China Must Choose: Defend Real Estate Prices or Exchange Rate

Discussion of the cost imposed by defending the currency and the housing market (via easy money) simultaneously. The case made here for several years is that existing inflation already calls for a major depreciation in the yuan, but further continuing the policy of easy money while defending the currency eventually leads to distortions which will force the PBoC's hand.

EO: 保房价还是保汇率这是个问题

First, there is a ceiling for home price increases. In the context of labor inflection point, easy money led to a rapid rise in second-tier cities housing prices will not only substantially increase labor costs, but also the houses will lose inhabitants, become an investors' game of bravery, residents in first and second-tier cities are gradually being washed out of the market, a family can not eat or drink for 10 years to buy a house, say there is no bubble is self-deception, but this situation is prevalent in a second-tier cities. After all, housing prices behind rise in proportion to the lack of income support. In future if the bubble continues to increase, the impact of which will rupture increases from the historical point of view the global economy, no country prices will only rise forever;

Second, with the steady implementation of SDR, RMB added along the way and policies, by expanding the overseas market is an inevitable trend of internationalization of the RMB is not reversible, the future gradual liberalization of cross-border capital flows are also the inevitable trend. Recent central bank vice governor Yi Gang, says that China decided to grant the United States 250 billion yuan RMB qualified foreign institutional investors (RQFII) amount. Recently, the central bank held a meeting to study the issue of commercial banks ordered to participate in the offshore foreign exchange market;

Third, the domestic and international markets artificially firewall isolation will continue to stimulate the property market and the exchange rate bubble. China's M2 growth rate of 13% annually for six years to make the broad money doubled, the currency issued will increase inflation, substantially reduced export competitiveness of enterprises in the RMB exchange rate unchanged. On the other hand, in the RMB exchange rate unchanged, there are a growing number of multinational enterprises funded through substantial acquisitions countries domestic credit assets, according to Dealogic, the first five months of this year, Chinese enterprises overseas mergers and acquisitions reached the scale $ 119 billion. Not only more than 2015 1,068 billion, also higher than the same period in 2014, more than twice. Large-scale overseas mergers and acquisitions will inevitably lead to dissatisfaction with China, the United States recently rejected it for various reasons, a number of Chinese companies to acquire US company merger, for now, the EU also has this tendency.

Since capital controls it is only a temporary measure, so the question is, in the gradual liberalization of cross-border capital flows and continuing internationalization of the RMB, bound to make a decision on monetary policy or exchange rate stability. In other words, pierce the housing bubble or the exchange rate bubble.

The author says there are two choices: the Japan model (defend the currency) or the Russian model (defend asset prices):

If you choose to pierce the housing bubble to ensure exchange rate stability, that is embarked in the late 1980s the Japanese model, the use of domestic monetary policy will be stretched. In order to ensure exchange rate stability and to prevent the outflow of capital, maintaining foreign exchange reserves, the central bank will have to tighten monetary policy, raising interest rates. Japanese experience, tightening monetary policy, the real estate market and the stock market will usher in a crash, real estate "to stock" campaign will also failed, followed by a drastic shrinkage of corporate, government, residents of assets, the bank's bad debt rate soared, the entire financial system is facing a huge impact. Exchange was saved, but the domestic economy to bear the costs too high.

If you choose to pierce the exchange rate bubble guarantee price stability, Russia is walking mode, while you maintain a slow appreciation of the yuan supplemented expectant management is a better strategy. Last year's "811" strategy adopted by the reform is the rapid devaluation of the renminbi in the short term, aimed not so rapid capital outflows, the RMB has depreciated in place, the risk in the short term can be quickly released. However, the implementation effect of view, the results are not ideal, but incurred at home and abroad will continue to depreciate the RMB consensus expectations, resulting in a rapid decline of foreign exchange reserves, stock market crash, the offshore renminbi exchange rate increased rapidly empty one, the central bank ultimately had to change ideas capital controls.

China Money Supply and TSF for May 2014

It is a mixed picture in May. Money supply was up, but Total social financing (TSF) five month cumulative through May 2015 is down 6% from 2013 Jan-May. For May alone, the year-on-year increase was 18.6%.

This increase is clearly seen in this monthly chart. Last year's cash crunch was kicking off in May and TSF for the May-July period was very low, which makes for easy yoy comparisons going forward.

Sub-categories declined nearly across the board; in essence the spike in bank loans rescued TSF from coming close to last May's total. Entrusted loans was the only other increased flow. Bulls can look to May loans as evidence of a pickup; bears can look to everything else and write off a possible blip in loans.

It is hard to see on the chart since bank loans distorts the scale, but foreign currency loans were actually negative ￥16.2 billion. That is the first contraction in this category since July and August 2013, when it fell ￥115.7 billion and ￥3.6 billion, respectively.

Also down were trust loans. They fell to just ￥11.6 billion, that is the lowest since a ￥3.7 billion increase in April 2012. The decline in the sector is clear. Even though bank loans increased in May, they likely didn't flow to the types of high risk borrowers serviced by the trust market.

Money supply growth ticked up as well and back in line with PBOC targets for 13% growth in M2 this year.

Yuan appreciation and crude oil

With Japan's failed efforts to keep the yen from appreciating, the BOJ's interest rate cut to zero having an effect measured in hours and the subsequent effect on the gold price, I thought it be worth it to take a look at the renminbi versus oil.

I have no idea whether this situation it will repeat. I used today's data for the last data point, but monthly data back to 2005. As the chart shows, it took a long time for the effects to kick in, but once the renminbi started appreciating more rapidly, oil also began a steep ascent. Using this recent data gives the appearance of an effect that does not exist, but if the race to devalue is on then it may well be that this is the start of it. Oil prices are likely to rise no matter what if nations devalue their currencies, but if there's a Chinese carry trade in oil or other commodities, there will another bubble. Also pay attention to real estate, stocks and inflation rates in China.

A condensed version is cross posted here: 人民币美元汇率和石油价格.

约翰默登—美联邦存款保险公司的大坑

可恶！——虚假的通货紧缩！

说到通货紧缩，我要说一个很离谱的事情。一般情况下，我实际上会站在那些承担通胀监控任务的官员们一边。通胀监控是一项很艰难的工作，所有人都会去批评你应该这样做，不应该那样做，事后诸葛亮。像享乐测量法、房屋租金等值等方法的原理我都能理解，即使我并不认同。我们总得设置规则，按规则行事吧。但最近这种混乱局面实在是太不光彩了。

好像美国劳工统计局准备在下周的消费物价指数中将800,000购车者按“旧车换现金”计划购车所获得的补贴当作汽车价格下降了4,500美元来计算。真的么？我纳的税怎么就不算？

此措施一石数鸟。它会降低用来调整本季度GDP的通胀率。非世界末日，但很讨厌。不过，真正重要的是消费物价指数是用来计算社保升幅和通货膨胀保值债券（简称TIPS）的利息的。

如果我试图使用这类会计戏法来欺骗某个客户，监管机构定会责令我关闭，将我起诉到法庭的。也应该如此！我们不会为了满足自身利益而刻意去修改规则。但劳工统计局却这么做了。应该马上将这项规则给否决掉。现实世界里的各种通缩力量已经够多了，没有必要再人为去制造。好，牢骚就发到这。现在来谈谈银行体系。

不要把坑越挖越深！

我办公室窗外正上演一幕与当前困扰世界的银行业危机很相似的情景。我在达拉斯一个祥和、安静的地区租了一套相当大的房子，去年将办公室迁了过来，这样办公、起居一起比较方便。除了省下很多（！）钱（省钱总是好事情）之外，上下班时间也全省了，我只需走下大厅，拐到房子后端的办公区就可以了，十秒钟。这样我和提凡尼每年可以节省下一个多月的行车时间。

然后，几周前，我安静的小区变得不再安静。在听完保罗-卡特尼的演唱会后的那个早上，我在酣睡中被吵醒，发现我的床几乎在振动。德克萨斯地震了？非也，好像是我的邻居想要造一间大房子，首先要把旧房给拆掉。后来数日，他们拆除的效率可谓相当之高，相当不安静。我们几乎可以感觉到屋子里的玻璃和其它物品在振动。

在搬掉一棵巨大的美洲山核桃树之后，他们开始在地块上靠近我房屋这端挖26个（！）25英尺深的洞，然后用铁和混凝土灌注支柱。他们计划建造一个面积相当大的地下室，那些经验丰富的建筑师们（都是特别好的人）希望确保地面不移动而给我的屋子造成问题。因此，连续三天，他们就在距离我的窗口差不多10英尺的地方钻洞，吵到不行（有一天，我就在这样的环境下写通讯）。

由于地块的其它边连接的是街道和胡同，不用担心会损害到房屋，他们没有在那些边上安设支柱。我没有想太多，这些人建造过本地区一些最大、最好的房屋，应该很有经验了。因为地下室要造得很大，他们接着开始挖一个很大的坑。坑的面积要大过地下室的实际面积，这样你才有空间放框架来灌注混凝土，等等。然后你还得从一隅开始挖掘。在整个过程结束之时，地块的大部分面积都朝着胡同方向下倾。

然后天空乌云密布，施工人员们意识到要下雨了。（你可以开始作各种猜测！）他们采取了预防措施，在坑的各个边上都铺上一层厚厚的塑料来保持坑缘干燥。接着德州下起雨来。塑料从墙上脱落，洞临街那边的雨水开始流入坑中，一直涌向人行道下沿。可怜的施工人员匆匆赶来，想方设法减轻损害，但损害已经造成，连续三天降雨只令情况更加恶化。雨后的那天早上，我简直成了湖畔住宅的业主。靠近我房屋这边的那些支柱都已经裸露出来。

他们招来人员对大坑的四周进行紧急维修。怎么办呢？好像唯一能做的就是把坑填起来，然后重新来过，只是这次要在房产的四周都安上支柱。他们现在就是这么做的。可是，泥土都运走了，现在只能从房产的其它位置挖土来填坑，填完之后再挖。

在我看来，银行业危机的情况很相似。我们让我们的银行挖了一个大坑，但只在坑的一侧进行规范，靠拼凑一些系统来支撑证券化、信用违约掉期和整个影子银行系统。

然后大雨来袭，整个工程土崩瓦解。我们现在所做的就是填坑，设置规则来保持系统完整，为开始下一个建筑项目做准备。但因为旧土已被运走，（银行必须冲销掉数千亿美元的坏债），我们现在不得不去找新土来填坑。这个过程是很昂贵的。这提醒了我千万不要盖什么房子。

美联邦存款保险公司的大坑

现在，就让我们来看美国联邦存款保险公司正在隐现的一个大坑。机构风险分析（IRA）估计是美国国内最顶级的银行分析服务机构。他们的旗舰服务收取的费用在六位数以上。负责人克里斯-维纶是我的好友，也是缅因钓鱼之旅的同伴。他很大方地给我发来尚未向公众发布的一些新数据。您可以在这里抢先阅读。（www.institutionalriskanalytics.com）

IRA从美联邦存款保险公司那里获取数据，并根据他们自己的风险参数进行处理。美联邦存款保险公司目前列入“观察”名单上的银行刚刚超过400家，但被IRA评为“F”的银行有2,256家。据他们预测，本周期内将有1,000多家银行面临倒闭或被收购。根据美联邦存款保险公司的数据，2009年迄今，全美总共有92家银行破产，2008年是25家。往后还有900家将面临同样的命运。哎唷！

我们现在谈论的是多少钱？评级为F的那些银行的保险资产总额为4.46万亿美元。本周期迄今，已被联邦存款保险公司接管的银行的损失比例已经达到25%！

来看IRA的两段评述：“此分析中的重要一点是，联邦存款保险公司的破产银行决议的损失估计大约是破产银行的资产总额的四分之一左右，比1980年到1995年间平均为11%的破产成本比例高出很多。对于美国银行在本轮信贷周期的损失比例最高可能达到多少，我司一贯认为有可能会达到1990年的两倍，或者，像国际货币基金组织指出的那样，大概是贷款总额的4%左右。截至2009年第二季度，所有受联邦存款保险公司保险的银行所持有的贷款和租赁物业总额有7.7万亿美元，因此，国际货币基金组织的估计暗示累计损失应在3,000亿美元以上。

“如果按照我们公司的内部假设，即大约有一半当前评级为‘F’的银行或大约1,000家银行将会破产或与其它机构合并，联邦存款保险公司的银行保险基金的损失大约会占到总资产的20-25%，那么，在整个信贷低迷时期，这些决议给联邦存款保险公司造成的成本可能会超过4,000-5,000亿美元。请记住，在做此震惊估计之时，我们忽略了评级高于‘F’的银行以及它们当中也有一些会破产的可能。并且，我们对于资产在100亿美元以上的大型美国银行在当前这轮信贷周期中的总的‘最糟估计’或者说‘可能的最大损失’是8,000亿美元。”

去年秋季还有将近600亿美元，联邦存款保险公司的储备今天已经被支取到只剩下大约100亿美元了（除去保留资金之后），16年最低。快速浏览联邦存款保险公司的数据可以看到，那些储备相对他们现在承保的存款数额来说显得很不足。对于其承保的每一美元资产，联邦存款保险公司大概只有一美分的十分之二的资产来支持。看下面这张来自凯西研究机构的图表。

联邦存款保险公司可以借到1,000亿美元的紧急资金，到2010年结束，还能再借到5,000亿美元。但这些钱都是要还回去的。还记得20年前在储贷危机中损失掉的资金么？当时，联邦存款保险公司只需借150亿美元。我们现在仍在偿还那笔30年期的贷款。

联邦存款保险公司有两个选择可以在短期内补充其保险基金：它可以向银行收取更高的费用，或者采取更为激进的办法，向美国财政部借钱。它已经征收了超过50亿美元的“特别费用”。

现在，让我们暂时撇开这个问题，稍后还会再谈到。

经济发展需要信贷市场的发展。信贷萎缩就预示着经济后退了。但如今各家银行都被迫去筹集资金，意味着很多银行不得不削减贷款。首先，让我们来看一张有关过去五年里银行贷款总额的图表。注意，贷款总额在2008年底曾出现过突增，这是因为商业票据变得很难获得，企业都用尽了它们的信用额度。自那以后，银行开始减少贷款。

下一张图还是银行贷款总额，但追溯到了1947年。请注意，贷款的增长一直以来都是相对平稳的，只在衰退期间有一些衡量偏移，从未像去年那样下降得那么严重。而数据显示，银行打算继续减少贷款风险，因为它们需要的是增加资本（至少大量有问题的银行都是这种情况）。

消费信贷下降了。银行削减了企业尚未使用的信用额度。我还可以继续说下去，不过您已经知道大概情况是怎样的了。还记得美联储为让银行能发放贷款而用来购买有毒资产的那笔资金么？它们现在越来越多地使用那笔资金来购买房利美和房地美的贷款，并将利息存起来，以提高它们的利润率。

为什么要筹资？因为它们的贷款损失很高，而且还在不断上升。看下面这张来自北方信托机构（Northern Trust）的图表。该图表显示消费贷款损失正在不断上升，到目前为止还不见有封顶迹象。曲线还在往上升。商业银行的房地产贷款的情况也一样，违约率已经超过9%了。这些乃银行保留在自家账簿上的贷款。

所有人都知道下一个悬念将是商业房地产贷款，坏账冲销规模可能会高达4,000亿美元。这将迫使一些银行破产，其它银行将被迫承受损失。

现在，让我们回到联邦存款保险公司。该机构主管席拉-贝尔（Sheila Bair）已经强调，联邦存款保险公司不会向国会请求注资。这表示，如上文指出的，联邦存款保险公司将不得不使用它们的信用额度，或要求增加“一次性”特别费用。

如果联邦存款保险公司借这笔钱（可能性很高），它们将不得不提高向成员银行收取的政府担保利率。要偿还的3,000-4,000亿美元呢？必须将利率提得相当高，由正在为筹资和利润在苦苦挣扎的银行去承担。

这将长时间给美国银行造成巨大的利润流失，使它们更难增加需要的资本。但这是不可避免的。注定要倒闭的僵尸银行必须淘汰，由更强大的机构进行接管，这样信贷方能恢复增长。但是，这不会在一夜之间实现。需要时间。

我现在谈论的是美国的银行，但这是整个发达世界的共同问题。须要筹资减贷的银行增长不了信贷，从而，拖累增长。信贷萎缩将形成一股强大的通缩力量。而且这还没有考虑到影子银行系统的破灭。

是的，从统计上来讲，经济在本季度、可能还有下个季度都会显现增长。但是失业率仍在上升，收入在下降。我们下周会谈到这个内容。

我们将迎来一次非常疲弱、无就业增长的复苏，而且，经济陷入二次衰退的可能性相当高。股市已经预好GDP和企业利润会迎来一次陡峭的V型复苏了。对此，我完全不确信。

Don't Drink the Water!

Zhou Qiren 周其仁, Beijing University professor, brings us "Money Supply Taste Test: Water or Honey?"

We will call the first theory "currency is like water." The general idea is that currency has no use other than to act as an intermediary in commodity transactions. Therefore, excess currency in the economy and market will not increase the amount of goods in the market, but certainly will increase overall price levels.

Imagine a cash-laden helicopter flying over a small country and dropping enough currency on its citizenry to double everyone's cash stash. What follows? Will everyone in the country be able to afford twice as many goods? Or will prices double? If you choose the second option, congratulations; Milton Friedman, the great master of monetarism, would be proud. But why would a cash drop from a helicopter double everyone's money？ Because money behaves like water: As soon as it enters the real world, it flows evenly into the open, offering equal access to all.

Another theory we will call "money is like honey." This theory holds that new money, after it's put into the economy and markets, sticks like honey. While flowing, it can accumulate in one area before gradually evening out. This means an oversupply of currency “roams” between different types of assets and goods, changing the relative prices of various assets and goods. This was the theory espoused by economist Friedrich August von Hayek, who emphasized that inflation has a "fluid equilibrium" quality.

Changes in relative prices create investment opportunities for some people. However, even if the market experiences "me-too-ism" and fanatical speculation, a single "hot spot" is hard to maintain. This is because honey continues to flow. The bumps eventually become smooth.

Each theory is interesting. What's important, though, is that from these theories we can infer an unambiguous thesis to test, with observable results.

货币似蜜，最后还是水

The professor comes to the conclusion that its honey first, water later, which is what was observed in the 1970s and during every financial bubble financed with money printing. Right now, it appears that oil, commodities and equities are first to absorb the "monetary emissions" or "货币喷射". In the long-run, inflation seems inevitable, but Japan shows the long-run can be a long time. Given that the entire world is printing money, however, the process may commence a bit earlier.