2015-08-31

China Can't Stop Yuan Outflows

Bloomberg: SocGen: Half-Hearted Capital Controls Are Coming to China
Société Générale China economist Wei Yao thinks Chinese policymakers will take a measured approach to solving this conundrum—allowing the currency to depreciate in a controlled manner while placing more restrictions on the flow of capital out of the country.

Yao notes that in this discussion, it's important to distinguish which variable is the dog and which is the tail.

"The total size of capital outflows, among other factors, is mathematically a function of the PBoC’s choice of currency policy, not the other way around," she writes. "That is, total capital outflows equal the current account surplus plus the amount of FX reserves that the PBoC is willing to sell based its target for the RMB relative to the market’s view."

The largest source of capital outflows over the fourth quarter of 2014 and first quarter of 2015 has been declines in loan and trade financing liabilities by China's corporate sector, with the majority of those flows attributable to debt deleveraging.
It would be better to call them half-assed capital controls. Yao goes on to note the massive hole that is "errors and omissions," which shows capital is finding ways out the country. Chinese exporters can hoard dollars in Hong Kong or other offshore banking centers. Chinese and foreigners alike can buy art, gold, property and other high value items as a way to exit the yuan, even if the asset in question never leaves the shores of China. Once expectations of depreciation set in, people will find a way out of the yuan. Finally, there's the offshore yuan which can act as a perma-drain on reserves if it consistently trades below the onshore price.
"Not letting the currency go requires significant FX intervention that will not prevent ongoing capital outflows but which will result in tightening domestic liquidity conditions; but letting the currency go risks more immense capital outflow pressures in the immediate short term, external debt defaults and possibly further domestic investment deceleration," says Yao.
The solution to this problem is a massive one-off devaluation. China did it in the 1990s and experienced 15 years of rapid growth, plus 5 more thanks to the post-2008 stimulus.

Currency devaluation is not a solution. It is the denouement of rapid credit inflation. Given the choice between deflation and devaluation, governments will choose devaluation. Given the behavior of China's government with regards to the stock market crash, I don't think their pain tolerance is as high as people think.

100-City Survey: Prices Rise 0.95% From July, 0.15% From 2014

51 cities up, 49 down. Shanghai led the way with a 3.51% price increase in August.

Data table here: 2015年8月中国房地产
Google translated table: 100-City Price Survey

Full report: 2015年8月中国房地产指数系统百城价格指数报告

Are You or Is Anyone You Know, A Short Seller?

Bloomberg: Man Group’s China Chief Said to Assist Police in Probe
Chinese authorities took Li Yifei, chairwoman of hedge fund Man Group Plc’s China unit, into custody to assist with a police probe into market volatility, according to a person familiar with the matter.

Li assisting with the investigation doesn’t mean she is facing charges or has done anything wrong. She has led Man Group in China since November 2011, according to her profile on LinkedIn. The person asked not to be identified because the probe isn’t public.

A call to China’s Ministry of Public Security rang unanswered Monday. Rosanna Konarzewski, head of communications for Man Group, declined to comment. Li’s mobile phone was turned off when called today.
There was no malicious short-selling when the Nasdaq collapsed in 2000, or in 1929 when the stock market collapsed. Authorities in China blew a bubble and now it has burst. They should have left well enough alone and today everyone would be a bull on China because the market would be up maybe 20% in past year, or at the very least, the volatility would be contained at much lower levels. Instead, they created instability by creating short-term speculative demand.
China's response is not unique. When the efforts of central bankers begins to fail and uncontrollable chaos begins in the financial markets, there may be literal civil war in some nations as factions fight to blame or avoid blame for the collapse.

Chinese Gamblers Not Paying Debts

SCMP: Macau casinos take out insurance policies after rise in hostage-taking over gambling debts
Major hotels, resorts and casinos in Macau are banking on lucrative insurance policies to guard against the abduction of wealthy or celebrity guests amid a rise in the number of kidnappings over unpaid gambling debts.

A top Hong Kong insurance broker said all major hotels and casino groups in Macau had expressed interest in specialist risk insurance to mitigate the fallout from any high-profile incident.

Chinese Give Up on Home Buying Plans Due to Stock Market Losses

tens of millions of Chinese investors' family "balance sheets" have been substantially modified.

Chinese brokers have seen traffic drop from hundreds of account openings per day down to low single digits as Chinese give up on the stock market.

 Beiqing Bao reporter visited a number of securities companies, business department, to see the scene are similar, very quiet. "Go on like this, I'm afraid someone Securities unemployed." In the lobby of a Wai Avenue business department of a securities company, a a sales manager looked up at the wall of the A-share charts and looked a bit sad.
He may not be as sad as those who lost money:
In this round of stock market crash, the market value of his stock fell from more than ¥1 million to ¥400 thousand, due to the market early, did not fall below the cost line, with the broader market rally, his stocks rebounded back to the market value of over ¥600 thousand.

About two weeks ago, Mr Rao think the stock market risk has been released is completed, he added more than ¥400 thousand into it. The results of his stock plummeted after a few days rose slightly. He deliberately open the "China Railway Construction" k line graph heavily loaded with his computer securities business hall. He pointed to the display on the wall five large Yinxian, he kept sighing, "not only no profit, but also a loss of more than ¥100 thousand, he has been caught up."
At least he didn't use leverage:
Working in a law firm Zhang Yuan in the beginning of the year after graduation accumulation of 200,000 yuan invested in the stock market, after several successive harvest limit, Zhang Yuan's paid 2% monthly interest, borrowed 200,000 yuan from loan sharks and dropped the stock market, "felt the stock market to make money too easy, I did not go to consider the risks."

In the first half, ST stocks have been stir-fried restructuring concept, a lot of buying shares of ST Zhang Yuan stock market had reached a peak of 800,000 yuan.

Continued to fall in June and July, Zhang Yuan's nightmare come. Shares he holds several fallen by two-thirds of the market value. "Tens of thousands of yuan gone every morning, every day is suffering."

Style cliff fall in the stock market this week, Zhang Yuan's stock market value fell below the cost line, the principal amount of the loss of nearly 100,000 yuan.

"I will not withdraw from the stock market, now is a loser's exit records, where the falls where you need to stand up." Zhang Yuan said that the stock market crash gave him a profound risk education.
Zhang isn't the only one hanging on to underwater shares (and representing a large amount of supply that could be unloaded as soon as turn profitable):
Two weeks ago, seeing the A-share rebound fatigue, Chen Fang began showings, which intends to take 300,000 yuan to do down payment. But accidentally, fast chips fancy house was robbed. In just two weeks, the "Oriental Fortune" and from about 50 yuan fell to the lowest 29 yuan. Wherein several consecutive limit, simply can not sell.
Others are shelving their home buying plans too:
August 26, Chen Fang's stock market value has fallen below the cost line since her market. She decisive "flesh" was. Friends group in the menu, she told everyone she shelved plans to buy a house.

Beiqing Bao Chen Fang told reporters, only a few dozen people "markets," the group, at least five of the original 80 to buy a house this year canceled the plan, the worst thing is to enter the stock market in May this year. "There is a friend, her family gave her ¥500,000 for a down payment, less than ¥200,000 remains, these days she's not in the mood to go to work and taking time off to rest at home."
Chinese investors are literally depressed.

Sohu: 股民称生活被股市暴跌改变:买房计划搁置

China's Debt Moves Will Fail

First, a deflationary move.
WSJ: China Places Cap on Local Government Debt
Chinese lawmakers have placed a 16-trillion-yuan ($2.5 trillion) cap on local government debt as Beijing looks for ways to address one of the major impediments to the world’s second-largest economy.

The Standing Committee of China’s National People’s Congress imposed a 600 billion yuan limit on the direct debt local governments are allowed to run up this year, the official Xinhua News Agency said late Saturday. That would be on top of 15.4 trillion yuan on debt owed by local governments as of the end of 2014, Xinhua said. The moves are the result of a new law requiring the government to limit local debt, it said.

The caps don’t include indirect liabilities, which officials said totaled 8.6 trillion yuan, according to Xinhua. The latest government estimate put China’s local debt load at 17.9 trillion yuan as of the middle of 2013, up from negligible levels just six years before, including debt held indirectly. Xinhua on Saturday said the local government debt balance grew by 40% last year compared with the first half of 2013, though it didn’t provide further details.
China's local governments are willing to borrow. They are creating bad debt, but they are borrowing. This is the opposite situation with private businesses, which are not borrowing. Capping credit at local governments will cap total credit growth.

Next, a seemingly inflationary move.
WSJ: China to Remove 75% Cap on Banks’ Loan-to-Deposit Ratio
China will remove a 75% cap on banks’ loan-to-deposit ratios on Oct. 1 following the adoption of a legal amendment by the national parliament on Saturday, according to state news agency Xinhua.

The ratio will instead be regarded as a liquidity monitoring indicator, according to the amendment passed by the Standing Committee of the legislature, known as the National People’s Congress, Xinhua said.

The 75% cap has been in place since its inclusion in a commercial banking law enacted in 1995, Xinhua said. China’s State Council, or cabinet, said in June that the ceiling would be scrapped in a draft amendment to the law.

Under current rules, Chinese banks must keep their loan-to-deposit ratios below 75%. For every dollar a bank collects in deposits, it can lend only 75 cents.
The cap doesn't matter for credit growth because banks create money when they issue loans. Lending creates the deposits, but when lending growth slows, it doesn't matter if you have deposits or not. It will ease the pressure to attract deposits though, which could go a long way to alleviating periodic cash crunches.

Starting Tomorrow: China Lowers Down Payment on Second Homes

China has lowered the down payment on second homes from 30% to 20% for home buyers who tap the public housing fund.
In order to further improve the housing fund individual housing loan policy, to support housing demand reasonable deposit workers, to have a corresponding housing units and home loans have been cleared of households, in order to improve the living conditions apply for housing provident fund loans to buy housing commission again, the minimum down payment the proportion of funds decreased from 30% to 20%. Beijing, Shanghai, Guangzhou and Shenzhen in the national unity policy, based on local realities, the independent commission decided to apply for housing provident fund loans down payment of the purchase of second homes.

iFeng: 公积金贷款购二套房最低首付由30%降至20%

U.S. Financial Empire to End; General Sees U.S. Policy as Driven By Monetary Concerns

Several long excerpts below, but even more at the link.

Francisco Sisci: One belt, one road

Dismal Data: NPL Ratios Rise, HK Sales Fall

Want China: Several Chinese provinces' bank NPL ratios approaching 2%
At a time when profits were declining sharply in the first half, Guangxi's banks' NPLs had been rising quickly, reaching 34 billion yuan (US$5.45 billion) as of the end of June, up 40% compared with the end of January, with the NPL ratio rising 0.49 of a percentage point to 1.96% from end-January.

...Shanxi's banks' NPL had reached as high as 4.5% due to serious overcapacity in the coal and steel industries, said one unnamed senior executive at China Merchants Bank on June 19. Shanxi regulators have yet to unveil any related statistics.
Shanxi is one of the rust belt provinces in recession.

FT: China’s banks face tightening bad loans squeeze
The country’s big four state-controlled banks — Agricultural Bank of China, ICBC, Bank of China and China Construction Bank — reported only marginal gains in net profit for the first half of the year, while official measures of non-performing loans surged.

...ICBC, the world’s biggest banks by assets, warned that the “risks of illegal fundraising and financial frauds are spreading to the banking system” as it reported a 28 per cent increase in non-performing loans compared to the previous six months.

The bank’s NPL ratio rose to 1.4 per cent as of end-June, from 1.29 per cent at the end of March, while Bank of China’s rose to 1.4 per cent from 1.33 per cent and Agricultural Bank of China’s hit 1.83 per cent from 1.65 per cent. The ratio for CCB rose to 1.42 per cent from 1.19 per cent at the end of last year.
Take those numbers with a grain of salt because there are many Tricks For Hiding NPLs.

Finally, SCMP: Falling sales in Hong Kong and China bank concerns all indicators of darker times to come
Swire Properties, a subsidiary of conglomerate Swire Pacific, said sales at its upmarket Pacific Place mall dropped 12 per cent in the first half and warned there is no sign of a pick up in the luxury retail sector.

Footfall fell 7.2 per cent at Lifestyle International's Sogo department store in Causeway Bay.

...At cosmetic retailer Sasa, second-quarter turnover fell 8.6 per cent to HK$1.8 billion. The firm blamed a "deteriorating" market environment for "putting more pressure on the group's earnings". Jewellery group Chow Tai Fook's second-quarter sales slipped 6 per cent, weighed down by sluggish business at its Hong Kong and Macau stores.

Technology Fueling Negative Mood Transition

Daily Mail: It's not just humans, COMPUTERS can be prejudiced too: Software may accidentally sort job applications based on race or gender
You might think that computer software operates without bias because it uses code to reach conclusions.

But scientists have found that programs used to sort job applications and loans could be just as prejudiced as humans.

Machine learning algorithms used in some CV scanning software may make generalisations based on data in an application that accidentally mimic human discrimination based on race or gender, they warn.
If you write an algorithm to sort candidates based on objective criteria, it exhibits racial "bias." The conclusion is not that bias is overstated in society since the machines, which have no bias, are putting out similar results to human decision makers. Instead, the software will be hobbled in order to make it conform with ideology. This is the anti-scientific bias that permeates during periods of negative mood.

Meanwhile, others are using technology to reject integration of all types.
Websites could soon block people from accessing their content due to their race or gender following the development of software that checks the genetic profile of users.

The Genetic Access Control application works by requesting access to information compiled by DNA analysis firms like 23andMe before allowing users can access a website.

This would allow the website to check the user's ethnicity or gender to limit or deny them access, according to the programme's creator.

The software, which has already been blocked by 23andMe, relies upon the user having already had their DNA profile analysed by genetic firms.
23andMe blocks the software, but it can't stop people from supplying the information.

2015-08-30

From Juggernaut to Crisis: Perception of China Shifts With Mood

When times were good, China's still heavily planned economy was a model to emulate. It was seen as turning into Singapore, a highly efficient market economy with greater individual liberty, but little in the way of political rights.

Now times are bad, and all manner of theories and criticisms are pouring out of the woodwork. The article below is a good example, and it takes a novel angle of looking at historic examples of rising powers with great central control.

Politico: China: The new Spanish Empire?
Since the dawn of capitalism, closed societies with repressive governments have — much like China — been capable of remarkable growth and innovation. Sixteenth-century Spain was a great imperial power, with a massive navy and extensive industry such as shipbuilding and mining. One could say the same thing about Louis XIV’s France during the 17th century, which also had vast wealth, burgeoning industry and a sprawling empire.

But both countries were also secretive, absolute monarchies, and they found themselves thrust into competition with the freer countries Holland and Great Britain. Holland, in particular, with a government that didn’t try to control information, became the information center of Europe — the place traders went to find out vital information which they then used as the basis of their projects and investments. The large empires, on the other hand, had economies so centrally planned that the monarch himself would often make detailed economic decisions. As these secretive monarchies tried to prop up their economies, they ended up in unsustainable positions that invariably led to bankruptcy, collapse and conflict.
It's interesting too see how many people have become suddenly bearish on China. In some cases, perhaps in the case of the author above, the person may have been bearish a long-time, but only now with a change in mood are their views accepted. In other cases, people are turning bearish all of a sudden and have little basis for their interpretations. Sentiment will turn extremely negative on China before the current crisis ends. If the yuan does tumble, there will be those saying China has failed. Watch the reforms though. As long as China continues to push ahead with reforms, it will emerge stronger on the other side of this turmoil.

Sentiment & Analog Call for A-Share Bounce, China Throws in the Towel

Speculators are betting heavily against the current rally and the analog with Nasdaq 2000 (as well as the Shanghai Composite - Dow 1929 analog) both show the market should be entering a bounce period here. It also appears China may dip at the open due to the government abandoning efforts to prop of the market. Government intervention is inherently destabilizing because investors wait for it to end. Now that it is ending, it lifts a weight off the market.

Bloomberg: If the Options Market Is Right, China's Stock Rescue Is Doomed
Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.
The cost of bearish contracts on the China 50 exchange-traded fund surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.
Sunday night futures look ugly.

ZH: Black(er) Monday Looms: Dow Futures Down 220 After J-Hole Speeches & China Fold

FT: Beijing abandons large-scale share purchases

BBC: China punishes 197 over stock market and Tianjin 'rumours'

BOJ Talks Up Chinese Economy

Japan Times: The Bank of Japan is China’s biggest cheerleader
Kuroda, however, is guilty of taking things to the opposite extreme. Speaking in New York, he challenged the negativity shrouding Asia’s biggest economy, saying he’s “reasonably sure” China will grow between 6 percent and 7 percent this year and next — a prediction that hardly anyone else has endorsed. Kuroda has effectively lashed his credibility, and his legacy, to China’s trajectory. It’s not hard to understand why he might have felt he had no choice.

Kuroda has to contend with three big problems. The first is demographics. Just as his predecessor Masaaki Shirakawa warned, Japan’s consumer prices are bound to fall as its population ages. The second is a dearth of confidence: Monetary policy has been rendered comatose by the public’s hesitance to borrow and banks’ hesitance to lend. The third is China’s slowdown — a variable far beyond Tokyo’s control, but no less critical for Japan’s fate.

Reuters: BOJ's Kuroda says China slowdown unlikely to hit Japan exports much
"Already exports to China have been affected, but I do not think that Japan exports in coming years will be (very) negatively affected," he told a seminar hosted by the Japan Society in New York.

That is "partly because China will maintain 6 to 7 percent growth and Japanese capital goods are... quite competitive."

Kuroda said China's monetary easing is an appropriate step to mitigate any impact on its economy, adding that some market players have become "too pessimistic" about the Chinese economy given its growth is "still quite robust".

..."We think that the 2-percent inflation target would be achieved with the current QQE," he said. "So at this stage we have no concrete proposal for further accommodation."

Analysts at Barclays Capital said Kuroda's remarks show the BOJ has not changed its upbeat economic and price assessments, and appears in no mood to act at least until April next year.

Macau Pawn Shops Still Moving Cash

Reuters: Despite raids, Macau pawn shops still help flout currency rules
At 10.30 am on Thursday, three Chinese men gathered in a tiny pawn store less than 100 metres from Macau's onion-shaped Lisboa casino. One, with spiky black hair and navy cotton trousers, watched as the female cashier counted wads of HK$1,000 bills he had just signed for through multiple bank cards.

Placing three stacks totalling HK$300,000 ($38,700) into his black leather bag after signing at least two bank card receipts, he pulled out another card and told the cashier in mandarin to give him another HK$200,000.

The transaction, which took less than 10 minutes, shows the ease with which Chinese gamblers in Macau, which generates more than five times the gambling revenue of Las Vegas, can use credit cards to skirt China's currency restrictions, which limit withdrawals to 20,000 yuan or US$3,200, and its money-laundering rules.

Mini Stimulus On the Way; 5 Signals From Li Keqiang

WSJ: Chinese ‘Mini-Stimulus Package’ May Be Coming, Ex-PBOC Adviser Says
Mr. Li, a former adviser to the People’s Bank of China who also goes by David Daokui Li, said the government could conduct what he called “acupuncture stimulus,” because it would target specific key points. Elements could include lowering long-term financing costs and the implementation of previously announced reforms for state-owned enterprises, he said. He also said interest rates “still have room to cut.”

The PBOC earlier this week cut interest rates and flooded the banking system with new liquidity amid a deepening slowdown and a stock-market selloff in the world’s No. 2 economy.

Big Chinese stock-market drops in late June and early July “arguably can be perceived as a healthy price adjustment,” Mr. Li said. But steep stock-market declines since then are “more scary for policy makers because it’s not due to leverage, it’s not due to overborrowing, it’s not due to inexperienced investors,” he said. “It’s due to lack of confidence in the overall economy.”

Mr. Li said he hopes for a “relatively quick” economic recovery, “but proper policies must be put in place.”
It fits with Li Keqiang's recent comments: China premier Li Keqiang insists economy 'within appropriate range'
"in the context of complex and changing situations abroad and deep-rooted problems at home, we pressed ahead with progress while ensuring stability with sustained efforts for structural reforms and targeted macro-regulation measures".

"These included, among others, cuts in the required reserve ratio, interest rates, taxes and fees and measures aimed at stabilizing the market, which are already paying off."

...Li conceded that "now that the traditional drivers for growth are not as strong, it is important to come up with new measures to bolster reform and opening up. It is necessary to provide more public goods and services, and encourage mass entrepreneurship and innovation to boost the growth momentum".
iFeng condensed Li's comments into 5 signals: 李克强首次经济专题会释放五大重要信号

1. China's economy is experiencing new pressures (financial markets and weak trade)
2. Continue to implement a proactive fiscal policy and stable monetary policy
3. Use micro-stimulus to stabilize the macro economy
4. Continue to advance financial reform and maintain financial market stability
5. There's no basis for continued depreciation of the renminbi

2015-08-29

China's Bull Market Is Over: Underwater Investors Describe the Descent From Heaven to Hell

However, the hustle and bustle comes to an end, like a Golden Age carnival gorgeous ended. But you know the bull really came, it had magnificent swept the hundreds of millions of micro-channel and stock accounts and had changed many.

The Economic Observer describes the role social media played in sweeping up investors in the bull market of 2014/15, only to leave them trapped in investment hell hanging on to paper losses.

EO: “群票”的秘密:被套者讲述从天堂到地狱

Here's one investor trading on rumors and following WeChat groups:
As practitioners bank personal financial business, Shen Xun need to reach many fund channel staff. In the past six months, she will continually add some groups, while the other side there is always some "inside information" from within the fund company. In her view, the news may not be all tricky, but not to the wind hole, worth in a bull market as an important reference for the subject, but on the other hand, the fund company in order to expand the business scale of years to do more, bear market, whether it is Plate or recommend individual stocks are not unreliable.

...Shen Xun deep-set stock for micro letter circulated news has been feeling numb, clung to the belief that long-term investment, but she also remember, only three or four months ago, everything is so beautiful.

...July 23, the stock market crash has undergone a crash is being repaired, said nothing of the bear market in the long-lost "lead Big Brother" ST Murray and drying out of the great wisdom of two K-line diagram, and with the word "perfect buy the dips." Shen Xun said, "a group of uplink perfect, almost no callback. Although it is issued afterwards, or make people feel envious. But you asked me if he was not really buy, I do not know."

Liu Cixin Wins Hugo for Best Science Fiction Novel

Liu Cixin's Three Body Problem won best novel at the Hugo Awards this year.

Caixin interviews him here: Liu Cixin on Fantastic Fiction
The Three-Body Problem unfolds at the start of the Cultural Revolution and is as much about the gravitational pull of planets as it is about personal ideologies. The author Liu Cixin has worked as a computer engineer at a state-owned power generation company in Shanxi Province for 30 years. His reign in Chinese science fiction started in 1999 with an article that won him the Galaxy Award, the highest award for sci-fi in China. He continued to receive the award for another seven straight years and again received the honor in 2010.

Now the winner of this year's 2015 Hugo Award, Liu's reputation as a master of­ the genre has been thrust into international prominence. The first in a trilogy, the Three-Body Problem depicts a mysterious alien civilization that wants to colonize the earth to save itself from being destroyed by the unpredictable suns in their galaxy, and the epic war humans wage to fight their invasion, which unfolds in full detail in the second book, The Dark Forest, of which the English-language translation was published in August.

With wit and candor, Liu offers a view into creating visions of the future and addresses how he feels about being a pioneer in the development of science fiction in China.

A translated excerpt of an interview he recently gave to Caixin follows.

Caixin: The Three-Body trilogy is both an ambitious and intelligent trilogy. Could you take us through the writing process of the books, and whether the narrative structure followed the initial idea?

Liu Cixin: Of course, as an amateurish author, I start writing a book only after I have the whole story outlined in mind. However, the story underwent many changes, and there were some unexpected divergences in its exposition. I can't say that it ended up being completely different. There were several changes, but it's hard to say by just how much. The story's central points evolved through a long process which involved many changes.

In what ways is Chinese sci-fi distinct to sci-fi written in the West?

That's a very big question and a few words on the subject would not suffice. One aspect is that Western sci-fi stories are often embedded with elements of Judeo-Christian thought and tend to focus on belief systems, concerning itself with moral issues such as cloning or artificial intelligence. Chinese sci-fi has emerged from its own cultural background and this accounts for many differences in how the genre has been uniquely interpreted.

Rebalancing and Revaluing: Foreign Investment Falls 30%, But Service Sector Growing

Use of foreign capital fell 30% in the first six months of 2015, but the service sector saw foreign capital climb 19.6% and now accounts for 62% of foreign capital deployed in China. Financial services saw foreign investment climb 381%.
Exchange rate depreciation will have lasted nearly two years of foreign reflux fears further enlarged, but this is the most sensitive to the feelings of all the real estate industry. In total fixed asset investment, foreign share is rapidly decreasing. Last year, the Chinese capital in place completed investment in fixed assets, the use of foreign investment decreased by 8.3%, while as of the end of June 2015, China's utilization of foreign capital has reached 30.9 percent decline.

On the other hand, the first seven months of this year, in agriculture, manufacturing the actual use of foreign investment are lower down the situation, the actual use of foreign investment in the service sector unexpectedly grow, especially in the financial services sector to foreign Capital maintained a strong appeal. January-July 2015, the actual use of foreign investment services $ 47.5 billion, an increase of 19.6% in the proportion of the national total of 62%. Among them, the actual use of foreign investment growth in the financial services industry the most significant, an increase of 381.1%.

Fluctuations in foreign exchange rates and investment can hold the data associated with the real economy is the most important reference index.

Qiming Venture Partners Zhang Yong told the Economic Observer reported, "There are foreign background of these investment institutions actually see more of China's long-term development, the basic of tune is not changed, but now return home produced some short-term view, even there has been excessive pessimism bias adjustment, which is more serious in Hong Kong, we can clearly see an exodus of foreign investment are Hong Kong and the Mainland. "
Economic Observer: 利用外资下降30% 外资加速撤离中国

Four Big Signs First Tier Home Prices About to Rise

iFeng: 四大信号透析房价走向 一线楼市或再度升温

1. Foreigners can buy
2. Land supply falling
3. Investor and buyer confidence is good; first-tier luxury sales are soaring
4. PBoC cut interest rates and RRR; home loans now the cheapest in history

2015-08-28

Deflation Fallout: East Asia's Largest Textile Company Goes Bust; 80% of Companies Face Bankruptcy

The firm in question: Jiangsu Baolijia Textile Co., Ltd.
Baolijia Textile Co., Ltd. is a new large-scale private enterprise, which was established from 2002 with total investment of RMB 800 million. It covers an area of 500mu and 140,000 sq.m. as building area, with totaled 4000 employees. Its design production scale is 300,000 spindles, and its annual sales amount is RMB 1.3 billion. The company is divided into Suzhou Baolijia Textile Co., Ltd. and Jiangsu Baolijia Textile Co., Ltd.

From the iFeng headline summary:
East China's largest textile large - Baolijia group discontinued message, causing the industry in an uproar, marvel!

Today, according to Hongze promote media message: Because Baolijia of bankruptcy, to the government and the general staff Baolijia brought great losses, now the county government will be to sell stock Baolijia way to pay compensation Employees loss!

Because Baolijia of bankruptcy, to the government and the majority of employees Baolijia brought great losses, the county government will now stock products to sell Baolijia way to pay damages of staff! June wages plans issued before August 10!

Text of Chairman's letter:
Baolijia of their staff and the community of friends:

Today Baolijia encountered unprecedented disaster, let us suffer, frightened. There are some staff wages and benefits did not get our hands on, there are no friends in the community loan is also clear, here I express my sincere apology. The following is the basic situation caused by these reasons and my views:

1, since last year, Baolijia Group are various financial institutions intensive pressure recovering loans of 207 million, equipment rental fee of 100 million yuan, cash flow of only 300 million yuan.

2, significant amounts Lu'an, Chuzhou Development Zone two investment agreements did not materialize, which Lu'an Economic and Technological Development Zone Investment Agreement commitments Lu'an Baolijia 420 million yuan project to solve the credit funds, has invested its seventh year, credit companies to get only 20 million yuan Lu'an agricultural businesses, is just a fraction of protocol commitments. Therefore reasons, resulting in insufficient Baolijia Lu'an company operating rates, resulting in annual losses, it can not honor the agreement of the Zone tax convention. Chuzhou Development Zone is also committed to addressing the credit for each completed a vehicle between 60 million yuan last year, four workshops have been completed and put into production, should be for enterprises to solve the credit funds 240 million yuan, the actual row in Chuzhou now only 10 million yuan loans, originally Chuzhou 20 million yuan loans ICBC also by 18 June this year, all the income loans.

3, in order to maintain business livelihood, strive to borrow from private social network circle 73 million yuan, and now the resources are all withered, but also saddled one debt.

4, received loans of financial institutions uncontrolled pressure loans, resulting in a serious shortage of companies operating rate, losses, until inability dimension count today.

5, the current storage materials company Lu'an enough wages and benefits paid to its employees, Chuzhou too few stocks, need to rely on government to solve problems. Hongze, Taicang government also needs to solve part of the problem, thus to trouble the employees and the community to bring a lot of understanding with me.

6, I also hope that all financial institutions to understand the sufferings of the enterprise, the overall situation, do not receive the loan uncontrolled pressure loans, hurt people hurt themselves also equal, and finally lose-lose. Also we hope that the integrity of the investment over the zone can not be invested in companies on what is the matter, all of the responsibility on the corporate body. A Baolijia go down is not terrible, if many companies have experienced the same fate Baolijia, will social stability will have a tremendous impact.

7, because I am the reason we lost confidence in harm Baolijia, I hope the employees and the community do not be discouraged, do not worry, even if I have not the ability to run this business, and I believe that the future will be Baolijia the ability to better boss to run well this business, because I lack the ability to control the business, resulting in Baolijia misfortune to all sectors of society friends and employees the hassle and confusion expressed deep regret!

I hope everyone in the hot summer, eliminate cool down, take a break, waiting for good news. If you have the opportunity to also, and everyone together, I will redouble our efforts to work, but also hope that we can continue to support me.

I believe the government can coordinate and deal with these issues in front, and finally I wish you peace, proceeds smoothly!

Baolijia Ge Fuchun

2015-7-31
What's perhaps even more amazing that this letter, published in a Zhejiang newspaper, is the two paragraph commentary that follows it, which includes a claim that 80% of private businesses are at the edge of bankruptcy.
Every employee should thank your boss, especially the last two years of poor industry as a whole. You may never know, when you are playing phone desertion, your boss is battered; you may never know how much you plan to take the salary that when your boss is down on an IOU signed. China's private bosses, to solve the employment of more than 80% of the Chinese population. But China's private bosses, more than 80 percent of enterprises facing collapse risk, legal risk. Typhoon cover when the ship, the captain must be the most unlucky own - crew can escape, but the captain could not bear his boat!

Please take good care of your boss, he really doesn't have it easy!

iFeng: 华东最大的纺织企业破产 董事长叹民企老板不容易

ChiNext Bounce Right on Schedule

At the start of the week I said a bounce would arrive in a few days; it came on Wednesday by close and Thursday by intraday.

This is a truly amazing analog when you consider China's massive intervention compared to the U.S.'s relatively hands off approach in the early 2000s. Two very different approaches to bursting bubbles and yet very similar performance in the first two months post peak. According to socionomic theory, the Chinese authorities are as much prone mood as the average investor. In other words, they intervene at the same moments that the mood in a free market would also "intervene" with contrarian, value and short-covering buying. Chinese authorities and average investors think "now is a good time to buy" because both are being affected by mood in a highly emotional market.

Yuan Depreciation Spiral Good for Treasuries

ZeroHedge lays out the "Chinese reserve depletion is bad for the U.S., QE4 is inevitable" argument.

ZH: Why QE4 Is Inevitable
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.

In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
Right here is my main beef with the argument. This line of thought assumes China will sell U.S. treasuries into a weak market, that there will be a mismatch of buyers and sellers, in this case way more selling by China and EM central banks.

An alternative model is as follows. Chinese (and other EM citizens) want to hold U.S. dollars and will exchange RMB for USD. This RMB is dumped back onto the market, resulting in more exchanges for USD. A depreciating spiral.

From the currency side, it's easy to see the U.S. dollar rally.

The treasury side is a matter of what to do with those U.S. dollars? Where are greenbacks going to flow in the middle of an emerging market currency crisis?

On the other side of the crisis, things look ugly for treasuries and the U.S. dollar, but both are very likely to peak at the most panicked phase of the crisis.



China Opens Real Estate Market to Foreigners

Buying financial assets and property is now easier than ever, right at the moment most people want nothing to do with China, including wealthy Chinese. A great moment for contrarian investors is coming.

WSJ: The Verdict on China’s Easing of Foreign Property Rules? A Resounding ‘Meh’
While some countries are starting to put the brakes on the onslaught of foreign property investors, China is doing the opposite.

Beijing’s latest move to loosen restrictions for foreign investors and homebuyers in the Chinese property market could draw some attention to the lackluster sector, but it’s unlikely to help the country regain its crown as an investors’ darling.
The key factor driving both policies is Chinese home buyers.
China is easing foreign-exchange restrictions placed on foreign companies and individuals when they apply for loans and when they need to change yuan proceeds gained from the sale of a property, said a circular jointly issued by six government bodies, including the housing ministry, the trade ministry, the central bank and the foreign-exchange regulator.

It is also providing foreigners the same rights as locals on purchases of multiple homes, depending on each city’s purchase policies, according to the circular, which is dated Aug. 19 but was published Thursday.

The earlier rules on restricting foreign participation in the domestic property market are no longer relevant in the current environment, as China struggles to cope with its worst economic slowdown in decades. Concerns about capital flight, given the surprise yuan devaluation earlier this month, have also compelled policymakers to make policy U-turns.
The bottom isn't in for Chinese property and yields are still terrible in many cities (witness the implosion of SOHO China's stock), but there may soon be the chance to purchase currency depreciated property at great prices.

Economists React to China's Shifting Capital Flows

These two videos describe 80% of mainstream coverage on China.

Economists react to China capital inflows: yay!


Economists react to China capital outflows: WTF is that?

China Pumps Up the Local Government Debt Swap

Bloomberg: China Expands Debt Swap Quota to 3.2 Trillion Yuan, Xinhua Says
China is raising the quota for regional authorities to swap high-yielding debt for municipal bonds to 3.2 trillion yuan ($500 billion), China’s Finance Minister Lou Jiwei said Thursday, as cited by Xinhua News Agency.

The change will help ease pressure on local governments to pay debt, the official news service said. Regional authorities had sold 1.4 trillion yuan of the bonds as of the end of July, Lou said. The nation announced a first batch of 1 trillion yuan in March and a second allotment of the same amount in June. Xinhua didn’t specifically give the size of the third increase.

“The plan will improve local governments’ fiscal strength and accelerate the implementation of investment projects, but it won’t reverse the downward trend of China’s economy in near-term,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co. Expansion of investment may worsen China’s industrial overcapacity and external demand will continue to weaken, Liu said.

...“This move will add supply in the bond market, and may cause the yield to increase,” Merchant Bank’s Liu said. “The PBOC needs to continue to cut reserve-requirement ratio or supply cash in targeted ways.”
Yuan negative at the moment.

2015-08-27

Industrial Profits Slump in July

Reuters: China July industrial profits slip 2.9 percent year on year
Profits earned by Chinese industrial companies declined 2.9 percent in July from a year ago, official data showed on Friday, underlining the weakness in the world's second-largest economy.

It was the second biggest drop in industrial profits since a total 4.2 percent decrease in January-February. Profits were down 1 percent in the first seven months of the year compared with the year-ago period.

National Bureau of Statistics official explanation: 国家统计局工业司何平博士解读1-7月份工业企业利润数据

1. Industrial production and sales growth slowed
2. Producer prices and raw materials prices fell 5.4% yoy in July; raw materials fell 6.1%.
3. Investment income fell from 110.4 billion yuan in June to 73.1 billion yuan in July (no mention of stock market...)

The positive spin:
Although the 7 month overall industrial profits fell to expand, but high-tech manufacturing and consumer goods manufacturing profits remained relatively rapid growth. 7 months, high-tech manufacturing profits rose 8.4% , consumer goods manufacturing industry increased by 7.5% . At the same time, interest rate cuts reduce costs, improve efficiency of the policy is to play a role, 7 months, corporate interest expense fell 3.1% , financial expenses decreased by 3% .

Land Sales Tumble 32% YTD in Top 10 Cities; First-Tier Drops Too On Supply Constraints

iFeng: 一线城市领跌 十大城市土地出让金大跌32%
Centaline real estate market research shows that as of August 25, a total of ten typical urban land transfer payments during the year was 395.3 billion yuan, while the same period in 2014, this value up to 580.26 billion yuan, year on year decline of 32%. Led by first-tier cities where there has been a situation, but the price of the land supply rose significantly, the introduction of an average floor price of land has increased by 9%.
Recall that land sales also plummeted in the second half of 2014. See: Deutsche Bank Says Land Sales Slowdown Only Started Hitting in Q4. First tier cities held up relatively well, while third- and fourth-tier cities saw land sales collapse in late spring of 2014.

To be clear, the real estate market in many of the top 10 cities is doing well. Land finance is coming to an end in cities such as Beijing and Shanghai not because of a bad market, but because the land is already extensively developed.
"2015 annual top ten cities, Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Tianjin, Hangzhou, Dalian, Chongqing, Jilin land transfer will be about 500 billion yuan, the transfer may be the recent six years lowest point fell more than 40 percent year on year. "Centaline Dawei, chief analyst, said the sharp drop in area and the amount of land transactions, mainly due to the supply of land continued to decline.

According to statistics, this year as of July 30, Beijing-Shanghai-Guangzhou-Shenzhen four cities total land supply of 309 plots, while in 2014, the annual supply of up to 849 plots of land. As of this year July 26, four first-tier cities, the total land transfer is only 206 billion yuan, down 26.4 percent year on year.
Indeed, the drop in Beijing land supply lines up with the decline in revenue:
And in 2014, the total for the program to 5150 hectares of land in Beijing, plans to supply 1,650 hectares of residential land, of which 650 hectares of affordable housing projects, commercial housing 1,000 hectares. Compared with last year's plan, residential land supply plans to reduce by 27%. Including from the housing, including housing supply area is also reduced by 25%.
I didn't come across an article discussing the situation in fourth-tier cities, but I did come across an article that says fourth-tier developers and speculators may begin fire sales to unload properties ahead of the property tax taking effect.

iFeng: 房地产税纳入立法规划 三四线城市或现甩卖潮
Lu Wenxi said that by lowering prices, will be home to share part of the cost of the next few decades to keep the room above, you can make a family to get rid of the depletion stage consumption situation, buyers while maintaining stable social spending power, can drive the development of other sectors consumption spillover effects should not be overlooked, to big to say, would help the balanced development of the national economy.

There is support, there will be dissenting voices. At present, the situation on the market generally reflects the limitations of thinking on the market for real estate taxes cause some concern, fearing the property this decline. In particular, some investors and housing prices are more objections. Lu Wenxi view, for investors, as long as timely exit, there will be no loss. Real estate tax is expected for at least another two or three years will really fall, but the last two years significantly reduced the proportion of investors a few years ago into the property market investors, income had doubled. Even if housing prices decline, is also the most profit on impairment will not "lose to the flesh."

Say It Ain't So: China Intervenes In Stock Market for Parade

If true, this is proof the political hacks are back in charge.

Bloomberg: China Intervened Today to Shore Up Stocks Ahead of Military Parade
China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter.

Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter.

2015-08-26

Is PBOC Financing the RMB Shorts?

Balding: Is the PBOC helping traders short the RMB?
This morning it was announced that the Hong Kong Monetary Authority, Hong Kong’s cental bank, had injected RMB liquidity into Hong Kong’s banking system to stem the increase in RMB deposit rates. This may seem pretty innocuous news as it only amounted to about $1.6 billion USD, a pretty paltry amount in today money markets. However, this is very important news given the context.

...Now here is where it really gets interesting.

1. The HKMA injecting RMB liquidity into the Hong Kong banking market is having the perverse impact of helping traders short the RMB in the offshore market putting more pressure on the PBOC to intervene.

Now here is where it gets really, REALLY interesting.

1. There is a high degree of probability the HKMA got its RMB liquidity from the PBOC itself via a standing swap agreement.

China's Austrian Moment; Crackdown Intensifies as Stock Plunge Continues; Headlines Roundup


A bit of light posting in the next few days; my wife had a baby yesterday.

There's a lot happening in the markets, but some of the scary headlines out of China are rumors or incomplete information.

Bloomberg: China Authorities Escalate Blame Game as Stock Slide Worsens
Police are investigating people connected to the China Securities Regulatory Commission, Citic Securities Co. and Caijing magazine on suspicion of offenses including illegal securities trading and spreading false information, Xinhua reported.

‘Hidden Crimes’

They’re probing suspects linked to the CSRC, including a former employee, over insider trading and forging official document stamps, Xinhua said. Eight people at Citic Securities are suspected of illegal securities trading and the Caijing employees are under investigation for allegedly fabricating and spreading fake stock and futures trading information.
The former probably goes on all the time, but now authorities are cracking down. The latter is more suspect; I'm interested to know what stories are involved.

This blog post is making the rounds: 中国年底将爆发远超08年的经济危机 (End of Year China Economic Will Have Crisis Surpassing 2008). One reason is, as I believe, China will run into protectionism if it devalues or tries to export its way out of the slump.
Foreign aggression, the national currency devaluation along the way to the region to deal with crazy devaluation, countries raise tariffs on Chinese imports, mainly steel. Trade war already broke out, along the way can not promote anything, the contrary, exports will further slump.
Another theory, due to the Tianjin explosion, many projects dealing with dangerous materials will be halted.
Internal troubles, Tianjin big bang people reflect the cost of economic development, a large number of dangerous project will be launched to stop, some dangerous project shut down, the economy worse.

Consumer, automotive abnormal downturn, smart phones fell for the first time, TV sales slump, the panel of serious excess capacity.

Economic downturn led to shrinking demand for commodities, devaluation to stimulate further decline in commodity prices, the result is a vicious deflation, which in turn continue to suppress economic, so a vicious cycle.
Taiwan is experiencing a major slowdown with China, but U.S. demand is robust:
Taiwan's Ministry of Economic Affairs to the latest statistics show that in July from the mainland amounted to 8.73 billion US dollars of orders, significant reduction of 14.1% compared with July last year , the main because of poor order panel, DRAM wafer, machinery and other goods, the financial tsunami hit, the Republic 98 years June, that is, in June 2009 to its biggest decline rate.

However, exports to the US jumped 24.7%, showing strong US demand.
Finally, the author looks at the mood and common wisdom on the state of the economy:
However, all is not important, important is the vast majority of people are still in extreme optimism, when the reality comes, the perma-bulls will quickly become dead short, the economy will fall of a cliff quickly, and into turmoil and unrest.
If nothing else, take that a sign of the growing shift in mood.

Hong Kong media:


Beijing Times, August 26, 2015 cover. Since red is lucky in China, it denotes rising prices. Falling prices are colored green.

Away from stocks, Beijing cut the interest rate on public housing funds to 3.25%. iFeng: 北京公积金贷款利率下调 五年以上降至3.25%

14 cities hoping for a housing price rebound after the PBOC's two-fer-Tuesday cuts. All are either already rebounding or are popular cities with low inventory. iFeng: 央行双降楼市最受益 14个城市房价有望反弹
According to reports, some analysts believe that the central bank "rescue" the rebound is most likely the following cities: Beijing, Shanghai, Guangzhou, Shenzhen, Xiamen, Nanjing; in addition, some of the larger population attraction, smaller coastal inventory pressure Center City and the Midwest populous capital city house prices are also likely to usher in a rebound, for example: Fuzhou, Suzhou, Qingdao, Dalian, Wuhan, Zhengzhou, Hefei, Chengdu.

ZH: China Stunner: Real GDP Is Now A Negative -1.1%, Evercore ISI Calculates. Official stats also show there were 5 Provinces in Recession in the second quarter.

Steve Keen has another post on China: Why China Had To Crash Part 1. His post explains how debt creation works and why the end of the credit cycle doomed China. A good into to the argument and a good prep from what I assume will be a follow on China.

At the end of 2014 I wrote: Global Deflationary Wave Round 2 or Why Did China's Government Create a Equity Bull Rally?
The modern global financial system is a credit based system, not a fiat currency system. Banks (and shadow banks) create most of the money in an economy; in the case of the United States, outstanding credit is about 60 times the amount of currency and 5 times the amount of M2 money supply. At the peak of a credit cycle, the money creation mechanism breaks down. In the developed economies, the crisis is huge because the credit cycle in question is measured in generations. It is not a business cycle measured in years, but a major credit cycle measured in decades or even generations, with major, immovable factors such as demographics playing a crucial role.

...In China, as in the United States, mortgage and real estate finance forms the base of the financial system. If peak real estate is reached, then peak debt demand is reached, and peak money creation is reached. Slower credit creation leads to slower economic growth, which isn't a major issue for countries with low debt levels. For those up to their eyeballs in debt, such as China, Japan, the US and EU, a slowdown in credit growth threatens the financial system because growth is not enough to repay existing debts, let alone finance the new debt that is needed to create faster rates of growth/inflation (either real growth or nominal growth via inflation will satisfy the financial system).

In a world where the credit creation mechanism is broken, inflation is nearly impossible. There must be a lender and a borrower in order to create credit, but if even one party is impaired, credit growth will evaporate. The only way central banks have been able to generate inflation has been via asset purchases and central government borrowing. The central banks are monetizing the debt by taking it onto their balance sheets. If the economy doesn't grow, all they will achieve is the collapse of the central bank and a sovereign debt crisis. China is in a better position than developed economies and probably could create inflation if it let the credit system run wild, but China doesn't want the crisis that would follow. China will try everything before it resorts to inflation, and one of the last ways to boost growth is for a bull market in stocks to ignite risk taking, equity finance and wealth creation.
The heart of the problem is credit growth. Read up on Keen's arguments on debt as well as the Austrians.

Bank of England: Money creation in the modern economy
Steve Keen: “The Roving Cavaliers of Credit”

That 70s Show

History repeats in music too, as predicted by socionomics. How better to explain the popularity of dance music at the tail end of a bear market rally?
"The rise of dance music has been astronomical... I happened to be in the right place at the right time," Harris told Forbes.
DJ Calvin Harris outdoes Jennifer Lawrence with $66 million earnings

2015-08-25

Is China About to Abandon the Reform Effort?


FT: Questions over Li Keqiang’s future amid China market turmoil
Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.

“Premier Li’s position has certainly become more precarious as a result of the current crisis,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “If the situation worsens and if there comes a point where [President Xi Jinping] really needs a scapegoat, then Li fits the bill.”

Mr Li and Ma Kai, vice-premier, were the architects of a now discredited plan to rescue China’s stock markets in early July, when the government rolled out a series of unprecedented measures to prop up plunging stock prices, according to people familiar with the matter.

“There are constant rumours that Premier Li is about to be booted out but that is partly because he is given all the toughest jobs to do,” said Kerry Brown, director of the China Studies Centre at the University of Sydney. “It would be incredibly risky to replace him at this point but it is possible they will find a face-saving way to move him aside at the next party Congress in 2017.”
There is precedent here. Zhu Rongji was sacked for pushing a similar package of reforms as Li, and served only one term as premier due to displeasing the party insiders. Much of Li's reform effort was a restart of Zhu's earlier efforts, not always literally, but often in spirit.

If there is merit to the rumors, at some point in the near future (ahead of a 2017 switch), power will begin shifting away from Li and possibly also the PBOC.

Chinese Govt Agencies Expect USDCNY to Fall to 7 in 2015; 8 in 2015

Bloomberg: Chinese Agencies Have Begun to Assume Yuan at 7 to Dollar in Research
Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.

The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. Those projections -- which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 -- were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
A week ago I posted Putting A Price on Yuan Depreciation; Analyst Reserve Forecasts Imply Depreciation of 2% to 10%
If this pace were to keep up and the relationship between the drop in reserves and the drop in the yuan to remain roughly proportional, a year end target for the yuan would be 6.8 per dollar, but financial markets aren't linear. A further drop in reserves will eventually trigger a bigger drop in the yuan. I'd expect markets to push it much closer to, or beyond, 7 yuan per dollar if reserves end the year closer to $3 trillion.
The government targets are reasonable, but you have to wonder where the financial markets might take the yuan given their predilection for overshooting the target.

ChiNext Gives Up 2000, Shanghai Comp 3000

PBoC Rate and RRR Cut Replaceds One Week of Outflows

China is conducting monetary policy to support the domestic economy, not the yuan.

ZH: The Most Surprising Thing About China's RRR Cut
So how does one reconcile China's reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning.

The missing piece to the puzzle came from a report by SocGen's Wai Yao, who first summarized the total liquidity addition impact from today's rate hike as follows "the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today's onshore exchange rate." And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC's decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday - after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today's RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

China: It's The Debt

President Obama might still be blaming George Bush for current economic conditions and voters love to blame presidents (and PMs), but they don't control the business cycle. China has far more control over the economy and we know exactly who passed the 4 trillion yuan stimulus that is directly responsible for the severity of China's economic slowdown.Yet in China, there is no criticism of the prior regime.

Allow Steve Keen to show you exactly what the boneheads at the Ministry of Finance cooked up seven years ago.

China Crash: You Can't Keep Accelerating Forever
China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse. As Figure 3 in last week’s post showed (reproduced below as Figure 3 below), the growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years.

This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010 (see Figure 1).

2015-08-24

Capital Controls Begin; How Long Before Chinese Run To Gold?

Caixin: 公安部:集中统一行动 严厉打击地下钱庄 (Ministry of Public Security: centralized and unified action to crack down on underground banks)
Ministry of Public Security official website on August 24 news, in April this year, the Ministry of Public Security in conjunction with the People's Bank of China, the State Administration of Foreign Exchange and other departments organized and carried out to combat the use of offshore companies and transfer of stolen money underground banking special action, Guangdong, Shanghai Liaoning, Zhejiang, Xinjiang public security organs tackling struggling continuously cracked a number of major cases. Up to now, the public security authorities destroyed 66 underground banks dens and arrested more than 160 suspects, involving up to 430 billion yuan, a harsh blow to the criminal underground banks.

Signs of A Bottom? Dark Headlines

Markets may be nearing a short-term bottom. Consider this headline from the front page of iFeng's finance section, which translates in part to "The Period of Darkness May Have Only Just Begun"

四利空砸晕股市 黑暗期或才刚刚开始
Commission once said when the market instability, when gold card companies will also attempt to save the city, but on Friday the market fell below the important 3600-point psychological support line and line, but no significant direct weekend of good news, which may imply Wind policy of weakening. Judging from the market trend, the volume getting smaller and smaller, outside the capital approach shows willingness to become weaker, coupled with the more narrow the width of the hot market, the market will be very pessimistic about the market outlook.

The current global stock market crash, the US rate hike expectations, so that accelerated the outflow of hot money in emerging markets, which is shrinking volume A-share market is undoubtedly worse. A decline or no less than the future of the stock market crash in late June, investors need to control the position and prevent risks.
Another headline is "who knocked on the big bear's door?"

年线失守再创新低 谁叩响了A股熊市大门
After the stock market crash in June and July, and no one thought of A shares will face even greater slump. Under tragic crash, stock index fell in line, officially declared the advent of a bear market.

Analysts believe that the A shares plummeted this reason, the mapping of the global crisis of internal and external resonance.

The reason it may generate panic margin denounce the bailout intervention, the yuan devaluation is expected to lead to a substantial outflow of capital may jointly caused by the global foreign exchange, capital market volatility and other factors. From the fundamentals, liquidity and valuation point of view in three dimensions, slowdown in economic growth, the RRR is "replacement", the valuation is too high is not conducive to building confidence capital markets, to spread panic played a supporting role.

Protectionism Is Coming

My first reaction to this article is to say the writer wants a job in the Trump White House. Which is to say, expect more. Arguments and debates supposedly "settled" are going to open back up. Donald Trump may not win the presidency, but the winner will be someone closer to him politically than most expect.

FT: China does not contribute one cent to global GDP
China’s official trade surplus – its huge goods surplus and sizable services deficit combined –was roughly $180bn last year. This constitutes $180bn subtracted from the rest of the world’s GDP. China has been running large trade surpluses for a decade, each and every year subtracting from the rest of the world’s GDP, not contributing.

Slower Chinese GDP growth would, in itself, mean nothing at all to anyone outside the country. What matters to GDP is the size of the trade surplus. If it rises, then rest-of-world GDP falls by that amount (everything else constant). In this case, the trade surplus is also a reasonable representative for China’s true impact on the world. A rising surplus says China is pushing down prices around, intensifying existing deflation.
In order to boost the U.S. economy, a protectionist Trump would have to force China to buy more U.S. imports or put tariffs on everyone because production would shift from China to other nations, not directly back to the U.S.
Protectionism is a short-term win for trade deficit nations that can onshore production though, which the U.S. could do for a lot of imported goods. It would also blow up the international system of trade and politics as well, since the U.S. returning to business as usual (the business of America is business) would eventually lead to a return to Fortress America.

China Bleeding Liquid Reserves, May Run Out of Cash By October


FT: Beijing capitulates after spending $200bn to prop up equities
Since the People’s Bank of China devalued its currency and introduced a new “market-oriented” foreign exchange price-setting mechanism on August 11, it has had to spend as much as $200bn of the country’s foreign exchange reserves to prevent the renminbi from falling more than it wants, according to people familiar with the central bank and its market interventions.

That was more money than the PBoC had spent over the past two years to keep its currency in the desired range against the dollar, these people said.
Last week in China May Only Have Enough Cash for 6 to 18 Month Defense of the Yuan, I looked at an estimate of liquid reserves from Charlene Chu of Autonomous Research. She estimated the country had $667 billion in liquid reserves, call it $700 billion. If China has already spent $200 billion yuan in the first two weeks of intervention, they could run out of liquid assets by the end of September or October.

WSJ: China to Flood Economy With Cash as Global Markets Lose Faith
The selloff in Chinese stocks accelerated Monday, adding pressure on Beijing, which is planning to flood its banking system with new liquidity to offset effects of its recent surprise currency devaluation, according to Chinese officials and advisers to the central bank.

The Shanghai Composite Index dropped 8.5%, bringing its losses since its mid-June peak to roughly 38% and sparking another selloff in stocks and commodities around the globe.

The expected move to free up more funds for lending—by reducing the deposits banks must hold in reserve—is directly aimed at countering the effects of a weaker currency, which could send more funds away from Beijing’s shores. The moves reflect an economy increasingly failing to cooperate with Chinese leaders’ playbook to control the world’s No. 2 economy.
Flooding the banking system with liquidity lowers the value of the yuan, which leads to greater devaluation expectations, more outflows, need for more liquidity injections......

China must do a large one-off devaluation of the yuan or it will bleed its way to a currency collapse.

2015-08-23

Does Market or PBOC Set Yuan Rate?

From a little over a week ago: PBOC Playing With Fire; Informational Power of CNH Magnified Greatly

The Uncanny Analog Says Short-Term Bottom

The Nasdaq peaked in March, made an initial bottom in May, and then didn't make a new low until November. Thus far ChiNext is on schedule within a couple of days, topping in June and now making the new secondary low two months later (51 days after the peak for Nasdaq in 2000; today is day 56 for ChiNext). Clearly there's some psychological similarities at work, but how long can this hold up? I don't see ChiNext holding out until February.

Yesterday I posted Next Week In A-Shares: Test of 3391 or 3373; 8 of 10 Brokers Bearish. Those support lines were taking out in the first five minutes of trading. They might be regained before the close though...

Accelerated Infrastructure Investment Anticipated

Last year, the government tried pushing out treasury funds earlier in the year and told local governments to accelerate their infrastructure investments. If it buys time in the short-term, it comes at the expense of future growth, and this year's further slowdown reflects this reality. The article below isn't from an official mouthpiece, but along with RRR cut expectations this weekend, reflects growing pessimism.

Sina: 经济调结构面临阻力 基建投资“风口”来临
The second half will significantly speed up investment in infrastructure

  From a historical practice, the second half of the investment, whether local or investment scale investment rate will have improved significantly over the first half, but the second half of this year will be even more so. In the current economic weakness, the probability of big government will strengthen fiscal policy, and infrastructure investment as the main driving force of GDP growth is expected to increase its investment.

 Early this year, there are nine central and western provinces identified annual fixed asset investment plan to complete the amount in the government work report. Among them, Hubei, Hunan and Shaanxi provinces planned size of not less than 2.2 trillion yuan, plans to scale Guizhou, Shanxi, Inner Mongolia, Jilin and other four provinces of not less than 1 trillion yuan. In addition, plans to invest 368 billion yuan this year, Ningxia, Tibet also plans to break through 130 billion yuan. However, according to estimates, the scale of investment in the first half of the nine provinces to complete only about 30% to 40% of the planned size. For example, investment in fixed assets this year, Ningxia plans to complete 368 billion yuan, 126.709 billion yuan in the first half completed. This may mean that in the second half as well as the remaining 60% to 70% of the space can be released, and Click to estimates, only the nine provinces, there are more than 7.5 trillion yuan of investment scale of release.

  Meanwhile, the agency expects there will be a number of recent positive measures will be launched, such as the introduction of special construction bonds trillion, the second batch of PPP projects. In particular, the special construction bonds, the launch is bound to form a strong support infrastructure investment will accelerate infrastructure projects landing. Zhang Jun Morgan Stanley Huaxin Securities macroeconomic research director, said: "The second half, particularly 1 to 2 months at the end of the money factors have assault, so the full year, to account for the bulk of investment in the second half."
Going back to the old playbook of infrastructure investment will result in depleted reserves.
if the only way China can stimulate the economy is through investment, then China's $3 trillion in foreign exchange reserves will be exhausted within 5 years.

Pension Fund Monday: No RRR, But State's Main Pension Fund Approved

BBC: China share slide: Pension fund to invest in stock market
Under the new rules, the fund will be allowed to invest up to 30% of its net assets in domestically-listed shares.

China's main pension fund holds 3.5tn yuan ($548bn; £349bn), Xinhua said.

The move is the latest attempt by the Chinese government to arrest the slide in the country's stock market.

The fund will be allowed to invest not just in shares but in a range of market instruments, including derivatives. By increasing demand for them, the government hopes prices will rise.
Hope and "keep the change" comes to China.

Key point: the pension fund doesn't have to buy. Also, the government wants to see what it can get out of the announcement alone first.

Mood Turns Negative in Europe as Freight Rates Tumble

Is social mood beginning a new leg to the downside? It may seem there is no link between tumbling freight rates and riots, especially when there is no sign of a major slowdown in the real economy, but socionomic theory says both are the product of negative social mood.

AP: RIOTERS ATTACK POLICE IN FRONT OF GERMAN ASYLUM HOME AGAIN
Right-wing rioters have attacked police in front of an asylum shelter near Dresden for the second night in a row with firecrackers, stones and bottles.

German news agency dpa reported Sunday that two police officers were injured while protecting a new asylum center in Heidenau in eastern Germany. About 600 asylum seekers are to move into the former warehouse on the outskirts of Heidenau. Some 120 people moved in Saturday amid strong police protection. On Friday night, 31 police were injured when rioters blocked the road to the asylum home.

German lawmakers have condemned the increasing violence toward refugees. So far, Germany has been largely welcoming to the tens of thousands of refugees arriving each month but the attacks on them and on refugee shelters have been on the rise.
Those German politicians won't be around for very much longer because, as in many countries, they represent themselves instead of their constituents. Plus, implementing a peak social mood policy in the middle of a negative mood swing is a sure path to political failure.

ZH: Global Trade In Freefall: Container Freight Rates From Asia To Europe Crash 60% In Three Weeks
As expected, on Friday, we got confirmation that the BDIY has indeed become a lagging indicator to actual demand, when Reuters reported in its latest weekly update using data from the Shanghai Containerized Freight Index, that key shipping freight rates for transporting containers from ports in Asia to Northern Europe fell by 26.7 percent to $469 per 20-foot container (TEU) in the week ended on Friday.

The collapse in rates is nothing short of a bloodbath: "it was the third consecutive week of falling freight rates on the world’s busiest route and rates are now nearly 60 percent lower than three weeks ago.

Freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand in goods to be transported. Rates generally deemed profitable for shipping companies on the route are at about $800-$1,000 per TEU.

Other Europe-focused freight rates did even worse, with container freight rates from Asia to ports in the Mediterranean plunging 32.1%, while those to the US West and East coast slid by 7.9% and 9.9%, respectively.

China Controls Middle East Oil Market

One Chinese oil trader is acting like a hedge fund, trying to drive up oil prices to win derivatives bets. The other is acting like a refiner, trying to drive down prices to keep cost low. As the two sides battle it out and increase their bets, the two Chinese firms become the market.

Reuters: Chinese trading rivalry ruffles Asian oil markets
An intensifying rivalry between China's two top oil traders Chinaoil and Unipec is whipsawing Asia's oil market, pitting the state-owned firms against each other in a battle for control of the region's crude benchmark.

Aggressive trading - with heavy buying by Chinaoil met by selling from Unipec - has pushed up Middle East crude prices for Asia, even as other grades are being pressed lower by a global glut.

Asian buyers are being driven to seek cheaper oil elsewhere or cut refinery runs, but analysts say Beijing is unlikely to intervene in a process that reflects the growing clout of Chinese traders in global oil markets.

...In a series of buying sprees that began in October last year, Chinaoil has been snapping up record numbers of oil cargoes during a pricing mechanism that sets benchmark pricing for 12 million barrels per day (bpd) of oil sold in Asia, about 13 percent of the global consumption.

The strong bidding has pushed up the benchmark price, fuelling speculation that Chinaoil was aiming to reap big profits on positions it had taken in the derivatives markets.

On the other side of the market, Unipec's parent Sinopec imports nearly 80 percent of the 4.8 million bpd it processes - more than half of which is priced off Dubai - and its trading arm is preoccupied with keeping prices low.

The rivalry has seen the pair duelling in the Singapore-based Platts Market on Close (MoC) assessment process, with Chinaoil bidding up Middle East cargoes and Unipec selling in an effort to restrain prices.

Chinaoil has been breaking monthly trade volume records, buying 47 cargoes in October 2014, before taking a record 55 cargoes in April and 18 cargoes in June, with Unipec the seller for more than 60 percent in the April and June trade.

Earlier this month, Chinaoil snapped up 10 cargoes from Unipec in a single day, the highest daily volume on record.

Next Week In A-Shares: Test of 3391 or 3373; 8 of 10 Brokers Bearish

Of 10 brokers surveyed in the article below, only 2 are bullish and 1 is very bearish. New Times Securities analyst Liu Guanghuan has sees a potential range of 3100 to 3600 next week.

The article summarizes the broker reports. Most are looking for a test of support in the 3300 range. The post-peak intraday low on July 9 was at 3373; on Friday the Shanghai Composite closed at the July 8 closing low of 3507.


iFeng: 十大券商看后市仅两家看多 一家看至3100

2015-08-22

Li Keqiang Losing War on Financing Costs; 70% of SMEs Have Seen Financing Costs Rise in 2015

Economic Observer has a front-page article on Li Keqiang's "war" on SME financing costs. The results aren't good so far: financing costs are rising instead of falling. Although the State Council has issued a series of policy initiatives, they're having little effect. Given the complexity of the financial system, it's difficult to pin down where the roadblocks lie, although one obvious explanation is that reform isn't taking place: local governments and SOEs are still grabbing the lion's share of credit. An even bigger problem may be the depth of the economic slowdown. According to the article, demand for credit clearly fell in June and July, signaling the business climate is turning for the worse. Finally, in light of the recent editorials announcing 'unimaginably fierce resistance' to reform efforts, this article is another log on the fire.

For Premier Li Keqiang, 2015 is an unusual year.

...In March this year, the Prime Minister made a number of specific objectives in the government work report, lower financing costs, lower social security contributions, reduce business barriers ...... the government work report is a military order and these goals are the prime minister "war."

Now is the time to confirm the victories.

Throughout the first half, Zhang Chenghui was all over the country fact finding. Recently her findings leaver her dismayed, because she found that the financial and the real economy is further out of step.

As the Director-General of the Research Institute for Finance, Development Research Center of the State Council (DRC), Zhang Chenghui has repeatedly said publicly that, although regulators are very concerned about the difficult and expensive financing of SMEs, and the central government has introduced all aspects of policy trying to solve these problems through policy measures, but the actual result is not very good.

"From a practical point of view, I am afraid from the solution to the problem is still a long distance." Blending said.

...Premier Li Keqiang is clearly aware of this problem. In the executive meeting of the State Council on August 13, he again issued a document designed to resolve the problem of SME financing called "on the promotion and financing guarantee industry to accelerate the development of idea" hoping to develop financing guarantee industry, will More finance "Living Water" directed small and micro enterprises and the "three rural."

This is the beginning of this year, Li Keqiang at the 12th executive meeting devoted to financing costs.

However, the unexpected is the plight of corporate financing costs have not yet been resolved, new issues are coming out now signs. The Minsheng Bank Shenzhen Branch general manager of SME financing Ma Changjiang told the Economic Observer that since June this year, you can feel the exact funding needs of small and micro enterprises declining. July this year released "Economic Daily - China Postal Savings Bank SME Index" confirms this phenomenon.

Data show that SME Index edged down 0.2 points from last month. "This shows that the SMEs are under powered, financing capacity decreased, financing demand is declining." Fiscal Science Research Institute researcher Li Quan to the Economic Observer reported.

Apparently, the high cost of corporate finance is not an isolated incident, for Premier Li Keqiang, it is like a war that requires the mobilization of all forces.

Limited decline

In early June, Zhang Chenghui has just returned to Beijing from a prefecture-level city in eastern China, the local Finance Office told her about financing problems.

In a SME park there are more than 90 small and medium enterprises witn an output value of 700 million last year, taxes of 15 million, but only two commercial banks provide financing for these more than 90 companies, the vast majority of SMEs rely on loans between friends to maintain normal production and business activities. Only a little more than 30% the entire city's SMEs have bank credit cards. "If you have a credit card, the bank does not necessarily give you loan. The credit card is only a preliminary step to get funding, it only means the SME has gone through the bank's credit evaluation, the second step of the problem is to obtain financing." Zhang Chenghui say why banks are reluctant to give small and micro businesses loans, in fact, say the reason is simple, because the risk is too high with SMEs. Although the interest rates can go up, the risks posed by interest rates going up makes the banks feel there's no money to be made.
Banks can raise interest rates on SMEs, but since that's likely to bankrupt the business, they can't raise rates. Hence, the market cannot compensate banks for the perceived risk. Banks are giving up on lending to SMEs and have stopped putting out SME reports:
In the past few years, a number of commercial banks have announced small and micro enterprises report. However, according to the Economic Observer newspaper reporter's partial survey, this year there are no published research reports, a commercial bank in this regard, even some banks drastically reduced to small micro-enterprise loans of investment. A joint-stock bank source reasons, only if the results are good will banks publish a report on the industry. This means that this year the banks are struggling to make progress in the SME business.
So the central bank has cut interest rates and reserve requirements:
To this end, from last November to June this year, the central bank has been 4 times lower deposit and lending rates, total loans from financial institutions cut the benchmark interest rate 1.15 percentage points year on year benchmark deposit rate by 1 percentage point. "Interest rates with lower standards, both to increase the financing needs of the real economy, but also increase the money supply, the long run is more conducive to steady growth, structural adjustment." People's Bank of China survey Division Shengsong Cheng stressed that the RRR three times this year too provide the market with ample liquidity.

On effect in terms of policy, lowering interest rates played a role in real accurate. People's Bank of China data show that as of the end of June 2015, the weighted average interest rate of the new loans was 5.97 percent, over the previous year fell 64 basis points, down 101 basis points over the previous year; the central bank on the real economy through loans, bonds, stocks and other Comprehensive assessment of all types of financial instruments and financing costs showed overall financing cost of 6.32 percent, over the previous year fell 68 basis points, down 85 basis points over the previous year.

However, Zhang Chenghui's research shows that although the central bank cut interest rates and RRR several times, 70% of the loan interest rates went up, only about 10% of the loan interest rate declined, and the remaining 20% ​​of the loan use the benchmark interest rate.

"I figure a bit based on the Wind database, since the end of September 2013 to the end of May 2015, average loans from financial institutions dropped from 6.65% to 6.56%, P2P net loans fell 12.75%, Wenzhou's private lending interest rates fell 1.69 percentage points. Figures show non-formal financial institutions outside the system of financial institutions, the central bank lowering quasi reflect much faster than formal financial institutions, formal financial institutions interest rates fell an average of only 0.1 percent." Zhang Chenghui said.

While banks generally believe that easing monetary policy can reduce financing costs, it's not a permanent solution. Minsheng Bank Shenzhen Branch President Wu Xinjun said its SME lending rate fell from 7.8% at the beginning of the current year to 6.8% presently, if there is further easing of monetary policy, SME lending rates could fall further, but based on cost factors, the room to fall is limited.

New Problems

On the one hand is the limited enterprise financing costs decline, on the other hand is the economy continues downward, further deterioration of the business environment, resulting in further decline in corporate profits.

Zhang Chenghui said this year first quarter profits of industrial enterprises decreased by 2.7%, the average lending rate is 6.56%, companies need to pay this year about 5 trillion in interest. The 2014 full-year profits of Chinese industrial enterprises is less than 6.5 trillion, much of the profits are used to pay interest.

And if you use the actual interest rate to calculate interest payments, they may reach 8 trillion, plus add in the producer price index (PPI), the real interest rate for enterprises soars to 11.1%.

The second quarter may be an even worse situation. Shenzhen Huaqiang North a business owner told the Economic Observer newspaper reporter that at present he can afford financing costs of less than 8%; if higher, then profits will be difficult to cover the costs, then companies may abandon real world financing, even turn to the virtual economy trying to "fight one."

Obviously, the financing problem has not been completely solves and new trouble ensued.
The new problem is the same one facing the West: peak debt. There is reduced demand for credit.
"Falling interest rates is a good thing, but on the other hand is not necessarily a good thing. Why? Explained a lot of money, does not flow out." People's Bank of China survey Division Shengsong Cheng said the RRR actually make more bank financing, but Supply does not necessarily mean more demand, is now not only bank willing to issue loans, as well as the real economy is not having a valid funding needs, and this is the most fundamental issue.

In early August, Minsheng Bank Shenzhen Branch general manager of SME financing Ma Changjiang told the Economic Observer newspaper said that since June this year, you can precisely feel the funding needs of small and micro enterprises declined. The owner of Huaqiang North, an electronic accessories business also said a large amount of office space has not been rented out for many years.

Where is the enemy?

The State Council and its affiliated ministries have frequently issued policies, why has there been limited results?

"Allocation of financial resources is overweighted towards the government, big business, to SMEs low or not at all, is the inevitable logic." The central bank research bureau director Lu Lei said.

In Lu Lei's view, the "real economy sector - the Central Bank - Financial markets - Financial institutions - the real sector" in fact constitutes an extremely complex economic system, but also in all aspects and institutions involved in the process of dynamic game of incomplete information on the before responding to the effect of different policy responses, the most critical is, it is difficult to distinguish the precise financial resources amuse themselves in the second round or in the third round take chances. "A lot of money into the capital markets, but the money did not enter the real economy." Zhang Chenghui told the Economic Observer, due to the relatively slow development of China's capital market, while the structure of the financial system is also a problem, the current state-controlled big banks dominate China's financial system. Such a financial structure for financing SMEs is undoubtedly a disadvantage because large banks operating costs will be relatively high, pay more attention to economies of scale, generally big banks do not adapt naturally to small and medium enterprises.

In this regard, Shengsong Cheng also told reporters that the media briefing, relying solely on monetary and financial policies, financing your problem can not be solved fundamentally, we need a combination with short-term policies.

Such short-term policies include agriculture support to small farmers and then increase the loan amount, the total amount of such policies directed to reduce the deposit reserve ratio, including direct financing expansion, increase the proportion of foreign currency financing, the pressure drop and the industry balance sheet financing, the use of prudent macroeconomic management boot of credit and other structural policies, including cleaning up banks arbitrary charges, regulate private financing, to promote municipal bonds and other special bonds and selectively break the cycle and some other rigid payment complementary policies.

Currently the central bank introduced a variety of policy precisely Shengsong Cheng alleged short-term policies, and to develop long-term policies include direct financing, gradually reduce the proportion of indirect financing, and actively promote the marketization of interest rates and so on. Vigorously develop the bond market, stock market and achieve standardization of all types of financing development, and create a fair competitive market environment. Improve financial market infrastructure, expand market access and so on.

Clearly, considering financial reform has a "butterfly effect" and reducing financing costs is a long-term policy, it is destined to be a very long wait.

EO: 总理的战争之:为什么融资成本下降有限