2015-09-30

Home Sales Flat in September, But Prices Rise

Centaline says home sales through September 27 were up a very slight 0.43% in its 54-city survey, while CREIS reports home prices increase 0.28% in its 100-city survey.

In the 100-city survey, the price rise was down from a 0.95% rise in August. The largest ten cities saw average prices increases of 0.50%. There were more cities with rising prices in September, 59 versus 51 in August.

There's optimism for a good "Silver October" thanks to the reduction in first-time home purchase down payments to 25%. Centaline dubs the latest move the fifth round of housing bailouts in 2015.

Centaline analysis rounds regulatory policy over the past year that can be divided into five rounds depending on the time point. First round: deregulation around the restriction policy. Second round: September 30, 2014 the central bank's purchase of the policy adjustment and interest rates. Third round: the country have issued housing subsidies and the central bank's RRR again. Fourth round: after March 30, 2015, began to improve incentives for self-occupation and demand, mainly in the fund policy. Fifth round: August 2015, superimposed relaxed outer limit order, drop quasi again cut interest rates, the national rescue fund for the two sets of deregulation, Liaoning and other provinces of city policy, coupled with last night's dual policy stimulus.

100-city Survey data: 2015年9月中国房地产
Google Translated: 100-city Survey Data page
Full Report: 9月百城住宅均价继续双涨:环比上涨0.28% 同比上涨1.36%
iFeng: 楼市发两大重磅消息 公积金未来可以这么用

China's Manufacturing Contraction A Precursor To Wider Slowdown

Recessions start in the more volatile, higher stages of production and work their way through the economy like a pig in a python. China's manufacturing sector is contracting, the heavy industry and resource extraction provinces are in recession. There will be no painless rebalancing.

China Increases Reported Gold Reserves

ZeroHedge says China bought gold, I suspect they may be simply under reporting and raising the number slowly over time.

Bloomberg: China Boosts Gold Reserves 1% in August, Diversifying Assets
China boosted central bank gold holdings 1 percent as the country that rivals India as the world’s largest bullion consumer seeks to diversify its foreign exchange reserves.
The hoard rose to 54.45 million troy ounces in August from 53.93 million ounces a month earlier, according to data released by the central bank on Wednesday. China ended six years of mystery surrounding the holdings in July, revealing a 57 percent jump since 2009 and overtaking Russia to become the country with the fifth-largest stash.
Economics aside, gold has no political strings attached. A no brainer for any nation concerned about its sovereignty. Dumping dollars for gold is yuan bearish in the short-term because they are unlikely to sell gold to defend the yuan, but long-term it is bullish for the yuan.

China Wants A Bigger Credit Bubble, Probably Won't Get It: Down Payments Cut to 25%

Nasdaq: China Lowers Down-Payment Rates for Buyers of First Homes in Most Cities
The People's Bank of China said Wednesday it cut the minimum down payment required from first-time home buyers to 25% from the previous 30%. The cut applies in all but a handful of the largest cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, where demand remains strong and which impose restrictions on second or subsequent homes to suppress price increases.

China Abruptly Reduces ATM WIthdrawal Limits Overseas

The window on getting money out of China is closing, but there is no limit on gold purchases.

Reuters: China forex regulator says to cap overseas cash withdrawals
China will introduce an annual cap of 100,000 yuan ($15,734) on cash withdrawals made through UnionPay cards outside the country from 2016, the nation's foreign exchange regulator said, to combat money laundering amid concerns about capital flight.

Cards issued by Visa Inc and MasterCard Inc will also be subject to the annual cash withdrawal limit, the State Administration of Foreign Exchange (SAFE) said in a statement on its website.

The current rule only sets a daily withdrawal limit of 10,000 yuan per card.

For the last three months of this year, the maximum amount of cash that can be withdrawn overseas using a single card will be 50,000 yuan, SAFE said.

2015-09-29

In the Yuan Overvalued? This Chart Says Yes

China hitched its wagon to U.S. dollar monetary policy during the 2000s, sterilizing dollar inflows via massive issuance of renminbi (CNY) into the domestic economy. Every USD that came into China was swapped at a rate of 8.28 CNY (lower after the peg was allowed to rise). Currency inflows devalued the yuan in the direction of the peg because it was fueling money and credit growth. (The currency would rise in the short-run as it does during every boom, but the long-term impact would be a bust and depreciation.) There were two values to the yuan, the "real" unknown value (due to no market price), and the peg at 8.28 to $1. As long as the peg was in effect, the real value of the yuan was falling towards the peg. Chinese authorities did not declare the yuan fairly valued until it reached about 6 to $1. When it reached this point, it was already at its most expensive versus foreign currencies since the early 2000s.

The yuan faced depreciation pressure in 2008 and since 2011. Massive inflation should have caused the yuan to depreciate. Instead, Chinese yuan moved in the opposite direction due to maintaining the peg for too long. Monetary policy with the U.S. also diverged. China wants to lower interest rates and devalue yuan; USA is raising interest rates and dollar is appreciating. The U.S. dollar rally puts continual pressure on CNY to rise. The devaluation to this point has only held the CNY level versus USD Index basket; it is still rising versus EM currencies.CNY cannot continue to rise with the dollar.

A depreciation of 15% takes CNY back to an expensive valuation over the past 15 years. A depreciation of 35% takes CNY back to its cheapest valuation in the past 15 years. These numbers are versus USD and assume no USD depreciation (which would reduce the numbers) or appreciation (which would increase them).

Beijing Real Estate Market Cools

The latest problem for realtors: finding customers.
On Tuesday evening, 6:00, Yang Lei single broker hands with a small stack of leaflets, standing on the sidewalk outside the store intermediary. Occasionally encounter people who linger, Yang Lei always enthusiastically send a printed leaflet full of listings. "In fact, this big day on Tuesday, the station which issued leaflets is wasted effort." Yang Lei said that since entering in September, Monday to Friday working days, the store has never been traded, are also signing the occasional weekend. "Business Day leaflets, only to accumulate points customers." Over the past ten minutes later, his hands leaflets sent out only two, one of which was given a house just come up to ask how much of their own households.

Done a few years of the broker, Yang Lei's hands is not without old customers. Unfortunately, these customers are either waiting for a buyer of a particular size, or is wandering around, just the price of hesitation, etc. who do not give him the real deal. So, he thought every day: where to look for new customers.
In June and July, Yang said more than 100 groups would visit new properties. By early September, it was down to 50. Now, sometimes nobody shows up.

The article relies on data from the first 10 days of the month though, which was impacted by the military parade. That week opened with a sales drop of more than 20% according to data from realtor 我爱我家, with new home sales off 37.6% and existing home sales down 7.7%.

iFeng: 楼市“金九”开局不利 新客户难寻成交量下降

2015-09-28

Industrial Bank Chief Economist Declares Yuan Overvalued

Chinese economists have found the source of China's economic problems: the overvalued yuan.

Industrial Bank (not to be confused with ICBC) chief econoimst Lu Zhengwei says the yuan's high value is the cause of China's economic malaise.
The reason is China's economic downturn causing a clear understanding of the underlying causes, not the policy departments attach great importance to the "financing expensive", but the real effective exchange rate overvalued caused the "hollowing out of industry", resulting first two industries in the enterprise, regardless of size, generally hard to survive.

We propose to continue to promote the RMB exchange rate market-oriented reforms, amended RMB exchange rate overvalued. Otherwise, in the capital continued open-door policy launched in the background, according to the current exchange rate stability maintenance mode for a long time, will allow China to bear, "Asian financial crisis" great risk of a repeat.
Lu sees GDP growth falling below 7% in Q3, but the turning point being reached in the current quarter, with growth rebounding above 7% in Q4 and the 7% target being hit for the full year.
The face of these pessimistic expectations, our analysis shows that: declining trend of China's economy has been stopped, although the third quarter will be below 7 percent, but the fourth quarter is expected to account for 7 percent on the year is expected to achieve 7% It targets.

First, the consumer has been basically stabilized. According to data provided by Exhibit 3, either from the nominal growth rate or from the actual growth rate, the total retail sales of social consumer goods were to appear after falling in April this year to stabilize, then rise steadily. Among them, the August month retail sales growth rebounded to 10.8%, reaching the highest level of the year, which also led to a rebound in growth YoY. Month for two consecutive months the actual growth rate is also stable at the level of 10.4%.
Here is the exhibit:
I can see the trend slowing and perhaps leveling out, but the small bounce seen this summer is not larger than any of the other bounces in prior years. The next chart shows the stabilization in fixed income investment.
Growth is slowing in part because governments have no money. Here is the cumulative balance in government finances:
Also, financing costs aren't hurting growth. Here's the example from the coal industry. The blue column is borrowing costs for the industry. The first red column is other expenses.
As the report says:
Exhibit 8 provides to the coal industry as an example of financial analysis conducted clearly shows this: in the four samples examined period, operating profit and gross margin compared to the lowest and highest, fell by more than half; however, its overall borrowing rates highest and lowest even're just 15bp, with the highest and lowest interest debt ratios there was only 9 percent, just enough to make this a combination of both absolute operating profit and gross margin decreased by half; further observation showed that coal Total turnover lowest and highest during the period compared to the industry, dropped by half, which reflected excess supply, product sales difficulties are the result key coal corporate profits fell sharply. This is consistent with the situation we feel in reality: There are many companies, even if they borrow at zero-interest, it cannot be guaranteed they will repay the principal.

In conclusion, the bank sees the overvalued yuan as crushing manufacturing, blaming government focus on the virtual and financial economy as leaving the industrial sector behind.
This clearly shows the current core issue of China's economy, in fact, all of the real effective exchange rate overvalued currency economies will appear "industrial hollowing out" phenomenon, but also policy authorities since 2012 on the puzzling "off real to the virtual "," does not support the real causes of the financial entity "and other issues.
I don't see how China does a controlled devaluation of the yuan, but the support/pressure to devalue will rise if more economists follow in Mr. Lu's footsteps.

iFeng: 中国经济转折前夜:当前核心问题真正根源终于找到了

Social Mood Deteriorating: Malaysia Race Riots; Free Catalonia; Mosques Burn

The Economist: Playing with fire
THE close-packed shops on Petaling Street (pictured), a dim warren in a Chinese quarter of Kuala Lumpur, Malaysia’s capital, often throng with bargain-hunting tourists. This month its mostly ethnic-Chinese stallholders faced crowds of a different kind. Riot police prevented a mob of redshirted protesters—ethnic Malays with a host of grudges—from marching down the street. They eventually dispersed loiterers with water cannon. One protester was filmed calling a journalist a “Chinese pig”.

...Malaysia’s broad ethnic mix, in part the result of British colonial immigration policies, has long coloured its politics. After a murderous race-riot in 1969, in which mobs burned Chinese shops, officials devised a slew of measures aimed at defusing tensions. Their aim was to reduce inequality between Malays and their richer ethnic-Chinese compatriots. Malays were guaranteed a quota of places at universities and the right to own shares in all listed companies, among other benefits. Though billed as temporary, many of the measures are still in force.
Sometimes I wonder if the editors of the Economist read their own magazine as they currently advocate more migration into Europe, and the guaranteed race riots and ethnic tensions that will follow.
Since then Malay incomes have risen rapidly (see chart). But greater equality has come at a cost. Critics say that state-sponsored favouritism has hooked Malays on handouts and government jobs, and helped to enrich the country’s elites—at the same time as enraging ethnic-Chinese citizens, and driving some of the most talented of them abroad. There have been growing demands, among Malays too, for the rules to be scrapped, or at least refocused on the neediest regardless of their race. When he came to power in 2009 Najib Razak, UMNO’s president and Malaysia’s prime minister, sounded as if he agreed.

All that changed after a general election in 2013, when the government retained power despite losing the popular vote. UMNO itself managed to gain seats at the polls. But voters deserted the small ethnic-Chinese and Indian parties with whom it rules in coalition, fleeing to a resurgent and more ethnically balanced opposition. Instead of trying to lure them back, UMNO has focused on refurbishing its reputation as a champion of ethnic Malays and of Islam, their traditional religion.
Which brings to mind this:
One moves swiftly and imperceptibly from a world in which affirmative action can’t be ended because its beneficiaries are too weak to a world in which it can’t be ended because its beneficiaries are too strong.”

Over to Spain. PRO-SECESSION PARTIES IN CATALONIA WIN LANDMARK VOTE
Pro-secession parties pushing for Spain's northeastern Catalonia region to break away and form a new Mediterranean nation won a landmark vote Sunday by capturing a regional parliamentary majority, setting up a possible showdown over independence with the central government in Madrid.

..."I have wanted independence ever since I was young," Perez said after voting in Barcelona. "During three centuries they have robbed us of our culture. We have reached the moment that the Catalan people say `enough is enough.'"
Why settle a 300-year issue now? Negative social mood.

Migration in Europe is still having major impact.

Two teenagers held on suspicion of arson after London mosque fire:
Two teenagers have been arrested on suspicion of arson after a fire engulfed part of a south London mosque said to be the largest in western Europe.

At the other end, Holland now allows child brides as long as it's legal in their home country: Dozens of Syrian child brides en route to Ter Apel ('Tientallen Syrische kindbruiden onderweg naar Ter Apel')

Corn Refiner Collapses As Northeast Economy Contracts

Global deflation and price supports, but so far no mention of debt. Except the debt owed to unpaid farmers.

FT: Collapse of China corn refiner leaves thousands of farmers unpaid
The shutdown of Asia’s largest maize refiner has left thousands of corn farmers in north-eastern China unpaid, adding to the unintended consequences of China’s policy of artificially propping up corn prices.
The recession in the Northeast is picking up steam.

China Must Choose the Form of the Destructor

Remember this story from a few months ago?
According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%.

Bloomberg: China Industrial Profits Fall Most Since 2011 as Growth Ebbs
Industrial profits tumbled 8.8 percent in August from a year earlier, with the biggest drops concentrated in producers of coal, oil and metals, the National Bureau of Statistics said Monday in Beijing. It was the biggest decline since the government began releasing monthly data in October 2011, according to data compiled by Bloomberg.

China’s stock-market plunge and currency devaluation are adding new challenges for the world’s second-largest economy as it struggles with excess capacity, sluggish investment and weaker manufacturing. The nation’s official factory gauge slumped to a three-year low last month, while Bloomberg’s monthly gross domestic product tracker remained below the government’s 7 percent goal in August with a reading of 6.64 percent.
There are many stories which say devaluing the yuan isn't a solution to China's problems. It isn't a solution, it is the inevitable result of runaway growth in money and credit. It is the "solution" in the same way that a ball plunging back to the Earth is the "solution" to throwing it into the air.

Except for genuine reform, any policy China chooses will have a major downside because of the massive levels of debt and malinvestment. Currency devaluation is likely to be part of the mix if only because it will prove to be impossible to stop.

Commodities Collapse Starts Taking Names


Next up:

Another SOE Default: Erzhong; Unless You Use Chinese Rules

Two weeks ago: Another SOE Default: China National Erzhong. The bill came due today. It was unpaid.

Another Chinese SOE Flirts With Default as Broker Calls It Early
“Onshore analysts haven’t reached a conclusion on if Erzhong has defaulted,” said Shi Lei, head of fixed income research at Ping An Securities Co. in Beijing. “Even if Erzhong’s parent doesn’t pay interest now, it doesn’t mean it won’t pay interest in the future. According to the international market’s definition, Erzhong may have defaulted, but according to the Chinese market definition, it is not yet.”
So no problem.

Renmin University Sees High Inventory Slowing Housing Recovery

Southern News reporter Chen Lei from the bottom of a recent report on developments and strategies National Institute of Renmin University in Beijing show that the real estate market to achieve full recovery, still long way to go.

Since April this year, affected by the introduction of related measures and reduce bank reserve ratio messages, real estate sales and housing prices significantly warmer signs, individual cities (such as Shenzhen) appear strong sales momentum, even with a view of the real estate will be full recovery.

In this regard, China's macroeconomic Forum, held September 26 (third quarter 2015) "issued by the real estate market recovery long way to go," the report said that the current real estate market recovery is still fragile, still mainly in the "de-stocking" adjustment period , new construction and investment in the real estate industry decline has not been checked, four-tier cities and more localized real estate market is facing serious challenges.

...Recovery is weak mainly due to high inventory

The report said, although some areas of real estate to pick up, but the real estate market, the supply of new construction index, real estate purchase land that is looking to be the development of land indicators, the real estate market is still relatively weak. For example, from the National Bureau of Statistics 70 cities year price change indicators, as of June this year, compared to last year house prices still declining, the biggest sales rise in June there was only two cities to achieve Rates year rise. The 100 city price index to see from CREIS (National Real Estate Index System), housing prices fell year on year in the same range of indicators, but the decline has been reduced. Rate hikes present in a certain distance.

The report analyzes that the reason for this phenomenon is mainly the Chinese real estate market inventory levels are too high, the real estate business to the inventory pressure, and therefore widely used "price for the amount" of the marketing strategy and the "steady withdrawal of" development strategy.

iFeng: 人民大学最新报告:库存量高致楼市复苏乏力

GDP Growth Will Fall Below 7% and Rebound in Q2 2016

Chinese economists are sanguine on the Chinese economy in a new survey, but don't see a bullish turn higher until the second quarter of 2016.
Third quarter GDP 7 can keep it? The findings of the survey show that 84% of economists believe the third quarter GDP growth will be 7% or less. A bigger change is expected, the bottom round is likely to push the economy to slow in the second quarter next year, but in the last few months of this year, the focus of policy adjustments more clearly point to the state-owned enterprise reform and financial reform.

Survey of economists by the "Economic Observer reported," initiated once every quarter. Respondents include authoritative economist investment banks, research institutions and government departments. The survey total of 79 valid questionnaires.
The article goes on to discuss the survey results.

iFeng: 调查称三季度破7是大概率 经济底部已经接近

2015-09-27

Liu Junluo: Fed Needs EM Currency Crash to Justify QE4; Rate Hike Talk A Giant Scam

The talk of a rate hike was a giant scam designed to push the U.S. dollar much higher in order to prepare for the ensuing drop when QE4 is announced.

Liu discusses how he said the Fed would never hike rates. The Fed said it would hike in March, then pushed in back to June, then September, now maybe year end. The Fed may push it back to N months later going forward.

Liu explains his thinking. It begins with 9 trillion in USD denominated debt that must be rolled or repaid.
First, businesses should master the basic professional knowledge. And this line of business of the global financial world, during the end of the year, are global banking settlement and global bond market liquidity worst time. In this way, you should also know, from 2009, the Federal Reserve launched successive 3 times QE , the global market had a lot of dollars arbitrage traders, most of them concentrated in China and emerging markets. At present, their size up to nearly 9 trillion. Chinese market of about 1.5 trillion US dollars. So, until 2015 years later, a lot of dollars arbitrage traders must return to the United States.

Therefore, the Fed's Yellen 2015, will raise interest rates later this lie is so vulnerable. Because 2015 years later in China and emerging markets will face unprecedented retreat dollar arbitrage traders. So, 2015 years later in RMB and emerging market currencies will fall into a catastrophic collapse. By then, the Fed's Yellen will talk about the cat crying mouse - because, the renminbi and the crisis in emerging market currencies, so the Fed will not raise interest rates, ready to launch QE4 to save the world.
The Fed is creating global debt destruction, in order to ride to the rescue with QE4.

The catastrophic time will be November to December. The PBOC will work hard to put down "the Boxer Rebels" between now and then, aka crush the nationalist Chinese holding RMB.

Liu says Boehner's resignation will push the debt ceiling battle from October to December. America will allow China into the SDR as a way to destroy the value of the yuan. The closing of the Export-Import Bank in America has led to massive layoffs at HP and Caterpillar. Europe and Japan are reading new salvos in the currency war.

Liu closes by saying that China's ignorance of globalization and financial warfare dooms it again, just like the Ming and Qing dynasties.
China has been the fate of the world's superpower. However, the fate of the Ming dynasty, the Qing Dynasty only shows that globalization is the most fatal weakness of ignorance Chinese. Now, with the Fed rate hike expectations deceived us to a more than a year's time. Today, that fool would think, I would go cheated several times. Today, however, the Chinese market is still talking about the Federal Reserve to raise interest rates farce. Today's world is full of shadow banking and arbitrage traders, we do not grasp the modern "financial weapons", we can only be used modern "financial weapons" massacre.

2015-09-25

There Go the Jobs: Northeast Miner Lays Off 100,000

Caixin: Coal Miner in Northeast Plans to Slash Workforce by 100,000
The largest state-owned coal mining company in China's northeastern region will cut its workforce by 100,000 over three months to reduce costs and improve efficiency, its chairman said on September 21.

Wang Zhikui, chairman of Heilongjiang Longmay Mining Holding Group Co. Ltd., said the firm, which now has around 240,000 employees, will make the labor cuts through layoffs, early retirements and arranging other employment.

Longmay will also sell its non-coal businesses and work to collect debts it is owed by other firms in a bid to resolve its shortage of cash, Wang said.
Credit guarantee and loan defaults are coming because everyone is short on cash.

China Has Printed A Lot of Money

FT: China’s money supply growth dwarfs the rest of the world
“The Chinese money wall may well dwarf anything in the international financial system including unconventional monetary policy [such as quantitative easing],” says Mr Mandeng, who describes China’s growth of M2 broad money — a measure that includes cash in circulation, savings and time deposits — as “scary”.

This is a reflection of massive expansion of bank balance sheets in China. It’s a big, big thing and it is lost on most people,” he says.

...“The Chinese will have to print money. That is predicated on the economy growing quite fast and that you have quite a leaky capital account. If they print money, foreigners are likely to flee,” he argues.
I have no idea what the common wisdom on China is today, but considering few people were betting on the yuan devaluing only a few months ago, I will assume they are unaware. If that is the case, financial markets have a long way to go before they fully price in reality.

Socionomic Alert: GOP Dumps House Speaker; Brazil on the Brink; Catalonia Votes



Socionomics tells us to expect these types of events when social mood is negative. Brazil is the cleanest signal; the currency and stock market are in free fall, the president on the verge of being removed from office. The developed world is simmering, ready to boil if anything drops into the pot. Say migrants: Finland protesters throw fireworks at buses

Not two weeks ago: Socionomics Alert: Australia Dumps Another Sitting Prime Minister. Prime Minister Tony Abbott was removed as leader of the Liberal Party. In the U.S., conservative House Republicans have been building support for the removal of House Speaker John Boehner over his refusal to allow a vote on funding for Planned Parenthood. Planned Parenthood receives federal funding for providing healthcare services. Opponents say it mainly performs abortions and funding is fungible; supporters say it mainly provides for women's health. Opponents have always wanted to remove funding because they argue federal money pays for abortions. At the center of the current controversy is a series of videos that show Planned Parenthood executives, doctors, or partners, discussing selling/buying fetal tissue for money. There are also claims that some abortions were performed late on purpose, in order to harvest intact brains and other more fully developed organs.

The Speaker opposes a vote on defunding Planned Parenthood tied to a funding bill because if President Obama vetoes it, as expected, it will shut down the government. GOP leadership thinks it will lose a fight in the media since the media will portray them as shutting down the government to defund Planned Parenthood. The conservatives in the party think they can portray President Obama as shutting down the government to protect organ harvesting. Political confrontation in the U.S. is about to step up a notch. There is already fallout: John Boehner Will Resign From Congress

To Brazil.

Bloomberg: Brazil Impeachment Battle Heats Up Before Rousseff Flies to U.S..

Also: Petrobras Default Looms Under $90B Dollar-Denominated Debt

To Spain.

APP: Catalonia to vote in fierce independence row with Spain
Catalonia's nationalist president Artur Mas, tipped by opinion polls to win the vote, called on Catalans to "Give the finger" to their opponents.

His adversaries have branded him a dodgy liar.

Writers, bankers and people on the street have joined in the angry debate.

"It is an unusually tense atmosphere," said Pablo Simon, a political scientist at Carlos III university in Madrid.

2015-09-24

All-Currency Bear Market in Gold is Over

The clear sign of a bull or bear market is that it is visible in nearly all currencies.

Here's gold priced in Australian dollars. If gold were to rally back to January levels ($1300) with no change in the AUDUSD exchange rate, it would break the 2011 high.

If the same scenario plays out in Canadian dollars, a new 52-week high will be made.

A similar rally would push gold near recent highs in the euro and yen.

The weakest chart is in dollars.
Gold recently made a new low in dollars and this trend is being driven by currency weakness more than strength in gold. If currencies continue to weaken, the rise in gold needed to trigger a breakout will fall. I expect overseas investment demand to move higher in the coming months.

Industrial Production Numbers Improve in Northeast

Most still below the national trend.

China's Economy Crippled By Central Planning

The Northeast of China is in recession due to its location at the higher stages of production. Raw material production slows first and to a far greater degree than the lowest stage of the production cycle, retail consumption.

Caixin: Central Planning Got the Northeast in Trouble – and Won't Save It
Even today the planned economy, dominated by centrally owned enterprises, still prevails in the region, leading to the worship of officialdom and power. Song Donglin, the head of Jilin University of Finance and Economics in Changchun, said that centrally owned businesses account for over 60 percent of Heilongjiang's industry, and a whopping 95 percent of the medium and large enterprises in Jilin.
A little history:
In the 1950s, the government wanted its core economic belt near the border with the former Soviet Union because it considered this region the safest. And so it is today that the economy of the northeast bears the most resemblance to the Soviet-style planned economy.
Also (cough) Japan (cough, cough) developed the region (cough).
A restructuring of Dongbei's SOEs is bound to face much stronger resistance than similar changes in other regions, due to the huge social implications. An incident involving Tonghua Iron & Steel Group offered an early clue to this likelihood. In 2009, a restructuring plan sparked a huge strike and demonstration that led to a general manager being beaten to death.

The lack of a business culture in the northeast means that when leaders there try to attract foreign investment, the first thing that springs to their minds is the opportunity for personal gain. This is, of course, not very attractive to foreign investors.

These and other problems have led to a brain drain that is exacerbated by the fact this region, more than any other in China, is heavily dependent on "guanxi," the social networks built around business leaders and government officials. Over the past five decades Dongbei has developed great technical proficiency, but now many engineers being lured to more developed regions in the south and east.
The North of China is more communist than the South, the South is more cosmopolitan. Teasing what is communism and what is deeper cultural issues is difficult, but for now, the South has huge cultural advantages on the North. Also demographics:
In fact, the entire northeast suffers from a wider decline in population. The Heilongjiang Provincial Academy of Social Sciences said that in the first three decades of the PRC, Dongbei had a net population inflow of 7 million people. However, the last three decades have seen 4 million people leave. Liaoning saw its two big cities grow, but overall the province's population has shrunk. Retirees in Dongbei outnumber the people joining the labor force every year.
The article leaves off the largest act of central planning in the past 20 years: real estate development. The local governments directed infrastructure and housing projects all over the country in a bid to drive GDP growth. The northeast provinces in particular turned to real estate when the industrial sector slowed.

From October 2014: Liaoning Sounds Warning on Chinese Economy
Although China's slowing real estate market draws the most attention, industrial sectors such as steel have been hit hard. Suffering from overcapacity and now a slowdown in demand, the sector led the slowdown in real estate. There is a feedback loop for some areas of the country, where the production of raw materials for real estate development fuel the local economy, which is also has its own real estate bubble. The result is rapidly slowing growth that could be a harbinger for the wider economy.

The data shows that real estate investment is plunging in the heart of China's industrial economy. The slowdown in real estate is happening nationally, with investment growth figures sliding in most provinces, but the three northeastern provinces are doing the heavy work of pulling down the national figure. One province among them is doing most of the work: Liaoning is the fourth largest province in terms of real estate investment, with 6.5% of the national total in September.
I concluded:
Liaoning is more exposed to the higher stages of production and therefore is one of the provinces most likely to experience a slowdown first assuming a normal contraction phase of a business cycle. We know steel and other industrial sectors have overcapacity. Problems in steel surfaced in late 2011, but wider economic growth was not impacted until very recently, following a steady deterioration in the market for more than 2 years and then a slowdown in real estate as well.

Liaoning's slowdown could be a false signal, but it could also be the beginning of a much sharper slowdown in China's economy. Industrial production in Shanxi province, which leans more on the coal industry, also slumped in recent months. Real estate was the replacement growth source for economies experiencing recessions in their main industries; now that real estate is slowing, the remaining economy is revealed.

Liaoning has sounded a warning bell on China's economy. The real estate slowdown and economic slowdown that had been broad and general, is now turning acute. This process is slow at first and it might take until the middle of 2015 for a national trend to emerge. There's no reason to panic yet, but Liaoning is warning that this slowdown may not be a gradual one.
The Northeast is in worse shape because of its reliance on SOEs, but it is partially reliant on SOEs because the central government maintains control of these industries. Yet even if there were no SOEs, industrial companies would likely be concentrated in the Northeast and the recession would still be happening in these industries. The real cost of central planning lies in the local and provincial government's direction of infrastructure and real estate development to increase GDP growth. Provinces in the south have a stronger economy to fall back on, but they cannot avoid the fate of all central planners.

Real Estate Investment Contraction Spreads to More Provinces

Here's the share of total real estate investment of some of the top provinces.
Real estate investment by province follows. Note the recent changes in northeast industrial provinces Inner Mongolia, Hebei, Jilin, Heilongjiang, Shanxi and Liaoning.

Caterpillar (CAT) Succumbs

ZeroHedge has been running articles on Caterpillar for years, with increasing frequency. Two of the most recent, from August and three days ago.

For Caterpillar, This Is What The "Second Great Depression" Looks Like
and
What On Earth Is Going On With Caterpillar Sales?
Below we show the latest monthly data from CAT which is once again in negative territory across the board, but more importantly, the global headline retail drop (down another 11% in August) has been contracting for 33 consecutive months! This is not a recession; in fact the nearly 3 year constant contraction - the longest negative stretch in company history - is beyond what most economists would deem a depression.
The stock market is to a large degree a reflection of social mood. When invetors are in a good mood, they ignore fundamental problems in the economy. When mood is negative, they ignore positive developments and cheap valuations.

Caterpillar has been whistling past the graveyard for years, but only last summer, coinciding with the U.S. dollar rally and drop in oil prices, did CAT stock fall. Now the stock is almost in free fall. The latest "news" is here: Caterpillar Shocker: Industrial Bellweather To Fire Up to 10,000; Slashes Revenue Outlook. There's no shocker though, things have been the same for almost 3 years.

Economists are frequently wrong about things such as China contagion because they ignore social mood and psychological factors. The broader market today is telling you nothing about China because the overall confidence is high. The Brazilian currency, high-yield debt (especially the distressed debt market) and copper? They're telling you another story. Eventually, these prices are going to synchronize. It could be that these weaker sectors will bounce and converge with equity prices, but I'm betting the opposite will happen. One day investors will decide these problems matter, will price it in accordingly, and economists will scream "contagion!"

End of the Pigflation?

Latest commodity price round-up through September 20 from NBS: 流通领域重要生产资料市场价格变动情况(2015年9月11-20日)

I compared the prices with those from August 30. Pig prices are down 5% in September, with a 4.4% drop in the 10 days thru September 20 alone. Gasoline and diesel are up about 6% over this period.

流通领域重要生产资料市场价格变动情况(2015年8月30—9月20日)
产品名称 单位  前期价格(元) 本期价格(元) 比上期 涨跌幅 (%)
价格涨跌()
First, black metal          
Rebar (¦µ16-25mm, HRB400) 2155.5 2066.8 -88.7 -4.12%
Wire (¦µ6.5mm, HPB300) 2280.4 2204.1 -76.3 -3.35%
Ordinary plate (20mm, Q235) 2166 2093.6 -72.4 -3.34%
Ordinary hot-rolled sheet (3mm, Q235) 2189 2158.8 -30.2 -1.38%
Seamless Steel Tube (6,20 * 219 #) 3049.8 2960.2 -89.6 -2.94%
Angle (# 5) 2454.3 2441.7 -12.6 -0.51%
Second, the non-ferrous metal          
Copper (# 1) 39142.2 40967.4 1825.2 4.66%
Aluminum (A00) 11839.7 11860 20.3 0.17%
Lead ingots (1 #) 13311.4 13386.7 75.3 0.57%
Zinc (0 #) 14853.4 14665 -188.4 -1.27%
Third, chemical products          
Sulfuric acid (98%) 422.1 395 -27.1 -6.42%
Caustic soda (caustic soda, 32%) 633.2 681.7 48.5 7.66%
Methanol (Excellence in goods) 1831.4 1807 -24.4 -1.33%
Benzene (petroleum benzene, industrial) 4342.9 4633.3 290.4 6.69%
Styrene (one product) 7525 7375 -150 -1.99%
Polyethylene (LLDPE, 7042) 9172.7 9139.2 -33.5 -0.37%
Polypropylene (T30S) 8242 8165.1 -76.9 -0.93%
Polyvinyl chloride (SG5) 5323.8 5266.9 -56.9 -1.07%
Butadiene rubber (BR9000) 9266.4 9470 203.6 2.20%
Polyester filament yarn (FDY150D / 96F) 7478.6 7441.7 -36.9 -0.49%
Fourth, oil and gas          
Liquefied natural gas (LNG) 3818.8 3757.2 -61.6 -1.61%
Liquefied petroleum gas (LPG) 3537.7 3588 50.3 1.42%
Gasoline (97 #) 7507.2 7516.7 9.5 0.13%
Gasoline (93 #) 6291.3 6662.4 371.1 5.90%
Diesel (0 #) 4804.9 5085.4 280.5 5.84%
Paraffin wax (58 # and a half) 6859.3 6776.3 -83 -1.21%
Five coal          
Anthracite (the 2nd wash block) 849.2 849.2 0 0.00%
Ordinary mixed coal (4500 kcal) 325 320 -5 -1.54%
Shanxi mix (5000 kcal) 355 350 -5 -1.41%
Shanxi high-grade (5500 kcal) 410 400 -10 -2.44%
Datong mixed coal (5800 kcal) 465 450 -15 -3.23%
Coking coal (coking 1/3) 560 543.3 -16.7 -2.98%
Coke (metallurgical coke) 691.2 680.8 -10.4 -1.50%
Six non-metallic building materials          
Composite Portland cement (P.C 32.5 bags) 234.3 233.2 -1.1 -0.47%
Ordinary portland cement (P.O 42.5 Bulk) 242.1 243.2 1.1 0.45%
Float glass (4.8-5mm) 1151.3 1155 3.7 0.32%
Seven, agricultural          
Rice (Japonica rice) 4400.6 4398.1 -2.5 -0.06%
Wheat (GB third class) 2350 2350 0 0.00%
Corn (yellow corn Second) 2260.9 2166.2 -94.7 -4.19%
Cotton (lint, white cotton three) 13157.1 13157.1 0 0.00%
Pigs (outside three yuan) 千克 18.2 17.3 -0.9 -4.95%
Soybeans (soybean) 4208.6 4213.8 5.2 0.12%
Soybean meal (crude protein content of ¡Ý43%) 2702 2742.9 40.9 1.51%
Groundnut (peanut oil) 7911.9 7930.6 18.7 0.24%
Eight of agricultural production          
Urea (small granule) 1670.4 1655.4 -15 -0.90%
Fertilizer (potassium sulfate compound fertilizer) 2814 2814 0 0.00%
Pesticides (Glyphosate 95% of the original drug) 18787.5 19004.2 216.7 1.15%
Nine, forest          
Wood-based panels (1220 * 2440 * 15mm) 51.8 51.8 0 0.00%
Pulp (bleached chemical pulp) 4746.4 4733.3 -13.1 -0.28%
Corrugated (high-strength) 2542 2536 -6 -0.24%

Doomsayers: This Is the Domino You Have Been Waiting For

Krugman: Chinese Spillovers
Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.
If there is any contagion it will spread through the currency market and it will dwarf the 1997 crisis by an order of magnitude. The devaluation of the yuan will lead to a collapse of emerging market currencies, Australian and Canadian dollars, followed by the yen, the euro and, finally, the U.S. dollar.

Doomsayers have been predicting the collapse of the global financial system and the dethroning of the U.S. dollar as reserve currency (or at least a severe real devaluation of the dollar versus gold and other other hard assets) for years. They have been wrong to date because the thesis was predicated on pre-2008 trends continuing. There was a significant change in 2008. First, a regular cyclical shift from inflation to deflation. In addition, demographics across the developed world and China likely are part of an order of magnitude larger cyclical shift. We are in the deflationary downturn of a larger deflationary shift, almost the mirror opposite of the 1970s cyclical inflationary boom amid the 1945 to 2008 larger inflationary boom. Central bankers have tried, in vain, to push the global economy back to the pre-2008 inflationary trend. Those predicting collapse for the greenback also argued China was the strongest economy, instead of one of the worst serial money printers in the entire world running up a credit bubble that looks to be the largest, and one of the most poorly invested, in history.

My position has been and remains that the fiat currency system will burn from the periphery to the core. China's currency has been artificially propped up since 2011, arguably since 2008 since the Chinese stimulus debt binge was the main driver of a rebound in commodities and emerging markets. The deflationary downturn was aborted globally by concerted central bank action in 2008 (and since). Imbalances have only grown since. China printed money at a rate that falls in the same category as Argentina, Russia, Brazil and Turkey. Those four currencies have all collapsed to varying degrees. China's currency is not immune to the laws of economics.

When the yuan devalues, it will start a fire that will consume the world's monetary system. It is the first big domino because when it falls, it will cause torschlusspanik.