China Says Bye-bye Debt, Hello Equity

There are suckers born every minute, so maybe some will dump their money down the sinkhole of public infrastructure. Forget if there's even no malinvestment: the government will hold prices low to promote social harmony. Investors will earn very low returns on their investments, but maybe there are some big pension funds, or super rich Saudis, who have nowhere else to stick their cash.
China Cabinet Says To Boost Urban Infrastructure Investment
China will step-up urban infrastructure investment and allow private capital to provide public services to boost investment and consumption, the State Council said Wednesday.

The Cabinet said in a statement following a meeting chaired by Premier Li Keqiang that urban infrastructure investment will focus on water, railway, power grid, gas and heat supplies.

It says the government will reform financing mechanism and attract private capital to participate in construction and operation of public services.

Urban investment and railway are probably the only two sectors will receive government funding support as Beijing refused to go back to the old stimulus package despite the growth is slowing.
Better profit opportunities can be had in the private sector. Most likely it will be foreigners coming in to play the role of sucker.

From a Chinese article giving more detail:
Fair for the first time officially released the new government in Beijing "the introduction of social capital to promote the field of municipal infrastructure construction pilot project implementation plan." Program clearly, Beijing will actively attract social capital to promote rail transport, urban roads, integrated transport hub, sewage treatment, solid waste disposal, the town building heating and other six areas, and with the pilot program launched 126 projects with a total investment 338 billion yuan, 130 billion yuan of social capital to be introduced.
The Chinese word "social capital' initially made me think they will raid the state pension funds. Unlike Social Security in the United States, which taxes workers and uses the money to pay current retirees, Chinese social security actually invests workers' contributions. However, it does appear they're talking about allowing private capital in. The question again is, who is going to invest?

Beijing to fund infrastructure construction with private capital
The introduction of private capital is a breakthrough in deepening reform and speeding up the transformation of government functions, Yang said.

The government will grant private investors a reasonable return through a series of measures, including investment, service purchases and financial subsidies, he said.

"The policy sends a positive signal," said Wen Yibo, chairman of Sound Group, a private water and waste treatment company. "It will benefit both the public and the industry."
It may all look good on paper, but you can be sure that if there's economic trouble down the line, the government is not going to hike sewer or road fees to pay back investors. They will keep prices low to keep the public happy, as they have already done. Private equity investment solves the problem of defaulting on debt, but for the investor the difference may be negligible in cases that are not outright defaults.

Another View of the Grand Super Cycle Top

The Blip
What if everything we've come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?

Picture this, arranged along a time line.

For all of measurable human history up until the year 1750, nothing happened that mattered. This isn't to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theater of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were litt le better than they had been two millennia earlier, in ancient Rome.

Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward – which contains, not coincidentally, the full life span of the United States – human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents' standard of living. In the space of a single generation, for most everybody, life was ge tting twice as good.

At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.

If you are like most economists – until a couple of years ago, it was virtually all economists – you are not greatly troubled by this story, which is, with some variation, the consensus long-arc view of economic history. The machinery of innovation, after all, is now more organized and sophisticated than it has ever been, human intelligence is more efficiently marshaled by spreading education and expanding global connectedness, and the examples of the Internet, and perhaps artificial intelligence, suggest that progress continues to be rapid.

But if you are prone to a more radical sense of what is possible, you might begin to follow a different line of thought. If nothing like the first and second industrial revolutions had ever happened before, what is to say that anything similar will happen again? Then, perhaps, the global economic slump that we have endured since 2008 might not merely be the consequence of the burst housing bubble, or financial entanglement and overreach, or the coming generational trauma of the retiring baby boomers, but instead a glimpse at a far broader change, the slow expiration of a historically singular event. Perhaps our fitful post-crisis recovery is no aberration. This line of thinking would make you an acolyte of a 72-year-old economist at Northwestern named Robert Gordon, and you would probably share his view that it would be crazy to expect something on the scale of the second industrial revolution to ever take place again.

"Some things," Gordon says, and he says it often enough that it has become both a battle cry and a mantra, "can happen only once."
Must read. This is completely in line with Tainter and it matches the prediction of a Grand Supercycle Top in Elliot Wave Theory.

The article ends with a discussion of politics, which will turn sharply to the right and stay there for decades or centuries if this bleak economic forecast is correct. First, society will no long be able to afford expensive lifestyles, such as early retirement and single mothers. Second, change will become very slow, if there is any change at all. Traditional patterns of family, work and religion will return and stay in place. "Freedom" as understood today will become very expensive, as it was prior to the industrial revolution. Ethnic and religious divisions will become huge because there will be a far more zero sum game afoot in global economics. Nations and peoples who grab their shares will survive, while those who cannot or will not defend themselves will be left with little. International travel may decline, while entertainment shifts towards lower cost virtual entertainment on the Internet.


Potash Follows Gold; China Slowdown Will Destroy Commodity Markets

Premarket: Potash plunges as Russia quits cartel
U.S-traded shares of Potash Corp. fell 18.2 per cent before the opening bell and shares of Mosaic Co. tumbled 17.7 per cent after Russia’s Uralkali dismantled one of the world’s largest potash partnerships by pulling out of a venture with its partner in Belarus, a move it expects will cause global prices to plunge by 25 per cent.
Shares down further now, still in pre-market trading.
The break-up of the Belarus Potash Company leaves North America’s Canpotex as the ruling potash export venture. Belarus Potash and Canpotex had accounted for 70 per cent of global trade in potash, an important ingredient for fertilizer, and the duopoly had set identical prices in key markets such as China and India. Uralkali said it was pulling out after reaching “deadlock” over sales and would export all potash via its Swiss-based Uralkali Trading. The decision may lead to a fall in the global potash price to below $300 per tonne in the second half of 2013, from the current $400 per tonne, it said.
Why is this happening? It is due to falling demand. There's less to demand to go around, so they're grabbing market share.

In the case of potash, China doesn't have massive reserves. Imagine what's going to happen to markets such as copper and nickel if China starts puking commodities onto the world market? And that decline in gold, what happens if China starts puking gold? I suspect the PBOC would soak up the gold to keep it from world markets, but investors should be prepared for a commodity market bloodbath if China hits the sell button.

More than 2000 restaurants close in Beijing; average restaurant loses 20% in first half of 2013

Small eateries and fast food restaurants have expanded slightly in number, with the losses falling in the restaurant category.

北京餐饮半年关店2168家 下半年市场或相对乐观


Even more China social mood: non-patriots are scum!

The top news story (online) at the moment is the Guizhou Vice Governor's weibo post, in which he said, "if you aren't a patriot, you're scum" and told them to quickly go to America. What I find interesting is that the media is repeating the posts of people calling him brain dead, and which say that supervision and censorship are unpatriotic. On top of that, below the story is a survey asking people what they think about it, whether government officials have a right to post freely on Weibo!


Get caught up on Chinese local debt levels and join the bears

Why does China start to audit local government debt again?
So here comes the next question, why wasn't this VIP satisfied with the last audit report? This table below can show you that the second audit was far less comprehensive than the first one and it is extremely doubtful whether the sample of 36 local governments can reflect the whole picture. In fact the last report could be misleading in many ways.

Why do I say this? The growth rate of debts in 36 local governments was 12% in the last 2 years, while it was on average 30% annually in the first decade of this century. If we believe the sample of 36 local governments is representative then we will see a very positive picture as local government debt growth has slowed down significantly in the past two years while GDP growth continued to be high. The first NAO report said that total local government debt was 10.7 trillion yuan and if we apply the 12% growth rate here, total local government debt would be 12 trillion yuan by the end of 2012, accounting for 23% of GDP, smaller than the ratio of 25% in 2010.

That local government debt totalled 12 trillion by 2012 simply looks too good to be true. Even the auditors themselves won't believe it. Dong Dasheng, deputy minister of the National Audit Office, said in May the latest debt scale for governments at all levels was between 15 to 18 trillion yuan, while Xiang Huaicheng, a former finance minister, said in April China's local governments might have already borrowed more than 20 trillion yuan. Three years after the government started the first audit, the total local government debt number still looks like a black box!
Or not. Which is why a second audit was ordered. Read Why does China start to audit local government debt again? for a much longer discussion of the issue.

So far there have been two audits. One completed in June 2011 and one in June 2013. Both were periods of bearishness in China, with real estate topping in June 2011 before major slowdown fears combined with the U.S. debt ceiling debate and euro crisis in late summer. By autumn 2011, Shanghai real estate customers were smashing real estate offices and by December, the yuan was falling versus the dollar. This year we saw China combine with Fed taper talk during a bearish episode for world markets across all asset classes. Today, stocks fell on news that a full audit will be conducted (the prior audit only covered 15 provinces, their capital cities, the municipalities of Tianjin, Shanghai and Guangzhou, and one district from each municipal city).

China orders audit of local govt debt
The government announced the audit in a one-sentence statement on Sunday. The ruling Communist Party's main newspaper, People's Daily, said the Cabinet sent an "urgent message" ordering the audit and telling local audit officials to suspend other work until it is completed.

Larger image here.

500 former employees protest two state owned banks in Beijing

The intersection of people who disbelieve in social mood theories and who believe China will not have a serious slowdown is probably quite large. For the rest, the signs of declining social mood are piling up and coming faster. Today, workers from not one, but two major state-owned banks staged a public protest in Beijing. There were about 500 protesters in all and they assembled in Beijing's Financial Street area. ICBC protestors were calling for the resignation of ICBC Chariman Jiang Jianqing. They wore shirts that said, "I want to eat" and "I want to live." They were protesting buyouts as part of bank restructurings in the early 2000s. Some workers want compensation because they received low buyouts relative to subsequent bank income (and inflation). Others want their old jobs back.

By itself this isn't a big story, but 500 people is a pretty sizable amount for a protest in the financial district. This isn't workers in a factory walking off a job, these are people who organized and came from around the city. Also, it's noteworthy that inflation isn't even that bad at the moment compared to where it was in 2011 or 2007, so why is the protest happening in 2013?


Social mood at Chinese airports

We haven't hit the bottom yet in China, not by a long-shot.

Chinese airlines hit by air rage amid long delays
At the end of June, a primary school teacher lost control when her flight from Wenzhou to Beijing was cancelled, slapping and kicking an Air China attendant to the ground.

"I waited there for such a long time. Nobody served me a bottle of water or a piece of cake or anything, said Liu Weiwei in her defence. "They were poker-faced, with no response or explanation".

Other incidents have seen passengers faint on planes that were held on the runway for full days, and cabin crew assaulted by enraged customers.

In March, Graham Fewkes, a British businessman based in Hong Kong, told the South China Morning Post he had witnessed cheers when a man assaulted a stewardess on a delayed flight to the island of Sanya.

"I heard a punch, and looked up and he was attacking the stewardess," he said. "The other passengers were applauding as the man was hitting her. It was a crescendo of noise coming down the plane."

Euro still forming a head and shoulders; gold bulls make a small comeback

Speculators remain bearish on the euro this week. Gold speculators continued to see the thinning of their bullish ranks reversed, but this still looks to be a trend that has yet to complete.


Negative Social Mood Directed At Chinese Soccer Team

Here's good coverage of the mid-June thrashing of the Chinese national team at the hands of a Thai team using seven replacements from the youth team.

Why Chinese Hate Their Men’s Soccer Team
A sizable number of fans found their way down to the team bus and blocked it from leaving while chanting furiously, sometimes obscenely, about the coach, the team and the human anatomy they all resemble. A riot ensued, injuring at least 100 people, according to the Hong Kong-based Information Centre for Human Rights and Democracy.

...If anything, things may have gotten worse. In 2011, when the Chinese were eliminated from the qualifying rounds for the 2014 World Cup by war-ravaged Iraq, it was regarded as the latest worst loss in the nation’s soccer history. But a loss to Thailand, a country that most Chinese view as a geopolitical inferior subject to Chinese influence, kindles popular frustration at the gap between China’s rise to the top of the geopolitical heap over the last decades and the lack of what some Chinese view as tangible benefits for themselves.

...Over the weekend, a faux dialogue between a Chinese soccer fan and a Thai one appeared on Sina Weibo, in various versions and edits. Its origin is uncertain, but not its popularity: It has been forwarded and tweeted thousands of times. In it, the Thai fan refers to many of the most intractable issues in contemporary China:

“China: We have 5,000 years of history!
Thailand: Your team was abused 5:1.
China: We have an area of 9.6 million square kilometers.
Thailand: Your team was abused 5:1.
China: One in every five people in the world is Chinese!
Thailand: Your team was abused 5:1.
China: Can’t we talk of something other than men’s soccer?
Thailand: You’re beaten down by local government officials every day.
China: ……
Thailand: You eat toxic food every day.
China: ……
Thailand: You suck in toxic air.
China: ……
Thailand: Even if you struggle for a lifetime you can’t afford a house.
China: Let’s continue talking about the soccer team, OK?
Thailand: Your team was abused 5:1.”
The reporter refers to Chinese anger as a bomb exploding. It will get worse.

The Mystery Hum

I've covered quite a number of stories on strange and sounds that disturb the peace, mainly mystery booms. Now, a hum has taken over.

Mysterious hum driving people crazy around the world
Reports started trickling in during the 1950s from people who had never heard anything unusual before; suddenly, they were bedeviled by an annoying, low-frequency humming, throbbing or rumbling sound.

The cases seem to have several factors in common: Generally, the Hum is only heard indoors, and it's louder at night than during the day. It's also more common in rural or suburban environments; reports of a hum are rare in urban areas, probably because of the steady background noise in crowded cities.

Who hears the Hum?

Only about 2 percent of the people living in any given Hum-prone area can hear the sound, and most of them are ages 55 to 70, according to a 2003 study by acoustical consultant Geoff Leventhall of Surrey, England.

Most of the people who hear the Hum (sometimes referred to as "hearers" or "hummers") describe the sound as similar to a diesel engine idling nearby. And the Hum has driven virtually every one of them to the point of despair.
The article does give a few explanations:
Most researchers investigating the Hum express some confidence that the phenomenon is real, and not the result of mass hysteria or hearers' hypochondria (or extraterrestrials beaming signals to Earth from their spaceships).

As in the case of the Kokomo Hum, industrial equipment is usually the first suspected source of the Hum. In one instance, Leventhall was able to trace the noise to a neighboring building's central heating unit.

Other suspected sources include high-pressure gas lines, electrical power lines and wireless communication devices. But only in a few cases has a Hum been linked to a mechanical or electrical source.

There's some speculation that the Hum could be the result of low-frequency electromagnetic radiation, audible only to some people. And there are verified cases in which individuals have particular sensitivities to signals outside the normal range of human hearing.
Is the mystery hum more audible due to a lower level of economic activity, which reduces the background noise?


America Prepares For War......With China

Who Authorized Preparations for War with China?
The Pentagon has concluded that the time has come to prepare for war with China, and in a manner well beyond crafting the sort of contingency plans that are expected for wide a range of possible confrontations. It is a momentous conclusion that will shape the United States’ defense systems, force posture, and overall strategy for dealing with the economically and militarily resurgent China.

Chinese stimulus will fail as social mood sinks

The State Council, effectively the nation's cabinet, approved a decision to offer China's small to medium businesses short-term tax breaks, speed up investment in railway infrastructure development and reduce exports red tape.

It is also likely the yuan will not be allowed to appreciate further against the US dollar, after a surge of nearly 20 per cent in the past year.

The tax changes, in which sales and value added tax will be waived from August 1, will apply to small businesses with less than 20,000 yuan ($3560) in sales a month. The State Council estimates more than six million small businesses will benefit.
Short-term tax cuts do not boost the economy. Individuals save them and it doesn't lead to hiring. These firms are basically individual businesses, as their monthly sales is equivalent to an upper middle class income in Beijing. These proprietors will save the money because they fear what is coming down the road. That's not to say lower taxes are bad—these firms will definitely be in a better position than they would without the tax break, but it will not lead to a meaningful change in aggregate behavior. See: China cuts tax, red tape as part of stimulus package for more info on the package.

Besides being an ineffective policy, social mood in China is taking a turn for the worse. The stock market is headed lower again and the newspapers are filling up with stabbings and murders.

Beijing Bans Selling Knives In Attempt To Curb Stabbings After Two Fatal Attacks
A spate of stabbings over the past week has prompted Beijing officials to introduce the ban in hopes of curbing other random attacks. Last week, a mentally ill man from Shandong province stabbed and killed two bystanders in front of a mall in the capital; one of them was an American citizen. Just five days later, a man by the name Wang killed a woman and seriously injured a two-year-old child as well as two other people. According to the Beijing Times, Wang had purchased his knife from the shopping center Carrefour, the location of the attack. Hed had spent five months at a Beijing mental hospital undergoing treatment for an undisclosed illness.

Unfortunately, China’s stabbing cases have become increasingly common.
The mall where the stabbing occurred is one of the most popular in Beijing.

Killing Puts Focus on Concerns Over China’s One-Child Policy
A man with a knife killed two government officials at a family planning bureau and injured four other people, the Chinese state news media reported on Wednesday, in an episode that drew wide attention in China because of continuing controversy over the country’s one-child policy.

From a social mood perspective, it is enough that the media is focusing attention on negative news items, particularly in China where the media is tightly controlled. Recently, the government told media outlets to play up the positive aspects of the economy and not to use the term "cash crunch" when discussing financial sector problems.

And then there's this story out today, which I suspect will soon become an international story: Beijing man kills two-year-old girl following dispute over parking
Han had been sitting in the front passenger seat of a white sedan driven by a male companion. They intended to park the car near a bus stop where the woman had stopped to check on her daughter, said the report. Han gestured for her to move, but the woman refused. Enraged, Han got out of his car and physically attacked the woman, said a witness and nearby business owner, surnamed Zhou.

“He then took the baby from its stroller and smashed it to the ground with great force,” Zhou said.

A man, who had been driving the car Han had been seen in, then got out and attacked the woman, Zhou added.


Government Pensions Vanish

Only one month ago I wrote in 90% Haircuts For Detroit; Municipal and State Workers Are Rich Minority
Pension benefits are vaporized! Teachers, firefighters, police, and municipal workers take heed: you pensions will be nuked. You are the rich minority when it comes to municipal finances.

Retired government workers have zero political power. Current residents and voters have political power. When it comes to a decision between bondholders, pensioners and current residents, the politicians are going to side with residents. It didn't take long for Detroit to do exactly as I expected.

Detroit not a one-off: Whitney
Detroit finally filed for bankruptcy on July 18 after years of a slow decline in its population and its once famous auto manufacturing industry. But the legal battle hasn't finished yet. The outcome could inflict more pain on Detroit's already-beleaguered residents, businesses, creditors, investors and city workers, whose pension plans may now be invalidated.

Three lawsuits were filed by city workers, retirees and pension funds earlier this month on worries that an anticipated bankruptcy petition by Detroit would lead to cuts in retirement benefits, with a federal judge on Wednesday expected to rule on whether U.S. law trumps Michigan's constitutional protections.

These promised pensions and other benefits for public employees, which have strong legal protection, need to be questioned, according to Whitney.

"The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services - in the case of Detroit, it could not even afford to run its traffic lights," she said.

"Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk."

In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.

"After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough," she said in theFinancial Times.
There will be no sympathy for the unions or government workers because they helped cause the bankruptcy by fighting for ever more lavish benefits. They assumed they were getting guaranteed money due to legal protections, but they abused those protections and now they will reap what they have sown. And as goes Detroit, so goes the nation. If Detroit can say tough luck to retirees on underfunded pensions, then every city in America, and later Illinois and California to state workers, will do the same.

Update: Detroit wins a legal victory that allows bankruptcy to move forward. It is a loss for the public sector unions who sought to block a bankruptcy filing. Detroit Chapter 9 Bankruptcy Objections Denied
The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors.
As I said, pensions will vanish. The public sector is about to get its comeuppance after 30 years of milking the public, a public that itself lost its pensions 30 years ago when the economy restructured. One can say that restructuring was the result of poor government policy, but in terms of reality, it doesn't matter why it happened. What matters is that the private economy got lean and mean, in order to compete globally, and saw benefits trimmed. Public sector unions, believing themselves sheltered from general economic trends and protected by special law, abused their position and ended up killing the goose that laid the golden egg.

And now with negative social mood, these pensioners will find no sympathetic ear from the public, particularly since in places like Detroit, the choice will be to pay police and firefighters today or to pay retired police and firefighters. Everyone knows who will win that battle.

One sign for the inflationists, or a sign that the top is near: financials headed back to top of S&P 500 Index

In State of play in Q32012: Fed and U.S. government policy is not enough to offset deflation, I wrote:

Not only is hyperinflation unlikely, there are even signs that we have seen the end of inflation for the time being. During the hyperinflation in Wiemar Germany, the financial sector rapidly expanded and came to dominate the economy. People were paid twice a day, and they immediately ran to the bank to cash their pay check before the value of the mark fell. Bank workers almost quadrupled from 1913 to 1923. The public also borrowed heavily and bought stocks.

In the early 1990s, right after the savings and loan crisis, financial stocks made up around 7% of the S&P 500 Index (SPY). This grew to roughly 22% at the market peak in 2007, and it has fallen to 14% recently. This growth in the financial sector occurred along with the massive $50 trillion in credit created by the economy. Credit functions like money in the economy and for this reason, if there's any comparison to Wiemar Germany, it may be the growth in debt and the financial sector from 1980 to 2008.

Interesting factoid: the financial sector is now 16.9% of the S&P 500 Index, behind technology at 17.4%. That works out to a 3% relative valuation gap; were financials to outperform technology by about 3% moving forward (which seems guaranteed based on earnings season), then financials will be back atop the S&P 500 Index sector allocation. (The number increases if technology rallies. For example, if tech advanced 12% in the next 6 months, financials would need to rally about 15.5% to overtake it.)

Amazing considering that financials were at the epicenter of the 2008 financial crisis. Ben Bernanke and the federal government have achieved the Great Delay. I believe they have re-blown the bubble and sown the seeds of the next decline, since with financials at the top of the chart, another financial crisis will have an outsized impact on the S&P 500 Index.

On that note, here's Bill Fleckenstein: Bunk from central bankers
But it is instructive to consider the modest actual amount of monetary injections, as a percentage of gross domestic product, in the mid-1920s that led to the stock bubble and, ultimately, to the bust. That stimulus was small compared with the easy money of the late 1990s that culminated with the $30 billion to $50 billion the Fed injected to protect the world from "Y2K."

Yet the sums involved in previous periods of irresponsibility are mere rounding errors nowadays.

Thus, when I contemplate the damage that will be done by four years (and counting) of quantitative easing, I just shudder at how big the disaster might be -- and there is no doubt this experiment will be a disaster.

The Fed has expanded its balance sheet to $3.5 trillion, and it now owns more than 20% of outstanding U.S. debt. Either it is going to continue buying bonds forever, which is impossible, or there is going to be a massive dislocation at some moment, because someone else is going to have to buy that debt when the Fed ultimately stops, even if it doesn't choose to sell anything (and just lets the debt run off).

There will be no painless extrication from QE and, as I have said, I don't believe the Fed will be able to leave ZIRP (zero-percent interest rate policy) willingly.

Fleckenstein goes on to quote from Paul Johnson's "Modern Times":
Domestically and internationally they constantly pumped more credit into the system, and whenever the economy showed signs of flagging they increased the dose. The most notorious occasion was in July 1927, when Strong and (Bank of England Gov. Montagu) Norman held a secret meeting of bankers at the Long Island estates of Ogden Mills, the U.S. Treasury Under-Secretary, and Mrs. Ruth Pratt, the Standard Oil heiress. Strong kept Washington in the dark and refused to let even his most senior colleagues attend. He and Norman decided on another burst of inflation and the protests of (German banker Hjalmar) Schacht and of Charles Rist, Deputy-Governor of the Bank of France, were brushed aside.

A market of two minds....and can China have a depression?

Here's copper today. First, there's the HSBC China PMI number sending copper lower. And then the rebound and rally higher......

I accept that I could be wrong about a recession or serious financial crisis in China. However, one thing I keep seeing the China bulls say is that there's still a lot of growth left because the Chinese economy is still at a low level of development, especially in the west. Then why did the United States have a Great Depression? Air travel, automobiles, radio, rural electrification......how did a country on the verge of a technological boom suffer a decade of economic depression? As Rothbard shows in America's Great Depression, a credit bubble followed by bad policy can be a witches brew. Most people think China has good policy, but it was government intervention by Hoover, then taken to the fifth power by FDR, that made the depression a decade long affair.

I see a conundrum: if Chinese leaders are truly perspicacious, they will allow a major crisis and aim their policies at accelerating the bottoming and next growth phase. All the Chinese response to 2009 was, was Hoover on nuclear steroids. This has created a bigger problem than existed in 2008, when housing prices fell 30% and the stock market fell 80%. Chinese real estate prices are at record highs and still climbing about 7-10% per annum. The yuan is about 10% higher versus the U.S. in a period when most of the world was devaluing their currencies against the U.S. dollar, which is up from its 2008 lows. And yet, stock prices are less then 20% above their 2008 low and still down 66% from their 2007 peak.

I put my money where my mouth is: I own shares of PowerShares DB Base Metals Double Short ETN (BOM) and PowerShares DB Base Metals Short ETN (BOS). BOS is extremely thinly traded, but sells at a 22% discount to NAV, and sometimes more or less during the trading day. It is very hard to obtain shares because of the thin trading, but I'm betting it will be heavily traded when China sinks into recession, delivering a gain on NAV, plus close the 22% discount. I also have puts on Freeport McMoran (FCX), and will consider adding to these positions or opening new positions as conditions and opportunities warrant. Still looking for out of the money yuan puts......


Visualizing the Death of Paper Gold

Net speculative positions in gold contracts (from the CFTC's COTS report) versus the price of gold (as measured by GLD). The bullish speculators are exiting the paper market in droves leaving the bears behind.

Jim Sinclair: "A picture of the "Emancipation" of physical gold from fraudulent paper gold."


Update on China charts

If current trends hold, the yuan may begin depreciating by the fall.

Money supply growth continues to slow and unless that trend reverses, Chinese stocks will not reverse their downtrend.

Look for loan growth to print sub-15% YoY growth when the yuan depreciates.

Gold's last stand as China's Great Depression looms

I have no idea how gold will perform in an outright recession in China, which would likely be accompanied by a currency crisis. I can see gold collapsing in price as bubble investors (gold is a bubble in China in terms of investor psychology) puke gold onto the world market. I do not expect the central government will puke gold because gold is an independent asset, politically superior to the U.S. dollar. On the flip side, if the yuan collapses it will take all the other emerging market currencies with it. The question then is whether this causes hoarding of gold or whether the epic U.S. dollar rally this will trigger will lead to a collapsing gold price.

At least initially, gold would fall because many investors are primed to think stronger U.S. dollar means weaker gold price and vice versa. This U.S. dollar strength would peak at the end of a financial crisis in China. It would be temporary and ultimately illusory as the rising greenback raised U.S. debt levels relative to the world, setting up a bigger crisis down the road.

The best policy for China in a currency collapse scenario would be to nationalize gold holdings, essentially a repeat of FDR's move in 1933 except that they wouldn't steal from the Chinese people as FDR stole from Americans. Instead, the central bank would most likely buy the gold from the public at an inflated price that would balance the books and end a run on the yuan. The Chinese economy would emerge from this depression "debt free" with a gold-backed yuan.

China risks deflation trap as true GDP crumbles
“The economic return on credit is rapidly declining. They increased loans by $1 trillion in the first quarter, but growth slid anyway and is now below levels seen in early 2009 after the Lehman crisis. It is no longer out of the question that GDP will actually fall,” he said.
Diana Choyleva, from Lombard Street, said the official Chinese figures show that the economy contracted by 0.2pc in the second quarter, rather than growing 1.7pc (7.5pc year-on-year) as claimed by the government.

The discrepancy comes from the inflation assumptions used by Beijing. The government relies on a fixed basket of prices that can flatter the true health of the economy.

A better benchmark is the “GDP deflator”, which uses an evolving measure of prices that better reflect the reality of China’s fast-changing economy. “If you measure it that way, China is much closer to deflation than people realise,” she said.


China removes the interest rate floor on loans

China has taken a major step in banking reform by eliminating the interest rate floor on loans. If all banks charge the same rates, then it favors the large and powerful banks that can offer greater service and complementary financial products for borrowers.

It is a small step that will lead to a more efficient banking sector, but it needs to be viewed properly. Here's the wrong view:

Why China's "Interest Rate Liberalization" Is Much Ado About Nothing

It isn't much ado about nothing; it is another item on the reformers' checklist. A 10,000 mile journey begins with a single step, and a major economic reform program begins the same way.

Social mood affecting summer movies?

A small one is impossible to extrapolate from, but if the general mood of moviegoers is any indication, a pullback in stocks may be coming.

#1 ‘The Conjuring’ Scares Up $38+M Weekend & Rare ‘A-’ CinemaScore; Other New Films Soft Or Sinking: ‘Red 2′, ‘Turbo’, ‘R.I.P.D.’
Friday had bad news for every new film except great news for Warner Bros/New Line’s The Conjuring (playing in 2,903 theaters) which not only opened #1 with a $40M weekend on tap but made $3.3M from Thursday late shows and Friday midnights. Horror flick also received a coveted ‘A-’ CinemaScore which should help word of mouth - an unusually good grade for the genre where ‘D’ and ‘F’ have become commonplace.
Not surprising that horror is less popular during a bull market in stocks, but now we see a horror movie topping the mid-summer box office and many blockbusters failing to attract an audience. A change in mood brewing or just a quirky summer?


China Will Devalue The Yuan To Pay Bills

It is difficult to stick to an "extreme" position when most of the popular opinion is on the other side, doubly so when one readily admits that short-term factors are moving in the opposite direction. I have remain steadfast in my opinion that the yuan faces great devaluation pressures, even as it has risen post-2008, and even substantially so. My preferred strategy would be to buy very low cost options on yuan devaluation, a strategy that is unavailable to retail investors.

China's central govt fiscal revenue growth slows
For instance, revenue from value-added tax in the domestic market only met 97.2 percent of the budgeted target because industrial performance was poor.

This year, the central government may be under great pressure to achieve the full-year target of 7-percent growth, Finance Minister Lou Jiwei said when elaborating on the report.

In the first four months of the year, central fiscal revenue dropped by 0.8 percent from the same period last year, largely due to a slowdown in economic growth and structural tax reductions, according to the report.

In the next few months, industrial output growth may continue to slow down and enterprises may report less profits, which will set back fiscal revenue growth, Lou said.

A pilot program to replace the business tax with a value-added tax (VAT) in some service sectors will be expanded to the whole country in August, which will likely reduce central government revenue, he added.

Since the beginning of last year, China has adopted a raft of tax-cutting measures to help alleviate burdens for businesses and individuals and serve the country's economic restructuring.
There is nothing wrong with their strategy of cutting taxes, but it can become expensive if they don't have a way to pay for it.

State Council vows revenue reform
A State Council executive meeting Wednesday pledged to further revitalize existing fiscal revenue and make use of idle capital, as the growth of China's fiscal revenue has slowed and some areas have even seen a drop in fiscal revenue.
What is idle capital in a nation starved for capital, where private interest rates can exceed 10%? Foreign exchange reserves.

Closer Look: What to Do about the Huge Shortfall in Tax Revenue (subscription required, may become free later)
If the government makes better use of the funds it has and
dips into the huge reserves in the central bank
, it and the economy will benefit

If China starts spending down their foreign reserves and the economy booms as a result, the devaluation of the yuan will be avoided. Once they tap reserves though, it will be the crossing of the Rubicon. If the economy does not recover, they will try spending more and those reserves will be depleted rapidly once investors do the math and start pulling U.S. dollars out of China.

UK Will Leave the EU; David Cameron Should Have Studied Socionomics

MPs vote for law promising EU referendum by 304 - 0
The vast majority of Labour and Lib Dem MPs stayed away from the debate, dismissing the whole European Union (Referendum) Bill as a parliamentary "stunt".

However, not a single MP actually voted against the Bill for fear of alienating the electorate, as the party leaders fear many voters are anti-Europe.
Don't make too much over the fact that no one was willing to vote against a "stunt," but it does speak to the electorates mood if not a single MP was willing to oppose a referendum.

Pro-EU politicians will need to use tactics to win this battle as they are holding the low ground and their position is eroding by the day. The best strategy, which Cameron has been foolish not to use, is the one of calling early elections. He should have held a referendum two or three years ago, when the outcome would have likely been close, but pro-EU. Now, time is on the side of the euroskeptics and their best strategy is for pro-EU politicians to continue delaying a vote.

Obama's Failed Foreign Policy: He Should Have Studied Socionomics

Unless the Obama Administration has a double secret strategy to set off sectarian violence across the Middle East in a grand Iran-Iraq War strategy (Kissinger reportedly quipped, "My only regret is that only one of these two countries can lose the war"), it's foreign policy is a total failure.

Anti-Americanism flares in Egypt as protests rage over Morsi's ouster

Usually one needs to read an article, but it's enough to read the one sentence summary:
Both pro-Morsi Islamists and the anti-Morsi Rebel group accuse the U.S. of supporting the other and allege elaborate conspiracies against Egypt.
I can't think of a prior time when a U.S. president managed to anger both sides in a civil war. Of course the non-interventionists will point out the best strategy is to stay out, but even if one decides to pick a side, it usually helps to pick a winning side or at least the side that aligns with your own nation's foreign policy. Instead, Obama sided with the regime that brought Israeli's and Arab's together—in agreement that this regime should go. Now he's left with no position in Egypt, a key country in the Middle East with one of the largest armies in the region.

Had President Obama studied social mood, he would have known that Egypt was a long way from peace and the current regime was unlikely to last in office, or if it did survive, it would resort to the same anti-democratic policies of the prior government.

It does not bode well for the rest of Obama's second term that the same social mood tearing apart Egypt will also fray the political bonds in the United States. If, as some of his critics argue, he is a foreigner in America (even those who do not challenge his birth location believe his time overseas changed his perception and understanding of America to that of a foreign viewpoint), then it is very possible he will come to be "hated" by all Americans. One can see some strains of this possibility in Obama's decision to delay Obamacare. If it is permanently delayed, he will no doubt anger Democrats who in some cases risked their political careers to ensure its passage.


More Pain For Over Leveraged Chinese Firms

If anyone was doubting the Chinese government would not follow through with current economic reforms, here's the proof:

China signals will cut off credit to rebalance economy
In a statement from the State Council, or cabinet, Beijing laid out broad plans to ensure banks support the kind of economic rebalancing China's new leadership wants as it looks to focus more on high-end manufacturing.

President Xi Jinping and Premier Li Keqiang have flagged for some time that the rapid growth of the past three decades needs to shift down a gear, and analysts said Friday's announcement was a signal that they intended to press on with reforms despite evidence of a sharper-than-expected slowdown.
The policy is the right one. The error comes from those who believe the Chinese can control the economy. Central planners can direct it, but they cannot control it or violate the laws of nature. This is going to be a multi-year restructuring and any misstep could precipitate a crisis. The government is likely to step in and try to head off a collapse in real estate or other markets, but the linchpin of the bubble economy is debt. As long as they keep credit tight, there is the constant risk of a volatile implosion of bubbles, and as long as they forestall the popping of these bubbles, they remain extant.


Can Egypt Recover? Will EGPT Bottom?

I've been looking for Egypt to collapse by the time this cycle of social mood and revolution completes. With dwindling foreign reserves, there's going to be a currency crisis even if the nation is able to return to some form of political stability.

Lingering Crisis in Cairo Dims Egypt's Economic Outlook
The political conflict between President Mohamed Morsi and his opponents threatens to do further damage to Egypt’s pivotal tourism industry, drag down already-depleted foreign-exchange reserves and increase the country’s painfully-high inflation rate north of 8%.

.......While Egypt’s foreign reserves totaled $36 billion in December 2010, they plummeted as low as $13.5 billion in March 2013. Reserves rose to $16 billion in May thanks to a recent cash injection of $3 billion from Qatar and a $2 billion interest-free loan from Libya.
Egypt is living off of foreign aid at this point. If the nation does anything to jeopordize foreign support, they will run out of currency reserves and be unable to import food.


The Hunt For Liquidity: Big Chinese Banks Borrowing From Small Banks; State Owned Mega Bank Sub-Branches Borrow From Rural Cooperatives

Below is the (poorly translated) Google Translation of the article. Many big takeaways, including:

Pressure is coming from the top down; large banks are in worse shape than smaller banks, something we also saw in the U.S. crisis of 2008.

Some sub-branches of the big four state owned banks are borrowing from rural cooperatives.

Deposits were fleeing large banks to the tune of 30%. Small banks serve small and medium businesses, but big banks serve the real estate developers and other firms facing pressure due to government policies.

This credit crunch began in 2011 with the real estate crackdown. This is an intensification and flare up of an ongoing credit event.

The battle for deposits has gone nuclear. Some banks have limits on deposit rates, for example 5.5% in one case cited in the article. Yet many banks are now enticing depositors with 7% interest or higher.

One bank mentioned in the article hit their 2013 lending target in March.

Banks are negotiating in secret in order to get around capital restrictions.

"Shortage of money is sitting in the office to come out of the word, right? "July 2, Lin Jiandong more than once referred to this recent buzzword. Moreover, each mentioned once, we will send an exaggeration of ridicule voice, "I have been concerned about the situation of this wave of regulation, public information reflected in , and our grassroots banks operating in market conditions, is out of touch for . "Lin said.

Lin Jiandong IICA Zhejiang region of a line of the branch president, where he considers himself a grass-roots small banks did not feel that this volatility on the market. And this year the bank capital position, showing the heat transfer with the current market of "money shortage" totally rebellious 's logic.

"This wave of pressure should be from top to bottom of a small row easily than big firms. " is indeed as Lin Jiandong 's judgment, Jiangsu Province branch president of a state accusing him of a Lu Zhen (a pseudonym) said that from his own where the bank Look, like magic, like financial pressure, year after year urgent.

Particularly mysterious is that many banks newspaper survey from Jiangsu and Zhejiang learned from IICA line to the city commercial banks, state-owned big firms, financial pressure is inversely related with bank size, the scale, the more feeling financial pressure; interview to understand that, even with the state accusing him recently to find with the regional branch lines and other basic small rural cooperative financial institutions lending in interesting situations.

Behind The reason is that the big firms and other sources of funds are mostly real estate developers and other large customers, in this wave of austerity is suppressed, customer churn in bank funding constraints; while IICA line and other basic bank savings is the main source of small and micro enterprises, In the current round of austerity in the latter be encouraged.

Branch president of Lanchu pressure

"Is a Stolen Life." June 23, Lu Zhen get a 20 million yuan in the deposit, relieved. And two days ago, Shibor (Shanghai Interbank Offered Rate) rose almost across the board, as a result of a state-owned big firms transferred funds tense and breach of contract, "money shortage" touted up. "The end of June of deposits as well as the second half of the decision in July to lend the amount of deposit is the foundation of the bank of the country, the source of profits. "

"In fact, this wave of pressure from two years ago, began to accumulate." Lu Zhen where the institutions, banking institutions in the region, the total deposits ranked second.

Lu said that this year with previous years, the largest of the difference is that the society 's funds obviously nervous, sources less. While in previous years is competition severe, the community does not lack money.

Lu Zhen introduction, in which he 's banking system, bank deposits total deposits is the main source of funds, of course, non-bank financial services sector 's deposits, including various types of deposits. Non-bank financial services sector, including insurance, securities, trust, small loans and so on.

More so Lu Zhen restless night 's yes, many branch outlets savings amount, even negative growth, "also a lot of negative growth, over 30%."

In fact, this wave of bank liquidity crunch period began in 2011. Deposit ratio was because the pressure, you compete with banks offering short-term or even catch a camel ultra-short-term financial products, Lu Zhen institution 's front-line marketers began to speculate and anticipate this wave of banks tightening now states, "At the time, everyone joked , afraid of trouble you? have central Mom Danzhao it. "

Lu Zhen introduction, but front-line operational staff do not think so much, I felt the head office level, so many experts, there are good reasons to do so naturally, they certainly have the ease way.

"Solicit depositors, financial products such as business assessment index a quarter of a quarter increase, we are just going to finish indicators, however, marketing staff daily morning meeting, as more and more like MLM to boost Manner of brainwashing."

Lu Zhen 's annual assessment of the deposit amount is 200 million yuan, and this time last year at this time, are not yet complete index. End of each month and quarter-end statistical indicators, will feel the tension; course, the end of the year and the year is more like a "battle." The total deposits of negative growth pressure line will often investigate discussion.

"We analyzed all the customers of the loss, and found to reduce the majority of the senior client assets. "Lu Zhen I also have a large customer churn.

"I've been doing a big customer, one that is 100 million is up, the target to complete two on the line. "Lu Zhen said he 's target customers are developers, shareholders have the best government background of the kind. But last year and this continuous loss of several large customers, these are real estate developers.

On the other hand, real estate macro control policies continue to overweight, prospects subtle; mainly rely on these large customers of the state accusing him, Lu Zhen and other personal in which the pressure in a year stronger than one year.

Pressure is not just bank middle. Newspaper learned that not long ago a branch of Agricultural Bank of China Shanghai, newly recruited staff of employees to bear a small yellow deposits indicators pressure, he had to let her husband bought yields unpredictable line of financial products, to complete the index.

IICA line of "loose" Paradox

And Lu Zhen different, as the Zhejiang city IICA line of branch president, Lin Jiandong recent live very easily.

"In fact the current macroeconomic policy should be moderately tight to the central bank squeezed out the water, deleveraging, this policy should be continued. "is also a branch president, as opposed to Lu Zhen, Lin Jiandong in this so-called the

"Money shortage" in, looked calm, "Our system does not have any feeling of pressure."

Lin analysis of their own system of rural cooperative banks where the fund composition. Its deposits, savings accounting for about 98% of the total. Among them, the individual and private and other small farmers and micro-businesses or individuals to deposit characteristics of the decision, the source of these funds are relatively stable, and not national regulatory policies being squeezed, to leverage the investment. Moreover, all these years, the rural social security and other aspects of the improvement in this area of the deposit of funds accounted for more than 2%. "We have to deposit at ease, no water. "

"Like entering the development of the golden path. "Lin case said.

Coincidence of that, as Lin's major customers of small and micro enterprises, rural social security, etc., it is precisely the country in recent years,

Family policy to vigorously support the column. Lin Jiandong where the small micro-financial institutions, deposits form, the basic no other large real estate projects of funding sources, this fluctuation, but seem healthy.

"Actually, we all understand that the central bank 's regulatory purpose of the market is trying to turn over the money driven into the real economy. "Lin Jiandong said.

Forest practitioners in community financial institutions nearly 18 years, he bluntly that he basically does not express any opinion on the media, public opinion, because there is the head office discipline. But this time, he could not suppress a little.

Lin said that after a number of other areas have been lending to the real estate of the capital, it is impossible in such a short span of period gave withdraw, "a policy change, it is impossible banks face immediately after all banks are also enterprises, but also should have the spirit of the agreement. These areas of asset recovery will take time. "

"This is actually not money problems, is the bank of the policy of the miscarriage of justice. "area of a city firm Zhejiang branch president Kim Ho (a pseudonym) on the market 's perception of the same feelings with Lin Jiandong, "before lending fierce put, that the central bank would be relatively Relax. "

In response, Kim Ho and other high-level communication between the often also do this prediction, as long as the release that the deposit reserve 0.5% of the national market will be 600 billion funds released. Unexpectedly, the central bank has pinched tight and hold it.

"In fact, in February we have had a study." He recalled Kim, remember that the M1, M2 fell sharply, mainly due to the slowdown in deposits. Central bank released the data show, M1-M2 negative scissors -5.7% -5.1% qoq to expand, capital activity dropped significantly, deposits continued to increase regular basis, "This is an obvious the tightening signal. "

Tightening the money supply, directly reflected in the bank to solicit depositors business of intense competition. This white-hot, not only in the market, banks and other financial institutions in lending, deposit rates also turn into hurricane.

Dahon find a small line of "lending"?

And now, regardless of Dahon small line, the reporter interviewed clinics, Lanchu actually starts heating up.

"Our line of the provisions of deposit rate can not exceed 5.5%, which gives us a lot of pressure to carry out operations. "He said Kim, joint-stock banks on the market, most of them have reached more than 7%.

According to its introduction, this year, commercial banks are no longer limited to simple way Lanchu 's commitment to "high interest" and "innovation" model also includes tailored financial products, reimbursement of expenses, etc., and even the rapid development in recent years, is called " their own money management artifact " of funds automatic imputation business, but also has become the most relied on bank deposits Running the "Absorbing artifact."

Lu Zhen was washed six deposits assessment, a lot of pressure, "before large customers sometimes low-interest funds back to the bank, to help us through the critical point." But this year, they came back to solicit depositors high interest rates, 6,000,000 yuan deposit a multi-annual increase of 3.5 million.

In addition, banks have large sums of money by providing tailor-made financial products, as well as additional funds to the line directed to issue high-yield financial products the way funds poaching, "This model is easy to step on regulatory red line, since the second half of financial products frequently made case, that is because the bank 's funding pressures cause. "

"This year we dot the loan amount, in March this year basically put over. "He candidly reveal their payments early in the operating profit, driven by madness loan, you need to head office lending of the loan amount.

Some banks also do not secretly through the financial institutions "borrow deposits" in the "moderately tight" monetary policy trend, the bank 's capital back showing an "interesting" path, "These are not the head office level of borrowing law, accusing the find IICA Bank and other financial institutions to borrow than more basic level. "a joint-stock banks Treasury Department 's responsible person said.

"This transaction is not a fixed price, the two sides negotiated secretly." One line IICA headquarters executives, the current high price of funds of more than 1.2%.

He also revealed that the region a row with a state-owned joint-stock banks of a "polygonal" Auction.

In mid-May, the state bank official asked to borrow 60 million in deposits, period of six months, the interest rate of 0.8%. Although the offer is low, but because the two sides have had before trading IICA line agreed.

The inner circle of the other joint-stock banks of the branch responsible person knows both sides of the "sale", the proposal by the circle of four outlets responsible person participate in the auction. Eventually, the price of money pushed up to 1.2%. This "game" so that the person in charge IICA line turned the music, not only to earn a large sum, but also won a dinner for the small circle.

Will Beijing Turn Into Detroit?

Unlikely, for a few key important reasons. But one Chinese blogger asked that question yesterday after Starbucks was forced to relocate due to high rents. The store is in the central business district of Beijing and even on weekends, traffic in that Starbucks was heavy. No matter, soaring rents forced it to leave.

Starbucks relocates flagship Beijing store due to sky-high rentals
Starbucks has been forced to move its first ever store in Beijing as its annual costs including rent and staff is estimated around seven million yuan (US$163,000) a year, while the company's average revenues in their shops in the Asia-Pacific area is around US$829,000, the paper said.

Here is the blog post: 连星巴克也受不了北京的高房租了 (Even Starbucks cannot bear Beijing's high rents)
It is normal and inevitable that the real estate bubble affects businesses due to rising rents, but when even big companies like Starbucks cannot bear the high rents, who is next? And after that one, will more businesses leave? So much that Beijing turns into Detroit? Only God knows!
Beijing won't turn into Detroit, but rents are reaching the upper limits if Starbucks was forced out of a prime location.

China still going gaga for Bitcoin

Bitcoin's bubble has burst, recently breaking below the $100 support level, but trade is still growing rapidly in the digital currency.

Chinese investors go crazy for Bitcoin
A BTC craze is sweeping China, as hundreds start to invest and trade large amounts of the virtual currency Bitcoin. The craze has given birth to a huge industrial chain, covering trading, mining, chip production and mining-machine assembly.

Tencent, China's largest internet company by value, said that the currend demand for Bitcoin can be regarded as a type of futures investment involving the growth forecast of BTC's value and mutual bets on credit standing between upstream and downstream players. The major risk for the BTC investments lies in whether the currency can be embraced by even more people and become a standard online currency. While the company added that the new currency's lucrative outlook is attracting the participation of a growing number of savvy investors.

Yang Yaojun, former founder of a university campus website, became a convert of the Bitcoin currency or BTC one month ago, when he set up the website asicme.com to explore BTC business. He was inspired by the success of Zhang Shenpeng, a BTC enthusiast, who posted an announcement of advanced sales on May 22, selling 1 million yuan (US$163,000) worth of BTC-denominated products in just two days.
I can personally speak to the boom in Bitcoin because my Weibo account gets the most activity whenever I post my forecast for Bitcoin prices or discuss the currency.


China's Alipay Investment Service Is Booming

It is not a coincidence that Alipay was allowed to battle for customer deposits just as China's cash crunch got underway.

Net Users Flock to Yu E Bao Despite Regulatory Hurdle
The service, jointly launched by Alibaba Group's online payment unit and Tian Hong Asset Management Co. on June 13, had 2.5 million registered users by June 30, Alipay and Tian Hong reported.

Also on that date, the annual return for investors was 6.192 percent. That for one-year bank deposits was about 3.25 percent.

However, on June 21, the China Securities Regulatory Commission said the service violates fund management rules because part of it had not been registered with regulators.

The commission has required Alipay to submit extra documents for registration or risk punishment. Both Tian Hong and Alipay have said the service will continue to operate and they will meet regulatory requirements as soon as possible.
If the banks had enough power, they would have this service shut down. CSRC is part of the PBOC's regulatory arm though, and they are unlikely to shut down 余额宝.