspire confidence:
Third, although China's M2/GDP is much higher than the US, it does not mean that the RMB exchange rate against the US dollar is necessarily overestimated. Because, first of all, the difference between China and the United States is not much different, both around 2%. There is no high inflation in China that seriously erodes the purchasing power of the renminbi. Secondly, after years of loose monetary environment, both China and the United States have different levels of asset bubbles. China's housing market, the US stock market, and Japan's bond market are also called the world's three hardest bubbles. Again, the US and China's non-financial sector leverage is not low, only China's non-financial companies add leverage, while the US is The government department has added leverage, and the family has a difficult experience. Although the US government's tax reform measures centered on tax cuts have boosted US economic growth in the short term, the sustainability of medium- and long-term US government debt is even more worrying.
What happens to the yuan, dollar and yen if all three of these bubbles implode? Collapse, soar, collapse.

His final paragraph also raises questions about the yuan's exchange value:
Fifth, foreign exchange trading is not the main business of most domestic market players. Therefore, it is advisable to grasp the general trend in the trend of RMB exchange rate. The fundamental factors in determining the trend of the medium and long-term exchange rate are: economic stability, stable currency, strong economy and strong currency. The reason why the short-selling and short-selling renminbi in the past two decades has been defeated is that these people have neglected the strong renminbi foundation laid by China’s 9% to 10% annual economic growth, and were short-term impacted by the Asian financial crisis and the global financial tsunami.
Two of the four pillars are gone. China's economy is not as strong as it was and it does not have a strong currency, evidenced by draconian capital controls propping it up. Stability is an illusion created by authoritarian price setting in the market, intervention to prevent visible weakness (such as defaults) or extremely limited access to global forex markets.

The market is aligned for a phase transition. USDCNY 9 is probably as absurd as 20 to many market participants. The Chinese government "won't allow it" is something believed with respect to defaults, recession and currency depreciation. In August 2015, the Chinese government allowed the currency to depreciate by an amount similar to a volatile week for the euro. Global financial markets panicked. While markets have adjusted to slightly more volatility and a yuan that moves inversely to the U.S. dollar, yuan-specific depreciation is an outlier view among China bears. But they now have a powerful group who is receptive to their bearish yuan arguments: the Chinese public.