Another BTC Analog: Amazon in 2000

Seen here.

What Tech Decoupling Really Looks Like: Nvidia Ignoring Chinese Veto of Arm Acquisition

Caixin: In Depth: China Plays Kingmaker in Nvidia’s $40 Billion Bid for Arm

Nvidia has said it expects the deal will take around 18 months to complete, with approval required by the U.K., European Union and U.S. in addition to China, the last of which currently accounts for about a quarter of Nvidia’s sales.

Many of the industry sources polled by Caixin said many China-based customers that rely on Arm’s technology are likely to balk at having the company come under control of an American peer. At the heart of their concerns is the different nature of Arm’s current relationship with owner Softbank and a potential future life under Nvidia.

Whereas SoftBank is largely a high-tech investor that lets Arm operate independently, Nvidia is a peer that would treat Arm more as a strategic purchase to complement its own products. Accordingly, most people interviewed by Caixin agreed that Arm would lose some of its autonomy if the deal is approved, becoming more like a traditional subsidiary of a larger company.

Losing 25 percent of sales would hurt Nvidia, but what percentage of its Chinese buyers have acceptable alternatives? I don't know the answer to that question. I do know that real tech decoupling would be evidenced by Nvidia ignoring a Chinese veto of its Arm deal.

Paratek Extends into Breakout

A week ago I posted Partaking of Paratek. As I discussed in the last post, this company makes antibiotics in the USA. This article is from June 2020.

Fierce Pharma: As U.S. calls for stateside manufacturing, antibiotic maker Paratek gambles on 'onshoring' effort

Paratek Pharmaceuticals, maker of antibiotic Nuzyra, is kick-starting a three-year plan to build a government-funded, second supply chain in the U.S. in an effort to flesh out the nation's strategic supply of pandemic response drugs.

Partaking of Paratek

Another chart winner. Back when Kodak (KODK) announced it won a contract to make pharmaceutical precursors, I went searching for pure-play stocks in this space. I didn't find anything attractive on the public markets. I did come across a company making antibiotics in the USA: Paratek (PRTK).

News out yesterday: Billionaire David Shaw Pours Money Into 3 “Strong Buy” Stocks

Shaw is among those cheering the company. Increasing its stake by 82%, D.E. Shaw bought up 457,341 shares in the second quarter. Following the purchase, the fund’s total PRTK position lands at 1,018,465 shares and is worth $4,267,368.

Writing for H.C. Wainwright, 5-star analyst Ed Arce cites NUZYRA’s performance as a key component of his bullish thesis, noting that the company's therapy is “already on track to be one of the most successful antibiotic launches of the last decade.” The asset is a tetracycline-class antibacterial designed as a treatment for community-acquired bacterial pneumonia (CABP) and acute bacterial skin and skin structure infections (ABSSSI).

I bought this one because I like that they manufacture basic drugs in the USA, plus they have a good basing pattern. There's a lot of resistance up to $10 per share, but the base completes around $6. The real upside would be if it can make it past $10 per share. I only have a starter position in this stock.

China Collusion Narrative Has Only Begun

Consider the FBI put Michael Flynn in jail for not committing any crime, for nothing related to Russiagate. It was a manufactured crime.

Consider that U.S. government officials, included elected Senators and House members, corporate CEOs, universities and professors, journalists, medical researchers and more...have extensive ties with China. The FBI could spend years putting people in jail for actual crimes, let alone rack up thousands or tens of thousands of procedural crimes similar to Flynn.

ZH: Rabobank: "How Is This Not Front-Page News?"

the Trump White House is going to “turbocharge” the extraction of supply-chains from China, taking an ‘all of government’ approach; this including financial incentives such as tax cuts or subsidies for those firms; the US is considering higher tariffs and targeted sanctions of Chinese individuals, and even close relations with Taiwan as well; and it wishes to bring other countries with it in a so-called new “Economic Prosperity Network”, which sounds like a combination of the TPP and the Cold War. At any point during the 2018-19 trade war, this would have been front page news. Instead, it got hardly a mention. It did rightly see markets dip somewhat yesterday, but arguably not to the extent the story deserved. It also ignored Peter Navarro following up that “Buy American would soon be the law of the land” for some US government departments.

As I put it before, Russiagate Was Bootloader for China Trade War. Russiagate was one of the worst episodes of jingoism and xenophobia in U.S. history. It also looks like the greatest scandal in American history and the greatest abuse of government power. Watergate is a small thing next to the crimes of Russiagate, which looks like a modern coup attempt. (General Michael Flynn was targeted because he was independent. As NSA advisor, he could dig into who was behind the Russiagate effort.) And since "the Cathedral" doesn't want to have Russiagate blow back on them and turn into something far larger than Watergate, what better way than to redirect all the Russiagate anger into anti-China sentiment? Trump supporters will take their revenge on China colluders, and the unrequited rage of the Russiagaters can also be sated with Chinagate. Trump and the nationalists get their trade war. Globalists get to push back on China as a competitor to U.S. global hegemony. Who's going to stop this train?

China Says Foreign Concern on Slowdown "Baseless"

Don't make too much of this, but the top headline in the finance section today is the CCP rebutting pandas.

iFeng: 外媒称中国经济“严重放缓” 发改委：无任何依据

On October 21st, Chinanews.com responded to China’s economic data by individual foreign media and believed that China’s economy was “seriously slowing down”. Yuan Da, director of the Policy Research Office of the National Development and Reform Commission, spoke on the 21st, saying, “This is no Any factual basis, untenable."

Xinhua: Skepticism about China's economic growth "groundless": spokesperson

"There is no basis for such skepticism," the spokesperson Yuan Da told a press conference, citing a series of robust economic indicators.

Over 500 million people hit the road during the seven-day National Day holiday. China's power use rose 4.4 percent in the first nine months, while cargo volumes increased 5.9 percent during the period.

"The indicators were the most direct reflections of economic growth, which prove that the national economy maintained overall stability," Yuan said.

If China's economy were growing fast enough, they would have already agreed to a small trade deal. They could afford to give Trump a face-saving short-term win that left them on a strong long-term footing. The trade conflict is a big deal for China because they can't handle a deterioration in trade at this moment.

Reuters: China more than doubles Sept approval for fixed-asset investment projects

China’s state planner in September more than doubled its approval for fixed-asset investment projects, as Beijing looks to step up support for an economy expanding at the slowest pace in nearly three decades.

...The National Development and Reform Commission approved 177.8 billion yuan ($25.15 billion) of investment in 14 fixed-asset projects in September, a commission spokesman Yuan Da told reporters in a briefing on Monday, adding that the investments were mainly in the transportation sector.

That compared with its August approval for 68.9 billion yuan worth of projects.

On Friday, China reported third quarter gross domestic product growth of 6.0%, marking a further loss of momentum for the economy from the second quarter and hitting the lower end of the government target of between 6.0% to 6.5% for the full year.

The September value was also the highest since at least April, official data showed.

Finally:

“As China’s economy shifts from a high-speed growth stage to a high-quality stage, as long as the employment expands, income increases and environment quality improves and economic efficiency increases, it is acceptable for the economic growth to be a tad lower or higher,” Yuan said.

This is on par with the Federal Reserve (or any central bank) claiming it knows the proper level of interest rates. Moreover, like the Fed's intervention plainly rebutting it's own rhetoric, the increase in fixed-asset investment that will be backed by more debt is exactly the type of low-quality "growth" that is causing China's economic slowdown.

Trade War Still a Sideshow,China Still Slowing

The message of this blog for years, and multiple times since January of this year, is that the country relies on credit-driven property and infrastructure development. Everyone looking for stimulus for China needs to account for policy that is delivering the exact opposite. And as has happened every single time before, when the rubber meets the road and the government faces the reality of its development model, it opens the credit gushers.

Caixin: Opinion: China Could Have Difficulty Holding Its Tough Line on Real Estate

Is it possible to stabilize economic growth without support from the property sector? And will property regulations be further tightened? These questions are crucial to judging the direction of China’s economy.

...From a historical perspective, an economic recovery at times when there was a drop in external demand usually relied on the “dual engines” of infrastructure investment and real estate.

...Admittedly, policymakers have not used real estate as a tool to boost the economy in the latest round of economic stimulus, but that doesn’t mean they will allow it to depress economic growth.

There's nothing wrong with this opinion piece. I'm using it to highlight the fact I've been saying this all along. However, it does signal that perhaps the government is running out of patience.

As for infrastructure spending, China has reached some limits.

SCMP: China’s railway spending plummets as Beijing struggles to sustain momentum

China’s spending on railways, a key driver for growth in the last decade, tumbled in August – in part because all major towns are now covered by the country’s extensive railway network.

China’s economic planning agency said on Wednesday that railway fixed-asset investment was 449.6 billion yuan (US$63 billion) in the first eight months of this year, which marked a modest 2.5 per cent fall from the same period last year.

However, August alone marked a steep fall of 27.1 per cent compared to the same month in 2018, according to calculations by the South China Morning Post, based on the official data.

Three takeaways. One, infrastructure spending is hitting its natural limit. Two, real estate development often accompanies (before or after) infrastructure development. When the government announces a high-speed rail stop in a town, the real estate around the station booms. A lack of spending has knock-on effects. Additionally, even if they keep spending on rail, they will build stations in out-of-the-way rural areas unlikely to attract developers. Three, credit-fueled economic growth requires a rising rate of borrowing because as credit becomes multiples of GDP, even a small decrease can have a huge impact on total nominal demand. Thus it is not surprising to see that as railroad spending slows, it tips into collapse.

Real estate remains in a slowdown, yet is also still very close to an explosive bull market if the government lets the credit genie out of the bottle.

Reuters: China's home price growth at weakest in nearly a year, developers seen cutting prices

Average new home prices in China’s 70 major cities rose 8.8% in August from a year earlier, compared with a 9.7% gain in July and the weakest pace since October 2018, Reuters calculated from official National Bureau of Statistics (NBS) data on Tuesday.

On a monthly basis, average new home prices rose 0.5% in August, less than July’s growth of 0.6% and the smallest increase since February. However, it still marked the 52nd straight month of gains.

Most of the 70 cities surveyed by the NBS still reported monthly price increases for new homes, though the number was down to 55 from 60 in July.

Investment could slow substantially in the fourth quarter though.

China’s property investment grew at its fastest pace in four months in August, data showed on Monday, in contrast to a protracted slowdown in industrial output and investment.

But some analysts said the rebound in investment was likely due to developers rushing to meet government requirements before they can start sales on growing financing pressure and worries about the market’s prospects as regulators have made clear that supervision is only set to tighten.

Turning to the global economy, Andy Xie in SCMP reminds us that a trade war deal is unlikely. US-China trade war: both sides have reason to compromise, but their differences remain intractable

China and the United States are taking steps to de-escalate the trade war. It has raised hopes for a breakthrough at the scheduled talks next month. While there could be an agreement to ease some of the tit-for-tat punitive measures, a complete solution is unlikely.

Indeed, the trade war is likely to continue for many years. The auxiliary tech war will only escalate. Full-scale military competition may not be far off.

US President Donald Trump is backing off to a degree because the stock market cannot absorb further blows. Americans depend on the stock market for their retirement. If it crashes, it is adios Trump. Right after the market crash in response to his announcement of a 5 percentage point increase on tariffs, he admitted to having second thoughts.

The market took that as a sign that no more was coming. He has taken more conciliatory steps since, such as postponing some of the tariffs to December from September.

China’s incentives for reconciliation are multifaceted. The top concern is to have a smooth national day celebration on October 1. Events and dates drive Chinese politics. This is a matter of face. Second, inflation is rising in political importance.

Not unrelated to the various articles above, comes an economist saying the government can keep unemployment low even with 4 percent GDP growth.

SCMP: China can handle much slower GDP growth rate and still create enough jobs, government economists say

China should not be alarmed by a much slower economic growth rate in the coming years, perhaps as low as 5 or even 4 per cent, with the economy now large enough to still create sufficient jobs at these growth rates, according to three prominent Chinese economists who advise the government.

The headline gross domestic product (GDP) growth rate slowed to 6.2 per cent in the second quarter this year, the lowest figure since quarterly records began in March 1992, due to the headwinds created by the slowing economy and the trade war with the United States. The risks are also growing that it could slip below 6.0 per cent next year which would fall outside of the government’s target range of between 6 and 6.5 per cent for 2019.

“China had to put growth as a top priority because China had to create enough jobs, and when China’s economic size was small, China had to achieve a high growth rate to ensure [sufficient] employment,” said Zhang Yuxian, the head of the economic forecasting division at the State Information Centre, a think tank under the Chinese government’s economic planning agency.

“But for now, a 6 per cent growth rate means 5.4 trillion yuan (US$761 billion) worth of additional GDP and China’s labour force supply has stopped growing. In other words, a 6 per cent growth rate is enough to absorb the new labour supply. When China’s economic size grows to 100 trillion yuan (US$14 trillion) or 110 trillion yuan, a growth rate of 5 or 4 per cent will be enough, so what’s the point of aiming for an overly high growth rate?”

The commodity sectors may not be an sanguine...

Moreover, while some blame the slowdown on trade, it isn't the key factor. It's better understood as a coincident event.

SCMP: Trade war alone did not cause the slump in Asia’s export hubs, but Donald Trump ‘blocking’ recovery

Outside Hong Kong, large semiconductor-producing economies including Singapore, South Korea and Taiwan have also started feeling the pinch.

All three, which count China as a major trading partner, have seen sharp drops in growth this year, showing the twin perils of being overexposed to the electronics sector and the world’s second largest economy.

On Tuesday, Singapore announced its non-oil exports fell 8.9 per cent in August, led by a 25.9 per cent decline in electronics, the largest exports after machinery and equipment. Electronic exports, of which semiconductors form a big chunk, have now fallen every month this year. In all but one of those months, the slump has been double-digit.

In South Korea last year “semiconductor sales accounted for a staggering 92 per cent of Korean export growth, a single product dependence more akin to an oil nation”, said Rory Green, China and North Asia economist at TS Lombard.

This is very evident for the U.S. As the import numbers indicate, the U.S. trade deficit isn't shrinking. Importers moved away from China.

Notice how the two numbers almost perfectly offset. There costs to the trade war. They need to be recognized. Attributing the Dolphins 0-2 start to the trade war does not make your case https://t.co/RBbDpOSWzt

— Carrie Lam Hairdresser Balding (@BaldingsWorld) September 19, 2019

There has been no meaningful uptick in M2 or TSF growth.

Finally, there's no sign of a major stimulus in China even in the wake of the Federal Reserve's rate cut and hinting at perma-QE.

iFeng: 美联储二度降息后 中国货币政策走势如何？

Wang Qing said that the future structural monetary policy tools will continue to exert efforts to provide "directed drip irrigation" for private enterprises and small and micro enterprises.

Terms like "fine-tuning" and "drip irrigation" do not indicate the market anticipates the opening of the credit gushers.

If China's non-real estate related domestic economy does not greatly increase its borrowing and its contribution to GDP, the economy is going to experience another step-down in growth. If the government waits another quarter or more before throwing in the towel, the global economy may experience China-related pain into early 2020. And if the economy slows and they don't act, if they've reached the natural limits of their powers, or if the global financial system delivers enough pressure through the rising dollar, then say 你好 to Chinese GDP contraction.

China Will Lose the Trade War, Only a Matter of American Will and Time

One of the falsehoods peddled by China bulls /American bears is that one day China will stop selling junk to the American consumer. The Chinese will consume their own output and the American standard of living will collapse. There is more than a grain of truth in that story, but it ignores a crucial point I've made more than once: Chinese have not built factories for domestic consumption. Chinese output is aimed at foreign markets. The closure of America's market is a loss for companies that focus almost entirely on the U.S. market. To exaggerate, much of China's economy is an American colony, it exists to serve U.S. consumers. If they lose access to those consumers, they are not prepared to sell into other markets, let alone China.

Moreover, the Chinese economy is not as efficient as it seems. It grew into a global power because it leveraged its access to the capitalist, free market industrialized world. Unlike Japan, South Korea and Taiwan, China has not reformed its economy away from reliance on foreign export markets because that requires loosening domestic political control. Instead of reform, it piled on ever increasing amounts of leverage to keep the old economic model running. There would always come a day when the U.S. would reach its limit for running trade deficits, either a political limit or a natural economic limit that would result in currency collapse. There would always be a limit to how much debt China could force into its economy, and how much steel, autos and ghost cities it could build to pump up GDP. And now all of these limits are being reached simultaneously.

NYTimes: China Needs New Places to Sell Its Mountain of Stuff

Faced with severe factory overcapacity at home and tariffs on exports to the U.S., Beijing wants to finish a much-delayed Asian free-trade pact.

No country can absorb the sheer volume of what China sells to American customers. China’s regional neighbors compete against it in a number of industries. And China continues to maintain high tariffs and other barriers to protect its own industries — barriers that would have to drop if other countries were to sign on.

The economic clash between the United States and China has thrown the world trade system out of balance. China runs an annual surplus in manufactured goods trade of almost $1 trillion, meaning that is how much more it sells to the world than it buys each year. Nearly half of that surplus comes from trade with the United States.

Already, the country is plagued with excess capacity for making cars, steel and other staples of global trade. More factory slowdowns and shutdown could lead to job losses and further drag down economic growth.

It's the NYTimes, hence there won't be any sentence about "President Trump was 100 percent correct in saying the U.S. already lost the trade war and that China has more to lose." Yet that is the reality on the ground. Their economy as currently structured cannot win the trade war. It was true in 2008 and it is more true today: China is more similar to the United States in 1929 that anyone wants to believe. The events of the 1930s were not caused by tariffs and other nonsense peddled by globalists seeking to subvert sovereignty of individual nations, but by a massive credit bubble enabled by poorly structured global finances. The British overvalued the pound, this led to incredible amounts of capital flowing into the United States, who in turn financed much of global trade while blowing twin real estate and stock market bubbles. In the 2000s and 2010s, China undervalued the yuan, blew a massive real estate bubble three times over, plus two stock market bubbles, ran up credit faster than any nation in history, and is far less efficient that the capitalist America of the 1920s.

Carl Walter with Jim Grant

Sounding Line: Carl Walter: China Will Never Open Its Capital Markets

“(Baoshang) is scaring everybody because they’re not the only one. They’re the one that couldn’t hold it together in the end, but… I’ve been trying… to figure out how many banks there are in China and supposedly there are 134 of these city commercial banks. 134 of which (Baoshang) is one, and all of these guys use wealth management products or borrowed in the inter-bank market to fund local things. Or, they borrowed in the inter-bank market or borrowed in wealth management products to support local asset management companies to hide other banks’ bad loans. I don’t think (Baoshang) is unique and I think the reason the markets are scared is because everybody knows that the emperor has no clothes. There is a lot more than just the one.”

“…The main point is that the People’s Bank had gotten their way and opened on all these things. They liberalized the interest rates, so you got wealth management products… You saw what happened when the capital account opened up and they closed it again. There is no way in the world things like that are going to happen (again) in China in your lifetime, my lifetime, or anybody’s lifetime as long as the Party’s in control. No way…”

Will the U.S. Allow China To Cut Its Losses

SCMP: China should cut its losses in the trade war by conceding defeat to Donald Trump

This setback has caused heated discussions domestically. People in academia, think tanks and the finance industry are concerned about China’s policy directions, not only in its recent dealings with the US about trade but also the overall trend over the past few years. There are increasing voices that China’s gain from the reform and opening-up policies of the past 40 years were because China has become integrated into a global economic system run by the US and its allies.

It is inappropriate, or at least premature, to send signals, intentionally or not, that China is about to build a new system to replace the existing one. China is still far from prepared for an economic confrontation with the US because China is much more dependent on US demand than the other way round, and it would only hurt itself if it were to take a hardline stance. Instead, China should be more focused on its own development and reforming the domestic economy.

It is possible that there were miscalculations several months ago when Beijing came up with the strategy of tit-for-tat retaliation, either because it underestimated Trump’s determination on trade policies, or because it underestimated the Washington establishment’s rising anti-China sentiments. By now, everybody in Beijing should have figured out how tough the situation is. Thus, Beijing has started to change its strategy.

The first mistake China made was not reforming its economy. It delayed opening up for 10 to 20 years depending on how you date it (whether you think Zhu Rongji was ahead of his time or not). China played a double game of accepting access to foreign markets through the WTO, but did not fully reciprocate.

China failed to reform the domestic economy. After the stimulus effects ran out in 2011, China realized endless real estate and infrastructure investment funded by rampant credit growth was a model it needed to break away from, yet nothing was done. It is 2018 and the government is still struggling with this issue.

China should have allowed the renminbi to weaken in 2008. Perhaps it was noble to coordinate with other nations to avert a deeper recession/depression, but taking the lumps in 2008 would have cleared the deck for growth. The renminbi weakened again in 2011/2 and 2015/6, and each time China intervened. Capital controls keep tightening because China's currency is becoming weaker.

Finally, China failed to understand the U.S. political system and cultural dynamism. Granted, even many "experts" in the U.S. missed rising populism right into the evening of the Brexit vote and the U.S. presidential election, but there should have been a sense that the good times wouldn't last. Americans wouldn't allow the "looting" of their country forever. In some sense the U.S. is also to blame for China's mess because it allowed it go on for so long. Had the U.S. confronted China earlier, perhaps this all would have been averted.

Today, China is in a weak position. Its currency is stable because of strict capital controls, but it also hasn't been tested by fire yet. If the U.S. Dollar Index is heading through 100 and on to 120 or higher over the next 12 to 18 months, the renminbi could weaken to USDCNY 8 before considering any outflow pressure. The country says it will embark on an inflationary stimulus, but we don't know if capital will pour into infrastructure and real estate again.

On the other side, if the U.S. dollar cycles keep going, a U.S. dollar peak in the next 12 to 18 months won't be challenged until sometime in the late 2030s. By then its likely the global monetary system will have reformed or collapsed. We may never see a stronger U.S. dollar in the future.

Once the U.S. dollar peaks and starts moving lower, the global economy will enter a new expansion phase. If China can make it through the next couple of years, financial pressure will alleviate. If the U.S wants substantial reform and opening in China, now is the time to press for it.

Everyone who wants a confrontation with China, be it Trump supporters, economists, defense officials or international trade experts, worries that Trump will fold early in pursuit of an expedient, short-term political victory. His behavior until now, plus recent comments by Steve Bannon, point to a larger goal. If Trump accepts a Chinese-favorable deal in September or October with an eye on the midterm elections, China can cut its losses and breathe a sigh of relief.

Assuming Trump extracts some major concessions as part of a quick deal, a victory for China would be a politically managed reduction in the trade deficit. China will make political import decisions. The trade deficit won't be allowed to exceed some figure such as $150 billion and China will target American markets, as it has done with soybean farmers, such that a future president won't even dare to risk a trade war. It might make concessions on IP that involve sending billions to the U.S. (which would offset the trade deficit), but it might also continue violating IP rights. The current trade relationship will largely be intact, but China won't profit as much. It will gain 10 to 20 years of breathing room.

If instead Trump wants a significant change in the relationship between China and the United States, one where China either opens up or the Logic of Strategy becomes U.S. policy, then China will suffer much greater "losses" before this trade spat ends.

Did Everyone Forget the J-Curve

Not only has the trade war not kicked off in earnest, but it seems nobody has ever heard of the J-curve as it relates to growth and exchange rates. Nations don't change their economic structures overnight and orders are placed months in advance. Increased growth in the United States increases the trade deficit, it boosts imports from China. Additionally, the trade war has its own J-curve effect as importers and exporters rush orders ahead of potential tariffs.

Bloomberg: China Imports Jump, Exports Robust as Trade War Yet to Take Toll

Exports rose 12.2 percent in July in dollar terms from a year earlier, the customs administration said Wednesday, faster than the forecast 10 percent. Imports climbed 27.3 percent, leaving a trade surplus of $28 billion.

Disharmony in China: Stimulus Is A Failed Strategy

The article below was at the top of the finance section today, a special section on the government's new stimulus effort and the recent Politburo meeting. It starts by examining the most logical outcome of increased liquidity: rising home prices. As discussed in Speculators Take Over Chinese Housing Market, the government has thus far failed to control prices and market distortions are multiplying as more heavy handed policies are introduced. Even if the government has finally strangled the market and prices are set to fall, it must prevent credit from flowing into real estate, otherwise it will reignite the market.

The article goes on to ask what else could absorb new credit? The next likely destination is A-shares. With Chinext at a new 3-year low, this seems unlikely for now. The author goes on to say he hopes for commodity inflation, since rising prices would at least help manufacturing. As for consumers, they'll be left in a similar position. Instead of being crushed by housing payments, they'll be crushed by consumer price inflation.

The track record with stimulus isn't encouraging. Prior rounds went into real estate and fixed asset investment. Ordinary Chinese were left worse off with more expensive housing. The economy also did not fully recover. Each stimulus round, in 2008, 2011 and 2014, was weaker than the last. This round may be even weaker then the trend would argue for because the United States has changed its trade policies.

Finally, the piece discusses how reform always leaves the government better off and the people worse off, and calls for real reform that redistributes resources and rights.

My comment: This article is a sign of negative social mood. It shows the latest stimulus effort hasn't boosted confidence. The slide in the A-share market reflects this fundamental reality. In addition to the main content, one surprising word in this article is hyperinflation. It is used as an aside, but it is notable that it appears at all. There is real concern about currency depreciation beneath the surface.

iFeng: 放水不能解决的问题：既然房价不能涨，那谁会涨？

"Resolutely curb housing prices."

But while giving you hope, while letting you doubt life - this meeting will give a "loose" tone, and in the second half of the year to ensure a reasonable liquidity, the market does not have to cry every day.

Although we have never fear that Chinese economics can contend with Western economics, we still can't help but feel lost about the country's direction and personal wealth:

It is necessary to release water and the house price does not soar. How do you play such a difficult action?

If water does not flow to the property market, where can it go, is it the big A-shares?

There is no price increase in the room. Is there always something in our daily life that will be pulled out to absorb this super currency emission?

With the fate of the nation at hand, are you ready?

A-shares is the most logical destination. Shares are down, the market is a confidence indicator for the economy and the government has engineered a market rise before (back in 2014/5).

Yesterday, the meeting was not over yet. Shenzhen upgraded the property market regulation for the first time, and bought a house for the company to press the timeout button. The house was sold for 3 years, and the divorce was strictly controlled to buy a house. In a word, the speculative seedlings are tightly held.

As the city's regulation of the wind direction, Beijing has clearly stated that it wants to control the land heat. In the next five years, the residential land supply structure will maintain the common commercial housing, shared property housing, resettlement housing, and rental housing 4:2:2:2 structure.

At present, the way of regulation is to artificially lengthen the trading cycle, making it difficult for you to enter and difficult, so that speculators can not benefit.

This time, directly speaking, the suppression of the rise is a fundamental shift in decision-making thinking. House prices can only be stabilized in the future, at least in the official statistics, and the front line of the population size may even fall.

Since the house price can't rise, who will rise? To be honest, we are more eager to see commodity price increases than house prices.

Rising commodity prices would be positive for China because it would ignite the emerging market growth cycle. But if the U.S. dollar is rising, how does China achieve rising commodity prices? With a lot of yuan and rising USDCNY.

The price has risen and the house price has not risen. At least it proves that money is not idling in the virtual economy, creating bubbles, and squeezing the living space of the entity. Instead, some water actually reaches the real economy, and the industry expands its scale, which in turn is transmitted to the rent, interest and people. On the payroll.

As long as there is no hyperinflation, the price increase is a blunt knife to cut the meat and warm water to cook the frog. The numb person will not feel pain. If you can't afford the house, then the wallet will be slowly smashed to the consumer goods. There is also an input inflation caused by oil prices. Oil prices are currently on the rise, and the cost of many industrial products is also rising. The price has risen a bit and the domestic demand has been expanded.

The above is purely an earnest hope.

Judging from historical experience, the two words "release water" is really a lingering worry, and it is the direct driving force for housing prices in the past decade.

During the end of 2008 and during the 12 years of flooding, the prices of first-tier cities have doubled. The 15-year policy shift has made the nation’s property market experience the feeling of panic and carnival. Divorce, lottery, and house-shaking are amazing. The housing dream finally fell heavy on the shoulders of every ordinary person, and even the third or fourth-tier cities you could not load on your body.

Three rounds of water release in history have directly stimulated soaring housing prices.

The logic of a surge in water prices is not difficult to understand, because for so many years, China has only dug up a real estate such a reservoir.

So far, no asset has a yield that can outperform real estate. Beijing has seen house prices rise at least 435% in the past decade, and Shanghai has at least 224%. Money is smart money, hot money with temperature, and of course know where to run. Everyone is turning afloat in financial real estate. Only when I go against the current, I am not cute.

Today, the total market value of Chinese real estate exceeds 400 trillion, while the total market value of the stock market is less than 60 trillion. After being cut one after another in the capital market, the people are even more convinced that the house that can be seen is true love. A toxic stock market can't be a water-absorbing sponge, and it's hard for entities to benefit from water.

Yesterday, Zhigu Trend was in the "Reading the Politburo meeting today: the most important one is landing, the policy shift is confirmed" article, "The problem that money can solve is not a problem", some readers are confused.

Quite simply, if printing money can save manufacturing, China's real economy will not be as it is today.

Even if the central bank has the heart to unblock the money transmission mechanism, it is difficult to stop the impulse of water from spreading to real estate.

Rescue the entity, it is impossible to release water.

There are still many problems that money cannot solve.

Stimulating infrastructure investment also won't help China because it needs to rebalance away from reliance on this method of growth, to say nothing of the falling investment returns as marginal utility declines, or the fact that local governments have a history of wasting money on projects.

Stimulation, infrastructure, and policy support... Each of these words sounds full of familiarity and dependence, but it is also worrying.

The historical experience has long proved that the marginal stimulation of large-scale water release is obviously weakening, and the investment income of infrastructure is getting smaller and smaller.

Guan Qingyou pointed out in the research report that the economic rebound effect brought by the loosening has become weaker and weaker, and the response has become slower and slower:

In the first round of 2008, it was loose, and it was effective in 2 quarters, rebounding 5.8% for 4 quarters.

The second round of easing in 2011, 5 quarters effective, rebounded 0.6%, lasting 2 quarters.

The last round of easing in 2014 was only effective in 8 quarters, rebounding 0.2% for two quarters.

Jiang Chao believes that the large release of water has not changed the downward trend of China's economic growth:

The first round: China's economic growth rate fell from 9.7% in 2008 to 9.5% in 11 years;

The second round: China's economic growth rate fell from 9.5% in 11 years to 7.3% in 14 years;

The third round: China's economic growth rate fell from 7.3% in 14 years to 6.9% in 17 years.

To achieve steady economic growth, it is not a matter of arranging money to stimulate it.

Although our idea is to fine-tune, pre-adjust and regulate the camera, Shanxi Securities issued a reminder that the index may be bottomed out again in the third quarter. When the policy is not up to the expected index, the easing policy may be more radical, or Structural easing has turned to full easing. A full, infinite loop of taste.

A new twist is the global economy. It is not favorable for China's stimulus.

The problem of the external environment is no different.

The contradiction between China and the United States is no longer a simple huge trade deficit. Conflicts continue to spread from the trade field to the fields of science and technology, currency, and ideology. Today, the proportion of tariffs is raised, and how many companies will be blocked by technology tomorrow. The day after tomorrow, I regret that I wanted you to enter the WTO... There is a cold war situation.

Last weekend, the Wall Street Journal published a long article "When the World Opened the Gates of China", mentioning that when Clinton first supported China's accession to the WTO, he hoped to include China in the Western economic system while reducing the control of conservative forces:

"China's accession to the WTO is not simply to let them agree to import Western products, but also to agree to a value cherished by the import of democracy - economic freedom. When individuals have more than just dreams and the power to realize their dreams, they will resort to more Big voice."

As the fate of the nation has come to this stage, China can no longer shut America up by spending huge sums to buy soybeans and airplanes.

The conclusion:

Today's China has a "change" in stability, and both internal and external weaknesses can not solve these problems.

The advantage of a controlling government has contributed to China's economic miracle, but its subsequent disadvantages have also constrained the upgrading of the economy.

Recently saw two paragraphs:

The word "reform" is now harder and harder to cheer. Like a tax cut, it becomes a word game. Every time it is drizzling, government taxes are rising year by year, and the physical tax burden is heavy. Local financial difficulties, but can not move the determination to abolish redundant staff and streamline institutions, and they are still counting on them when the stimulus policy comes.

If a great reform has become a situation of "the nation advances and the people retreat", it is really distressing.

What is really needed now is not to release water, but to complete a revolution in the face of difficulties, the transformation of the way resources are allocated, and the redistribution of rights; what is really needed is to activate the vitality of the people, not to make them confused, depressed, confused, The panic sentiment spread.

Professor Sun Liping once said that at present, the most realistic and urgent need for reform in Chinese society to solve problems is threefold:

The sense of direction of the country, the sense of security of the elite and the upper class, the sense of hope of the people.

China Enters the Trade Trap

Perhaps nobody know what President Trump will do next, including President Trump, but right now it looks like he has successfully maneuvered China into a trade trap. The goal is to slow China's economy such that military modernization slows and its economy cannot catch up with the United States. Meanwhile, implementation of this strategy is called "Beijing's playbook" and the whole time President Trump speaks positively about Xi Jinping and China's help in other areas.

Bloomberg: Xi to Counter Trump Blow for Blow in Unwanted Trade War

“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. China “thinks it can outlast the U.S. They don’t have to worry about an election in November, let alone two years from now.”

This is the mistake autocrats always make about Western governments and the United States. They view the messy and inefficient political system (intentionally designed that way to protect liberty) as a weakness. They think politicians care more about elections than anything else. They see the difficulty in reaching consensus as a weakness. However, they miss the fact that democratic governments enjoy greater legitimacy. If the U.S. reaches a majority in favor of confronting China on trade, then President Trump has the far stronger political hand.

Confronting China on trade raises President Trump's popularity. His base and independent voters favor this policy. Democrats oppose him because he is Trump, but they would lose votes if the only issue in November was "Confront China on trade, yes or no?"

If President Trump makes it through November losing only a few House seats (as is typical of nearly all mid-term elections) and sticks to his China trade policy, he will come out the other side incredibly strengthened on trade heading into 2020. If the public begins to view the trade war more as war than trade, they will want to win the war of attrition.

China's "ace" remains yuan devaluation. When I wrote The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I expected economics to lead the way as the yuan devalued. Although the yuan weakened in 2015 and 2016, it was not the substantial depreciation needed to reset the financial system. Still, China created the conditions for a major currency depreciation and U.S. trade policy will soon lean heavily on this pressure point.

Finally, remember that geopolitics is right beneath the surface of the trade war. The U.S. is confronting China in the South China Sea. Pacific nations are turning against China.

ABC: China warns citizens in Vietnam after protests fuel anti-Chinese sentiment

China has warned its citizens in Vietnam after protesters clashed with police over a government plan to create new economic zones for foreign investment that has fuelled anti-Chinese sentiment in the country.

SCMP: China tells Australia to remove its ‘coloured glasses’ to get relations back on track

Relations between the two countries have cooled since late last year when Prime Minister Malcolm Turnbull’s government proposed a bill to limit foreign influence in Australia, including political donations. Beijing saw the move as “anti-China”.

Critics say President Trump's trade policy is poorly designed and antagonizes allies, but the Logic of Strategy says nations will come around to Trump's position in the coming months and years.

Chicken Tax Worked, U.S. Dominates Light Truck Sales

FactSet: How Would Higher U.S. Auto Tariffs Impact the Global Auto Industry?

Currently, auto imports are taxed at 2.5%. However, light trucks (pickups and SUVs) are subject to a retaliatory tariff instituted in 1963 by President Lyndon Johnson in response to European tariffs on U.S. chicken. The so-called “chicken tax” imposes a 25% tariff on all light truck imports, and despite calls over the last 55 years for its repeal (coming from outside the U.S. auto industry), the law still stands.

The Trans-Pacific Partnership (TPP) trade deal signed by President Barack Obama in 2016 would have gradually phased out the chicken tax for the signatories; however, President Donald Trump withdrew the U.S. from the TPP shortly after taking office in 2017. The recent trade agreement reached with South Korea is supposed to phase out the chicken tax on imported South Korean trucks by the year 2041. Canada and Mexico are currently exempt from the tariff under NAFTA, but given the recent extension of the steel and aluminum tariffs to these countries, this could change.

Since light trucks are already taxed at a 25% rate, it is important to consider the shifting composition of U.S. vehicle sales when looking at the impact of potential auto tariffs. Over the last several years, the U.S. auto market has seen a rapid shift away from cars and toward light trucks.

There are two key segments of the light truck market: pickup trucks and SUVs/crossovers. The chicken tax has distorted the U.S. pickup truck market by largely excluding foreign producers. With the U.S. vehicle market shifting away from autos and toward light trucks, the exclusion benefits the U.S. auto industry. The top three selling vehicles in the United States last year were all trucks, with Ford leading the pack by a mile, followed by GM (Chevrolet) and Fiat Chrysler (Dodge). Many observers believe that the chicken tax has stifled innovation by U.S. auto makers by limiting foreign competition.

It doesn't stifle innovation because foreign companies can avoid the tax by manufacturing a truck in the United States. Yet somehow the American companies still dominate.

However, consumers would be hardest hit by an auto tariff. Higher prices for automobiles would be another inflationary jolt and rising energy prices could make the tariffs especially painful (WTI crude has jumped by 38% in the last 12 months).

Tariffs don't create inflation. Banks and central banks create inflation. If the price of automobiles rises and it isn't financed by credit, consumers will spend less somewhere else. Or they can keep their automobile longer. The greater threat to the auto market is not tariffs, but rising interest rates, since many Americans already finance the purchase of a car.

Govt Trade Wars Already Underway Against Multiple Targets

While President Trump's critics continue to attack his trade negotiation tactics, one development is a growing consensus that China should be confronted on trade. In essence, what confrontation did was highlight the reality of an ongoing trade war that the United States wasn't fighting. Similar to how Trump's discussion of immigration won him the Republican nomination and then helped him win the Presidency, his position on trade has revealed a deep well of support that was left untapped by a bifactional establishment that did not allow deviation from free trade orthodoxy.

Meanwhile, critics of monopoly power in Silicon Valley are pleased with the European Union's protection of privacy and fines for big technology companies. Now another attack on technology companies is taking shape, this time memory chip manufacturers. This fuses animosity towards big tech with China's industrial policy goals. A couple of week ago I posted an article from China discussing the development of a domestic memory chip supplier. Chinese Govt Spends Big to Develop Memory Chip Companies. The Chinese government has been spending heavily for more than a decade and it still faces an uphill battle against established producers such as Samsung, Hynix and Micron.

Now two weeks later, China is launching anti-trust investigations against these companies on the heels of an anti-trust lawsuit filed in California.

Nikkei: China launches antitrust probe against US and Korean chipmakers

China has launched antitrust investigations into three American and South Korean chipmakers in what some analysts suspect may be an effort by Beijing to further its high-tech ambitions and gain leverage in its trade row with Washington.

Regulators are looking into Micron Technology of the U.S. and South Korea's Samsung Electronics and SK Hynix, the top manufacturers of DRAM memory chips. These three companies -- which together control more than 90% of the global DRAM market -- are accused of abusing their dominance to drive up chip prices, among other unfair practices, according to a source familiar with the situation.

China, a major production hub for smartphones and other devices, is the world's largest semiconductor market. DRAM prices have climbed steadily since 2016, apparently prompting formal complaints from big Chinese chip buyers. The chipmakers could face heavy fines if regulators find that they violated antitrust law.

...Similarly, the investigations into Samsung and SK Hynix may be an effort to deal with companies that Beijing has found to be less than cooperative on the tech front. Manufacturers including Samsung have been accused of using older technology at Chinese plants than in South Korea, and are leery of cross-licensing patents with Chinese partners, insiders say.

South Korean companies aren't stupid.

A Chinese article on the story cites a California lawsuit that claims these manufacturers agreed to raise DRAM prices.
21st Century: 反垄断审查三巨头 中国存储需警惕“逆周期”扩张

In the Q1-2018 Q1 price increase interval in 2016, Samsung’s storage chip business revenue increased from 79.4 trillion won to 173.3 trillion won, an increase of 118%; Hynix revenue increased from 3.65 trillion won to 8.72 trillion won, an increase. 139%; while Micron’s revenue increased from US$2.93 billion to US$7.35 billion, an increase of 151%.

During the same period, Samsung’s stock price has increased from 25,000 won in early 2016 to 50,000 won today, Hynix has increased from 30,000 won to 90,000 won, and Micron’s share price has soared from US$14 to US$58, an increase of 314%.

It is worth mentioning that during the crazy price increase of memory chips, a US law firm began to investigate this phenomenon. During the interview and investigation of the Big Three by China's antitrust authorities, the US law firm Hagens Berman launched an anti-monopoly class action lawsuit against Micron, Samsung, and Hynix at the Northern California Regional Court on April 27, 2018.

The law said that the investigation showed that DRAM manufacturers agreed to increase DRAM prices by limiting the supply of DRAM. In 2017, the price per bit of DRAM rose by 47%, which was the largest increase in 30 years, of which the price of 4GB DRAM products rose by 130%. As early as 2006, Hagens Berman had acted like a DRAM antitrust litigation and won a $300 million settlement fee for his agent.

One unexpected outcome of the trade wars could be increased scrutiny of corporations and multinationals, and in the United States, a revival of anti-trust law. Government is stepping up its regulation of the economy.

Trump Fights to Protect Chinese Jobs

21st Century: 转机！中兴通讯销售禁令有望取消！或成下周中美重要议题，8万员工31万股东可稍松口气
CNBC: UPDATE 3-U.S., China nearing deal to remove U.S. sales ban against ZTE -sources

Washington and Beijing are nearing a deal that would remove an existing U.S. order banning American companies from supplying Chinese telecommunications equipment maker ZTE Corp , two people briefed on the talks told Reuters.

The people, who declined to be identified because negotiations are confidential, said the deal could include China removing tariffs on imported U.S. agricultural products, as well as buying more American farm goods.

Flawless Chinese victory.

White House advisors have said previously the ban against ZTE is being reexamined, and that the firm would still face "harsh" punishment, including enforced changes of management and at board level.

There will be no change to the real upper management of the Chinese state-owned enterprise.

The Chinese trade issue isn't going away. Trump could revive the trade issue at any moment and he probably will. If he doesn't, someone else will. Negative social mood will guarantee it.

Chinese Govt Spends Big to Develop Memory Chip Companies

An article discusses Wuhan Xinxin Semiconductor Manufacturing Corp and the Chinese government's plan to spend billions on chip technology. Wuhan Xinxin is still unprofitable after 11 years.

21st Century: 中国芯”艰难突围路：武汉新芯十一年终扭亏

Following the investment in the first phase of the IC Fund, which amounted to RMB138.7 billion, the second phase of the Chinese government's large capital investment has once again focused on the market. Relevant media reports indicate that the second phase of the brewing fund is expected to be no less than 150 billion to 200 billion yuan in size.

How will the national team support the chip industry? On the morning of April 26th, when General Secretary Xi Jinping came to Wuhan Xinxin Research under the Yangtze River Storage Store of the Ziguang Group, he mentioned that the core technology with independent intellectual property rights is where the company’s “Gate of Life” lies. The chip of equipment manufacturing industry is equivalent to the heart of people. The heart is not strong, and the body size is not too strong. It is necessary to speed up major breakthroughs in chip technology and bravely climb the peak of semiconductor storage technology in the world.

The 21st Century Business Herald reporter recently interviewed relevant stakeholders of Wuhan Xinxin, taking samples of issues such as Wuhan's efforts to develop IC industry and Wuhan Xinxin's development over the past decade and beyond, to restore the difficult breakthroughs of the central government and enterprises in the chip field.

From 2006 to the present, the central government has continued to invest heavily in Wuhan Xinxin. The integrated circuit industry has a intensive and long-term investment cycle. This company, which continued to lose money before 2017, is also struggling to break through the controversy.

Wuhan Xinxin was launched more than a decade ago as part of an effort to develop domestic chip suppliers:

The chip is called "industrial food". China still has gaps in chip design, manufacturing capabilities, and talent teams. China is the world's largest chip consumer, with 90% relying on imports and imports exceeding $250 billion a year.

The representative company of the Wuhan Xinxin Central Government who made efforts to develop the chip industry was incorporated in April 2006. It is invested by Hubei Province, Wuhan City and Donghu High-tech Zone. The investment scale for the first phase reached 10.7 billion yuan, which is the first time in the Central Region in these years. A 12-inch integrated circuit production line project.

As of now, Wuhan Xinxin is the only memory-based IC manufacturing company in China. Wuhan Xinxin is facing an urgent task of catching up with technology. Behind it is the continued investment of the Central Government. On August 5, 2015, the Hubei integrated circuit industry investment fund with a total size of not less than 30 billion yuan was established, of which Wuhan Xinxin is the investment focus. The first phase of the national integrated circuit fund of 138.7 billion investment, one of its investment priorities is the memory.

Experts who participated in the new core project told the reporter of the 21st Century Business Herald that Xinxin did achieve losses in 2017. On the one hand, the international market conditions were relatively good. In the past 20 years, the global semiconductor factory was much more involved. In addition, with mobile communications and the Internet of Things, With the development of the chip, the demand for chips has greatly increased and it is good for Xinxin. Of course there is another reason. From the financial report, the depreciation of the equipment is over.

The loss of data in the financial report does not mean that the real dawn has come. According to the data provided by Tanshui, at present, the global memory market is highly monopolized and the market and key technologies are in the hands of several oligopolistic companies such as Samsung, Toshiba and Hynix. Samsung, Hynix and Micron monopolized 95% of the DRAM memory market. Samsung, Toshiba, Micron and Hynix monopolized 99% of the NAND memory market. The top six manufacturers monopolized 90% of the NOR memory market. Wuhan Xinxin still has a long way to go.

"Although it is a state-owned enterprise, unlike many monopolized state-owned enterprises, Wuhan Xinxin is faced with global market competition. This industry is a globally transparent market, and there is no designated unit procurement for the product. State-owned enterprises are not good at doing it." A practitioner from Wuhan Xinxin told a 21st Century Business Herald reporter.

Related:

A good in-depth view at Semiconductor Engineering that sees high hurdles for China: Will China Succeed In Memory?

IP issues are just one of the challenges. China’s memory makers also face stiff competition in a tough market. “I look at this at maybe almost like what China did in the foundry industry. They have 10% market share. Maybe China will get 10% of the memory market,” IC Insights’ McClean said. “I don’t think it would be zero. But I don’t see big chunks of market share coming out of Samsung, Micron and Hynix anytime soon.”

Asia Times: China has too few chips to play in high stakes tech game
China.org: Xi calls for maintaining new development philosophy, winning 'three tough battles'

"Businesses must unceasingly make breakthroughs in core technology, mastering more key technologies with self-owned intellectual property rights and building up the ability to dominate industrial development. The country needs you to pick up the pace," Xi said.

Xi then visited Wuhan Xinxin Semiconductor Manufacturing Corp. to inspect a national memory production base and assembly lines of integrated circuits.

In workshops, he listened to reports about smart manufacturing of chips and accelerating chip localization progress.

Referring to chips as like the human heart, Xi said, "No matter how big a person is, he or she can never be strong without a sound and strong heart," he said, urging businesses to make major breakthroughs in chip technology and challenge the new heights in global semiconductor industry.

Free Traders Lose the Narrative

The narrative on free trade as changed from the extreme "it's always good; trade partners only cheat themselves by using protectionism measures." Where it ends is anyone's guess, but a "fair trade" (reciprocity) consensus is building.

Barron's: The People’s Republic of Protectionism

By 2025, China aims to produce 80% of its “new energy vehicles,” 70% of its medical devices, 70% of its industrial robots, 60% of its advanced tractors and harvesters, and 10% of its commercial aircraft. The targeted sectors represent the bulk of U.S. manufacturing exports to China. While these targets are directly opposed to the spirit of an open international order, the Chinese government should have little trouble achieving its goals within the confines of World Trade Organization rules. China has plenty of experience with import substitution.

The first step is to “digest”—the Chinese government’s term—advanced foreign technology. Sometimes the know-how is explicitly traded for market access, sometimes it is acquired through mergers and acquisitions, and sometimes it is stolen.

Trade War: No Deal

The Guardian: US-China talks end in increased tension and demand for $200bn trade deficit cut

Tensions between the US and China increased on Friday as it emerged US officials had handed Beijing a list of demands including a $200bn cut in its trade deficit and an end to state subsidies on strategic industries.

The two days of talks in Beijing between Steven Mnuchin, the US treasury secretary, and Liu He, the vice-premier, ended on Friday after weeks of escalating rhetoric between the two nations.

A statement released by the official Xinhua news agency described the talks as “frank, efficient and constructive” but added that there remained “significant disagreements over certain issues”.

A document handed to Chinese officials described the trade relationship between the two countries as “significantly imbalanced”. The US’s trade and services deficit with China was $337bn last year, according to US data, and the Trump administration is pushing for a $200bn cut in that deficit by 2020.

Hot take:

1. Trump openly talks about how he negotiates. The $200 billion target or the 2020 deadline, or both, are flexible. There will be no movement in the U.S. direction unless China thinks this time is for real. The news out of trade talks will get worse whether there is a deal or no deal down the road. It's possible there won't be a deal (real, not window dressing) until Trump walks away.

2. Assuming U.S. real GDP grows 2 percent in 2018 and 2019, it will grow ~$800 billion heading into 2020. If Trump got everything he wanted and it was fully onshored by the U.S. (Chinese exports don't shift to other nations), a trade deal would boost GDP growth by ~0.5 percent in the next two years. Who knows what China's GDP really is, but assuming it is ~12 trillion, a $200 billion swing in the trade balance would slow GDP growth by ~0.8 percent in the next two years. This is a big number, even for the huge U.S. economy, in a world where GDP growth has struggled to sustain 2 percent after 2008.

Winter is Coming to China, Tax Cuts and Infrastructure or Bust

iFeng: 预警！美元寒冬逼近，中国楼市悬了

China can't ease monetary policy.

According to the analysis of the previous two sections, if the Chinese currency chooses to relax at the moment, the Chinese government bond yield curve will shift downwards, and then the spreads between China and the United States will be further squeezed, which means that the renminbi will be subjected to tremendous devaluation pressure.

China can't devalued the renminbi though, since it will exacerbate trade tensions:

On the one hand, Trump will not allow China to resolve the dilemma of declining external demand through the devaluation of the renminbi, which is inconsistent with the United States’ stance of launching a trade war.

On the other hand, China’s efforts to enhance product competitiveness by devaluing its own currency will also hurt its trading partners outside the United States. Under the current environment of confrontation between China and the United States, it is obviously unfavorable to China.

China also can't tighten monetary policy as the trade surplus declines.

How to expand domestic demand? The total output of a country, divided according to demand, can be divided into three parts:

Investment + consumption + net exports, the first two parts are domestic demand, and the last one is foreign demand. Now that external demand is not working, it is logical to either expand consumption or expand investment, there is no other way.

Is it easy to expand consumption? Very difficult.

Taking into account the arduous efforts made by the Chinese resident sector in the past two years to “de-stock,” mortgage loans for decades have completely overdrawn most of the residents’ spending power and willingness to consume.

Therefore, only investment is left. Investment can be divided into manufacturing, infrastructure and real estate.

Manufacturing? Unlikely.

Is manufacturing investment easy to start? The same is very difficult!

Why? Because manufacturing ROE (return on investment) has been significantly squeezed out of finance and real estate, it is almost zero, or even negative. The ROE that reshapes the manufacturing industry is a relatively long process. It may be that the entire process of supply-side reform and de-leveraging is completed and that the market is only possible once it is cleared.

Real estate? Also unlikely.

The key point is that the level of residents' debts is increasing very quickly. It's scary! Resident debt ratios ranged from 20% to 50%, the United States spent 40 years, and China only spent 10 years. At this rate, within the next three to four years, the United States could reach the top of the bubble in the last round of housing bubbles by 73%.

It is also the madness of residents that increases leverage and restricts the contribution of consumption to economic growth. The growth of real estate investment is based on the overdraft of residents' consumption in the coming decades.

If the currency depreciates, the real estate market will suffer:

Especially with the United States in the cycle of rising yields, if China's currency cannot tighten to maintain spreads (in fact, it cannot), then the renminbi has a greater depreciation pressure to start real estate and may cause house locks. Without the liquidity, there is a systematic risk that the capital flight will lead to the passive rupture of the real estate bubble. This result is very damaging! This is also the fundamental reason why the exchange rate cannot be depreciated significantly.

What is left? Centrally planned infrastructure!

However, I believe that, based on the above analysis, the top management is likely to abandon this short-term goal and instead tolerate the short-term increase in the level of local government debt, in order to achieve the goal of “expanding domestic demand”. In connection with the latest Politburo meeting's description of the “Rural Revitalization” strategy and the “Out of Poverty Alleviation” program, I think it is possible and feasible to promote domestic demand through the expansion of rural infrastructure.

This kind of deduction is also in full accord with the statement made by the Politburo meeting on "adhering to a proactive fiscal policy." The implementation of a proactive fiscal policy, which is implemented in concrete terms, is most likely a result of the foundation of the infrastructure (economy) (domestic demand).

Therefore, fiscal policy points out that tax cuts and infrastructure will continue to be “positive”.

Tax cuts and infrastructure.

China will face a dilemma in the selection of any kind of policy tools. However, taking into account the circumstances that lead to the smallest possible systemic risk, only an active fiscal policy is the current way out. Specifically, it is a tax reduction and maintaining a relatively positive infrastructure.

Monetary policies may remain neutral, and they cannot be significantly loosened, nor can they be tightened. There will be a small depreciation of the exchange rate, but there is no long-term depreciation condition.

As regards tolerance of local government for increasing leverage, local government debt and bank's possible bad debts can be regarded as the opposite of the government. It is possible to temporarily relax the restrictions.

Politically, China can no longer allow the renminbi to depreciation. Yet depreciation is where the market wants to go. China boxed itself into a corner. It is now at the mercy of the markets. Positive economic shocks can bail it out. Strong growth overseas could bail out a China. A resumption of global growth to pre-2008 levels, with massive U.S. dollar credit growth and depreciating USD, can bail them out. Otherwise, the are walking a tightrope and any mistake leads to currency depreciation.

The author of this piece finishes with some investment advice based on the above:

Based on the above analysis logic, the trading strategy is self-evident.

The stock market will not have major systemic opportunities.

The reason is that the currency will not relax and the risk-free yield will not decline. Corporate earnings are also difficult to exceed expectations in the face of demand pressure. The turbulence in the box and the concept of fried items are the main theme of this year (for example, Hainan, semiconductors, etc.).

The bond market will move slowly down the high.

The reason for not making a sharp turnaround is because there is no inflation expectation in China and there is no possibility that growth will exceed expectations. However, taking into account the traction of the U.S. debt, it is possible that the Chinese government bond yields will slowly increase.

Goods are the only major assets that may have opportunities.

Logic is a foundation. From the previous year to the present, commodities represented by black lines have plunged in pessimism. I think this pessimistic expectation may be remedied with the introduction of more measures to “expand domestic demand”. In addition, inflation in the United Stat es may raise the price of bulk commodities globally.

Finally, talk about real estate alone.

Regardless of how the cannon was said, or the six purses and the seven purses, I always believed in my own logic, that is, real estate could not be restarted at present, for reasons that have been detailed before. If I was beaten later, I would accept it willingly.

In this world, there are too many things that are beyond our knowledge. We cannot calculate their probabilities. But what we can do is to limit the possibilities of infinite with limited knowledge.

If not, what is the difference between each of our actions and gambling?

PS: People shouting that the government should restart real estate, do you forget that in the midst of ZTE's battle, we feel the helplessness and incompetence? Real estate not only fails to save the country, but also buries the future of the entire nation.

Hope is the strategy now. Hope that U.S. growth and inflation picks up, boosts commodities, and more Chinese infrastructure can boost the economy there.