2016-12-30

75pc of Chinese Investors Lost Money in 2016

The ChiNext Index fell 27.7 percent in 2016, 32.5 percent in U.S. dollars.
The SME Composite fell 16.6 percent.
Shanghai Composite fell 12.3 percent.

According to an iFeng survey of investors, 75 percent lost money in 2016. Of these, 15 percent said they lost more than 50 percent. On the flip side, of the investors who said they gained, 73 percent gained less than 10 percent. iFeng also estimated the average account in the Shanghai and Shenzhen markets lost 43,000 yuan in 2016.

Only 9 percent of respondents expect a bull market in 2017 vs 21 percent who expect a bear market.

In terms of where gains are expected in 2017, the least picked was the ChiNext, at 14 percent.

iFeng: 2016沪指跌12%创业板指重挫28% 逾七成股民亏损

Almost Two-Thirds of China Dissatisfied With Housing Regulation

Chinese citizens aren't satisfied with government efforts to rein in home prices. According to a CASS survey, 37 percent said policies were effective, but 40 percent disagreed, saying the policies failed to stop the rise in home prices. The survey was carried out from April to June.


iFeng: 社科院报告:房价调控满意度下降 需要再调整

China Opens Financial Sector to Foreigners

WSJ: China Vows to Ease Curbs on Foreign Investment in Finance
Investment restrictions will be relaxed in banking, securities, fund management, futures and insurance, Ning Jizhe, vice chairman of the National Development and Reform Commission, said during a press conference Friday, without elaborating.

Current rules limit foreign investors in China’s securities industry to 49% stakes in joint ventures set up with local partners.

Earlier this week Premier Li Keqiang vowed steps to attract foreign investment in manufacturing and “create fair competition conditions for foreign and domestic firms.” In manufacturing, restrictions will be eased in transportation equipment, motorbikes, ethanol and edible fats and oils, said the NDRC, the country’s highest economic-planning agency. China will also lower curbs on foreign investment in unconventional oil and gas production, including shale gas.

Foreign capital will be allowed in accounting, architecture design, auditing and rating services, according to NDRC, which also said it will push for the “orderly opening-up” of the telecom, internet, cultural, education and transportation sectors.

2016-12-29

Chinese Box Office Sales Flat in 2016

Chinese box office receipts hit a brick wall in 2016. The most amusing part of the story is one of the excuses offered: yuan depreciation.

SCMP: How bubble burst on China’s cinema industry ‘boom’
Box office sales totalled more than 1 billion yuan during Christmas week, helping 2016’s takings reach 44.5 billion yuan as of December 23, and surpass last year’s Christmas week total of 44 billion yuan. Analysts anticipated that the box office revenues in 2016 would reach about 45 billion yuan, according to Sina Entertainment News.

Tong Gang, deputy head of the State Administration of Press, Publication, Radio, Film and Television, which oversees the film industry, blamed the decline on the yuan’s depreciation, the Xinhua news agency reported.
The more likely explanation is the crack down on subsidies:
“As big as the slump in China’s box office sales seems, this is actually the real situation of the Chinese film industry,” Wang said.

“I said in 2015 that the bubble would burst if we deducted all the ‘ticket subsidies’.
Another issue is quality:
Film administration body chief Zhang Hongsen said the quality and standard of Chinese films could not meet the rising demand of domestic audiences and the industry should “promote the spirit of craftsmanship”, Xinhua reported.

China Adds Collapsable Currencies to CFETS Basket, Admits Will Manipulate Yuan

The CFETS basket is changing, with the addition of currencies that can collapse. If the U.S. Dollar Index rockets to 120, USDCNY is going to blast well past 8.

Update: A quick calculation based on the old and new weights. By my count, if the CFETS RMB Index is baseline 100 at the end of 2015, it falls to 94.09 in 2016. If the 2017 basket was in effect, it would be 94.72 at the moment. If the 2017 basket was in force since 2014, the CFETS RMB Index would be 97.08 at the moment.

Also, according to the announcement (2017年起CFETS货币篮子新增韩元等11种货币), the index will begin anew each year. The CFETS RMB Index will reset to 100.

Reuters: China expands CFETS index basket, yuan seen weakening vs. dollar
China will change the way it calculates a key yuan index in the new year, nearly doubling the number of foreign currencies in a basket that is used to set the yuan's value, its foreign exchange market operator said on Thursday.

...Starting on Jan. 1, the number of currencies in the CFETS basket will be increased to 24 from 13, the China Foreign Exchange Trade System (CFETS) said in a statement on its website.

..."If the dollar strengthens sharply, weakening in the yuan will be inevitable."
I expected a weaker yuan in years past solely because China was reducing the size of the U.S. dollar in its reserves, while increasing the euro and yen. Since I expected a U.S. dollar rally, it's obvious the yuan would diverge. In the past year, the yuan tracked very closely with the euro, but next year, it should depreciate faster. China is adding more volatile currencies, while reducing the weight of the dollar and euro.
The 11 currencies to be added, including the Korean won, the South African rand and the Mexican peso, will have a 21.09 percent weighting in the basket, which the CFETS said would basically cover the currencies of China's major trading partners.

The dollar's weight will be reduced to 22.4 percent from 26.4 percent and the euro's to 16.34 percent from 21.39 percent, the CFETS said in its statement.
The CFETS basket will be more stable, but the renminbi divergence from USD with increase amid a dollar bull market.

The final important bit of information is China admitted it's not trying to create a stable basket for the yuan, but manipulate the currency. The dollar is being reduced because China wants a weaker yuan, and no doubt the dollar will be added back once it starts depreciating again:
It said it would adjust the composition and weighting of its currency basket annually.
The Trump Administration has all the evidence it needs to declare China a currency manipulator.

Two-Child Policy Increased Birth Rate in 2016

SCMP: China experiencing baby boom now that one-child rule is lifted
Now China is undergoing a minor baby boom, with almost one million more newborns expected this year, National Health and Family Planning Commission deputy director Wang Peian said, according to official media reports.
More than 17.5 million births were expected in 2016, he told a conference in November – which would reverse a decline last year and be the highest figure since 2000.

But while the end of the one-child policy swayed Zheng and her husband, it is unclear how much it contributed to this year’s baby boom.

Previous statistics show the increase was concentrated in the first half of the year, before the new policy could have an effect. And 2016 was the lunar year of the monkey – considered a particularly auspicious zodiac sign to be born under.
Chinese do time their births based on the Lunar calendar. I covered this a few years ago in Dragon baby boom. The abstract from a paper looking into the question:
This paper analyzes the widely held belief among Asians that children born in the Year of the Dragon are superior. It uses pooled cross section data from the U.S. Current Population Survey to show that Asian immigrants to the United States born in the 1976 year of the Dragon are more educated than comparable immigrants from non-Dragon years. In contrast, no such educational effect is noticeable for Dragon-year children in the general U.S. population. This paper also provides evidence that Asian mothers of Dragon year babies are more educated, richer, and slightly older than Asian mothers of non-Dragon year children. This suggests that belief in the greater superiority of Dragon-year children is self-fulfilling since the demographic characteristics associated with parents who are more able to adjust their birthing strategies to have Dragon children are also correlated with greater investment in their human capital.
However, the data shows the effect isn't that large. More likely, the spike in births is due to pent up demand, in which case it will fade sometime in 2017.

2016-12-28

2017 Picks

I think I had only one pick for 2016 now that I go back over my posts: Turkey down.

2016 Forecast: Turkey Collapses

TUR was $36.07 in that post and closed at $32.07 today, not exactly what I expected. I'm sticking with this pick for 2017 though. Turkey had a lot of geopolitical problems in 2016 and I expect they will turn into financial troubles in 2017. The chart alone points to it. A different take on Turkish politics from FPRI: What the Assassination of the Russian Ambassador May Be Telling Us about Erdoğan’s Turkey

Another country with a similar chart is Mexico. (EWW) I'm not sure if this is a "Trump" formation caused by investors anticipating bad news for Mexico or not. But I will look for a downturn in 2017.

In the near term, the Chinese yuan looks a little oversold. I expect a bit of a rally after it cracks 7, even better if it rallies before since it will catch the bears. A 3 percent rally takes USDCNY to about 6.75, a 5 percent rally to 6.60. The PBoC has given bears nice entry points before, hopefully they provide another one. I don't think USDCNY will be the best currency play.

Speculative long picks: natural gas (FCG) and solar (TAN). I will pick out some higher volatility components within those funds.

Chinese Money Market Yields Rise, One Fund Has 24pc Annualized 7-day Yield

This money market fund 嘉合货币B now has a 24 percent annualized 7-day yield. The chart and table shows the soaring 7-day yield over the past few days.

An article in iFeng asks: what happened? iFeng: 货币基金七日年化收益率飚至20% 发生了什么?
Even more impressive is the performance of individual funds, such as the Jiahe B currency has a 7-day annualized rate of return reached 20.8960%, in the 27th of the market-wide Monetary Fund ranked first. In the past month, the fund's yield has not more than 6%. But nearly three days of the rapid rate of return of its soaring, December 26, the fund's yield reached 16.272%, 27, further rise.

In addition to Jiahe currency, the Dacheng Feng Treasure Monetary Fund 7-year annualized rate of return is also more than 7%, Industrial stability days surplus currency, the people's livelihood plus silver Teng ingot currency, SDIC Swiss money money Treasury 8 Fund seven The annualized rate of return of more than 5%, investment wealth Po transaction currency, Merchants Zhao Jinbao currency, BOC securities cash stewards currency 62 money fund yield between 4% -5%, and another 173 funds The yield is between 3% and 4%.

Short-term financial funds is also very optimistic about the rate of return. December 27, there are nine short-term financial funds of the seven-day annualized rate of return of more than 4%, of which agricultural silver 14 days of financial B reached 4.7%, 4.48% and so on.
The iFeng doesn't see trouble so much as a "liquidity war" as money market funds jockey for investor funds:
"Monetary Fund's capital flow improved mainly from two aspects.On the one hand, the agency's large redemptions in the first two weeks has been completed, the Fund's passive pressure to reduce the basic release of leverage in this case, as long as the bond market a little stabilized , The Fund has a lot of motivation to increase short-term high-yield varieties, especially the high market returns, is very suitable for the Fund, but also very attractive.

On the other hand, more than one fund channel sources confirmed that the amount of money in the first-line bank retail sales began to rise in the last week of the end. Product yield recovery is one reason, and the other is due to retail customers, the Fund's higher security and competitive varieties of lower earnings side by side, triggering the continued inflow of funds.

In other words, when other non-bank institutions in the exchange and the interbank market staged a "war of funds" at the same time, with unimpeded retail channels of the Monetary Fund, with individual investors "ammunition" began to return to the market, a liquidity Of the suppliers. This identity advantage gives the IMF an excellent opportunity to increase its yield.
Bloomberg isn't as optimistic about the yield spike.

Bloomberg: China’s Money Market Pain Is About to Get Worse
China’s money-market liquidity squeeze is about to get worse.

...“The central bank’s attitude towards monetary policy has changed fairly significantly in the past six months,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “Market participants are anxious as the tightness at year-end is worse than expected. Tougher monetary conditions and deleveraging are having the same negative impact on domestic liquidity.”

...“Liquidity will be the biggest risk next year,” said Ming Ming, head of fixed-income research at Citic Securities Co. “Smaller financial institutions will face more difficulties in borrowing and the cost will be higher. The big picture in 2017 is de-leverage, so the monetary policy will be neutral to tight -- this is negative to the bond market.”

Yu Yongding: Devalue Now, Before Trump Takes Office

The endgame could come early in 2017:
Ultimately, trying to keep a lid on the Yuan is a game China will lose, and some are already preemptively admitting defeat. Among them is Yu Yongding, a former academic member of the PBOC's monetary policy committee, who overnight urged his former PBOC colleagues to engage the "nuclear option" - a sharp, one off devaluation similar to what China did in August of 2015.

In emailed comments to Bloomberg, Yongding said that China has a window from now to President-elect Donald Trump’s inauguration to halt FX intervention and let yuan depreciate to its equilibrium level.

Yongding believes that once FX reserves fall below a certain psychological threshold, capital outflows will only accelerate, and while depreciation expectations may weaken occasionally, they will never disappear until the yuan free floats and finds its equilibrium.

He also warned that concerns over depreciation have severely affected the PBOC’s monetary-policy independence and said that while tightening capital controls is right move, this has massive side effects and can be evaded.
ZH: With China Facing Currency, Liquidity Crises, Ex-PBOC Official Urges USe Of "Nuclear Option"

Delicious Spicy Rabbit Heads

It's pretty good. I think what turns off most Chinese, and myself, is the blazing hot spices they cook it in.

SCMP: Why Chinese province loves weirdest of delicacies ... rabbit head
But even in China there is little appetite for rabbits’ meat, much less their heads, which are overwhelmingly eaten in Sichuan, a remote province long isolated by mountain ranges.

The dish is a speciality of the region, rarely found outside of a few popular restaurants in Beijing and other major cities.

“Two out of three rabbit heads consumed in China are eaten in Sichuan,” said Wang Min, the manager of the Chengdu restaurant, adding that locals were proud of the snack.

Beijing Slows Capital Flows, Gold and Bitcoin Jump

SCMP: China may tighten capital controls as yuan outflow continues
Money is leaving China’s shores at a faster clip, as more citizens and companies rush to get their currency out of the country before the yuan’s value deteriorates faster.

The average daily turnover of China’s foreign exchange market reached US$34.2 billion as of December 19, 12 per cent more than the US$30.5 billion daily average in November, according to research by investment bank China International Capital Corp (CICC).

...The Chinese government is likely to “throw sand in the gears” and create friction in capital remittances such as scrapping or adjusting the annual US$50,000 individual foreign exchange swap quota, CICC analysts said, instead of imposing hardline capital controls.
CICC analysts see a line in the sand for Chiense reserves:
China’s foreign exchange reserves are adequate and won’t be a threat to external payments as long as they remain above US$2.6 trillion, CICC said.
These road blocks are having an effect because Chinese are already finding ways around them. Bitcoin is rallying:
Gold on the Shanghai Gold Exchange trades at a premium, 2.7 percent as of today, or $30 an ounce. It's down from a peak above $40 an ounce.

Reuters: Shanghai Gold Exchange cuts transaction size to limit price moves
Shanghai Gold Exchange, the world's biggest physical bullion exchange, said on Wednesday it will curb the amount of gold investors can trade at one time, a move analysts said would limit institutional investors' influence on prices.

The exchange said in a statement it will halve its limit on transactions to 500 kg on some spot gold contracts starting Jan. 1. It did not give a reason for the move and the exchange did not answer calls seeking comment.

The new limit, which would be worth more than $20 million based on current prices, suggests the move is targeted at institutional investors, such as banks and hedge funds.

The move does not affect the amount traders can sell or buy in any one day, but it would likely force traders to carry out big transactions in multiple moves, reducing the potential for "fat finger" erroneous trades or preventing big investors from carrying out rapid-fire buying or selling to influence prices.

It may also drive up the transactions costs.

Turnover in the exchange has soared as Chinese retail investors' appetite for gold as a safe-haven investment has increased. In November, volume hit 3.4 million kg, the highest monthly total so far this year.

2016-12-27

2 Trillion Yuan in PPP for 2017

iFeng: 明年PPP或掀起2万亿落地热潮 相关政策密集出台
According to "Economic Information Daily" was informed from the industry, in 2017 PPP could set off a 2 trillion yuan boom, tax incentives, rules for the operation and other related policies will be introduced intensive, and policy framework to encourage both the specification will be further refined. Among them, the focus of fiscal policy from the "complement project" to "fill operation."

Gao Shanwen: 15 Months Until Housing Inventory Cleared

iFeng: 高善文最新报告:再过15个月 楼市去库存会基本完成
To the current level of inventory, based on the historical reference to the reasonable rate of speed, it seems after about 15 months time, a large number of small cities to the inventory will be basically completed. The realization and confirmation of this transition marks the normalization of the economic operation, and will have a major impact on the large class of asset markets.

...It is noteworthy that, for much of 2014-2016 China experienced relatively deflationary deflation in the industrial sector, which means that de-leveraging in part actually started a vicious cycle of debt-deflation, which Making the lever to very difficult.

With the elimination of industrial deflation, corporate macroeconomic conditions to leverage the significant improvement in leverage will soon be significantly accelerated.

Some industry-level feedbacks suggest that the recent micro-base of capacity de-assetization and asset-liability ratio repair is based on the fact that a number of fast-growing competitive industries are completing the survival of the fittest and shifting to an oligopolistic, more mature and competitive landscape. If this judgment can be confirmed, it will mean that the recent deflationary recession and corporate earnings recovery is across the cycle, and will form a more long-term support for the capital market.

...As a result, asset turnover in China's corporate sector is likely to bottom out, supporting both the improvement in corporate macro leverage and the return on assets to support the stock market.

Chinese Credit Gets Crunchy

ZH: Chinese Interbank Funding Freezes Again As Overnight Repo Hits 33%
And while some of the liquidity squeeze was certainly calendar driven, what is more concerning for Chinese markets, where as we reported recently the local authorities, regulators and even press are confirming that the government crackdown on the credit and housing bubble may be serious for once due to fears about "rising social tensions", much of the overnight repo rate spike was driven by the PBOC which pulled a net 150 billion yuan of funds in open-market operations today, the most since December 7.

The result was another brief, but painful, freeze of the interbank lending market.

Should the PBOC continue to not only not inject liquidity among banks, but aggressively withdraw it, it is possible that a repeat of the 2013 bank crisis
Prior coverage of the 2013 "crunch".

Nothing has changed since 2008 in terms of the ultimate end game for China. Allow deflation or devalue the currency. Credit growth can stave off deflation for a time, with housing market, stock market, bond market and housing market bubbles. A never-ending parade of bubbles until inflation kicks in and destroys the value of the currency. Or it can slow credit growth and try to keep all the plates spinning in an environment where one broken plate can freeze the financial system. History and experience says even if they seriously try to tighten credit, eventually they'll blink and ease one big plate, or a few small ones, break.

Meanwhile, the choice isn't even fully China's to make. The U.S. dollar is in a bull market and forcing the yuan higher against most currencies, not lower. Deflation is coming via the global financial system (the contracting dollar system) unless China allows the yuan to depreciate or domestic credit inflates, which is a roundabout way of weakening the yuan. The final blow comes if the U.S. Dollar Index hits the upper targets around 120. At current rates of depreciation, the yuan will slide past the old 8.28 peg. China has to increase its defense of the currency, and when USDCNY climbs through 7 towards 8, depreciation expectations will ramp up.

First-Tier Land Sales Drop

Only Shenzhen saw land sales climb as other first-tier cities run out of empty land and buying restrictions take effect.
December 19, the Guangzhou Municipal People's Congress to consider and adjust the 2016 annual land transfer budget report, the application for the Guangzhou City, the level of state-owned land transfer revenue budget from 65.2 billion yuan at the beginning of the year reduced to 38.0 billion, less than 60% of the planned budget.

...According to the Centaline Property Research Center statistics show that first-tier cities in Shenzhen this year, only better performance, land sales revenue over the 2009-2015 annual maximum, the Beijing and Guangzhou land transfer gold fell to the bottom of the past few years the same period in history. Land transfer constraints and more and more constraints, is leading to land market data cooling the main reason. Many cities in order to avoid the king for the land has increased the restrictions.

Second-tier cities, as of December 26, Suzhou, Nanjing, Shanghai, Hangzhou, Tianjin, Hefei, Wuhan, Chongqing eight cities sold more than 100 billion yuan; Wenzhou, Guiyang, Yangzhou, Nanning, Shijiazhuang , Haikou, Luzhou and other three or four lines of the city's relatively good performance, the first 10 months land sale income close to or more than last year's level.

Caijing: 限制越来越多 北京广州土地出让金跌至近年来谷底

Chinese Watch Canadian Central Bank's Housing Warning

iFeng has a translated version of this ZeroHedge article on its finance homepage: Bank Of Canada Lays Out In YouTube Clip How The Economy Could Tank
There is good news, Slive says. Stress tests show Canada’s big banks will be just fine even with a large drop in house prices (stress tests also showed that both Belgian Dexia and Spanish Bankia were perfectly solvent just months prior to their respectively failrues). It’s also important to note that the Bank, in its financial system review, said there is a “low probability” of a sharp correction in house prices. But there’s no getting around the immense damage such a scenario would have on the economy.

The video is a break from regular fare on the Bank of Canada’s YouTube channel, which is largely made up of speeches by top Bank officials. And even if Slive’s delivery is trademark central-banker dry, the message is stark, and shows the Bank is desperate for Canadians to heed its warnings on debt and rising house prices.

If there’s one quibble to be made, it’s with the initial domino that the Bank sees setting everything in motion—a severe recession leading to job losses. Since the U.S. housing bubble popped and that country went into its long, dark funk, a chicken-versus-egg debate has raged over whether the housing collapse triggered the U.S. recession, or whether something else, like soaring oil prices, brought on the recession and turned the housing slowdown into a total collapse. What’s beyond debate is that America’s housing market reached its frothiest in mid-2006, and then began its decline, one-and-a-half years before the recession began.

Whatever the case, the Bank’s video should be another wake-up call for Canadians, but "not that anyone’s listening" as Jason Kirby laments.
iFeng: 加拿大央行五张漫画告诉你:为什么不能让房价暴跌?

China Prepares for Trade Battle

"Chinese manufacturing has overwhelming superiority, multinationals will not leave" reads the headline at iFeng (中国制造有一个压倒性优势 跨国企业不愿放弃)

Facing a competitive threat from the United States (and possibly a protectionist threat) and the recent high profile move by Fuyao Glass, which moved jobs to Ohio, China wants to calm nerves.
In April of this year, Deloitte and the US Competitiveness Commission released the report "2016 Global Manufacturing Competitiveness Index" pointed out that in 2016 China was again listed as the most competitive manufacturing countries, but the next five years, China will decline to second Name, the United States hopes to replace China by 2020 and occupy the top spot. Global executives interviewed agreed that advanced technology is the key to unlocking future manufacturing competitiveness as manufacturing converges in the digital and physical worlds. The prestigious Boston Consulting Group (BCG) in 2014, "the global manufacturing cost competitiveness index" also pointed out that China's manufacturing cost advantage relative to the United States is currently less than 5%, facing enormous challenges.

In addition, the cost of global manufacturing industry in the past few years there have been greater changes. "Who would have thought ten years ago that Brazil was now one of the most expensive manufacturing economies, and that Mexico's manufacturing costs would be lower than China's? London is still the world's price of living and travel," the BCG's report said with surprise. But the UK has become the least costly manufacturing sector in Western Europe, while manufacturing costs in Russia and Eastern Europe have risen to almost the same level as in the United States.

...BCG released in 2011, "return to the United States," pointed out that the past two decades, China's overwhelming manufacturing cost advantage to the rapid decline of the US manufacturing industry. With the rise in labor costs in China, increased productivity in the United States and the depreciation of the dollar and other factors in the next decade, the United States and China's manufacturing costs will become very small.

Deloitte pointed out in the report, manufacturing competitiveness of the main driving elements of two. Talent remains the top priority, with manufacturers and executives also ranking talent as the most important driver of global manufacturing competitiveness. In the era of slow economic growth, in addition to building robust supplier networks and ecosystems, controlling costs, increasing productivity, and increasing profits are still important for manufacturers, in terms of cost competitiveness, productivity, and supplier networks. China as a traditional manufacturing power, the core competitiveness focused on production costs and supply chain aspects. In a cross-cutting comparison of the competitiveness of the US, Germany, Japan, Korea, China and India, the report cited India with a score of 55.5, slightly higher than 51.5, in talent competition.

The rise of the Power Five (MITI-V) is noteworthy in countries that want to take advantage of China's transition to developing low-cost manufacturing bases. Malaysia, India, Thailand, Indonesia and Vietnam, the five Asia-Pacific countries are expected to be among the top fifteen of the manufacturing competitiveness in the next five years. These countries have low labor costs, flexible manufacturing capacity, favorable population distribution and market, economic growth. According to the Deloitte study, China's competitiveness ranking in the next five years will continue to rise, while China continues to focus on higher value and advanced technology manufacturing in the manufacturing sector.
China has structural political and cultural advantages which will keep it competitive with the United States, namely that Chinese are willing to work longer and harder, with little social safety net, versus Americans who are relatively unwilling to work:
A senior Philips mechanical engineer on the Die Zeit reporter analysis: "From a rational point of view, China's labor resources or the United States has an advantage, first of all in the price.Secondly, even the United States has the same labor force with China, Now this social atmosphere will not form China's industrial scale, the problem is in the mentality, my previous company had tried to build the assembly plant in Silicon Valley, but soon found that Americans do not want to engage in labor Too strong, low level of technical work, and do not want to work overtime, the union is too strong, a little problem behind the duration will be affected, and later had to give up.

The article has this graph showing export manufacturing costs in 2014. China is on the left at 96, next is Germany at 121 and then the U.S. at 100, Japan at 111 and Korea at 102.

2016-12-26

Another Day, Another Default

Reuters: China bank calls documents "fake" after bond default on Alibaba-linked platform
The fate of a defaulted $45 million Chinese corporate bond sold through an Alibaba-backed online wealth management platform was thrown into doubt on Monday, after a bank said letters of guarantee for the bonds were counterfeit.

China Guangfa Bank Co Ltd (CGB) [GDDVB.UL] said guarantee documents, official seals and personal seals presented by the insurer of the bonds "are all fake" and that it has reported the matter to the police.

The dispute highlights challenges in China's loosely regulated online finance industry, where retail investors often buy high-yielding bonds and other assets, expecting them to be "risk-free" due to guarantees provided by various parties.

At the centre of the latest dispute are 312 million yuan ($45 million) worth of high-yielding bonds issued by southern Chinese phone maker Cosun Group that defaulted this month.
ZH: As Mystery Of China's Multi-Billionaire Default Deepens, A New "Bond Scare" Emerges

China to Tackle Pollution

SCMP: China passes landmark law to slap steep taxes on polluters
The legislation, which comes into effect in January 2018, will tax factories, power plants and other pollution emitters for releasing contaminants such as sulphur dioxide, a key contributor to the smog that has choked much of the country in the last couple of weeks.

Analysts said the levies could be steep enough to push some dirty firms out of business, going some way to answering criticism that the central government has been half-hearted in tackling pollution.

Among the critics is Peter Navarro, US president-elect Donald Trump’s nominee for head of his new White House National Trade Council, who claims Beijing’s lax regulation of pollution has undermined trade fairness.

2016-12-23

Land Ministry Says Wenzhou Property Rights Renew for Free

Global Times: Wenzhou releases interim measures on land tenure
Wang Guanghua, vice minister of the land and resources, said during a press conference that Wenzhou residents living in houses with a 20-year tenure don't need to specially apply for the extension when their tenure comes to an end. Rather, the tenure will extend automatically.

He also emphasized that no fee will be charged on extending residential land use rights.

The measures were announced after recent media reports highlighted the problem of the expiry of residential land use rights in Wenzhou.

According to Wang, the measures are temporary as the government is working on a formal law on improving the system of property rights protection.
iFeng: 国土部回应“温州房屋产权到期”:自动续期不收费

Back in April, Wenzhou sparked a mini-panic among Chinese homeowners and homebuyers. Some homes in Wenzhou have expiring land use rights and the local government considered charging as much as 50 percent of a home's value to extend the rights. While the issue is put to bed for the moment, the national government is still formulating a policy. A property tax would be the natural solution, but the launch date keeps moving farther into the future.

Trump-China Negotiations Continue

FT: Beijing fires trade warning after Trump appoints China hawk
“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”
China does not yet realize negotiations started when Trump took a call from Taiwan's president, and they haven't stopped.

CNN: Trump team floats a 10% tariff on imports
A senior Trump transition official said Thursday the team is mulling up to a 10% tariff aimed at spurring US manufacturing, which could be implemented via executive action or as part of a sweeping tax reform package they would push through Congress.

Incoming White House Chief of Staff Reince Priebus floated a 5% tariff on imports in meetings with key Washington players last week, according to two sources who represent business interests in Washington. But the senior transition official who spoke to CNN Thursday on the condition of anonymity said the higher figure is now in play.

Such a move would deliver on Trump's "America First" campaign theme, but risks drawing the US into a trade war with other countries and driving up the cost of consumer goods in the US. And it's causing alarm among business interests and the pro-trade Republican establishment.
There will be much wailing and gnashing of teeth by free traders, but U.S. policy is pro-import and anti-export compared to most of the world. Adding a 10 percent tariff is not the best way forward for global trade, but other nations could abolish export subsidies and VAT rebates, and encourage more domestic consumption. Given current social mood, however, it's more likely nations will oppose the U.S. action and the result will be grudging acceptance of U.S. policies. The alternative could be the end of the WTO because protectionism is one rise all over the world.

AFP: China tycoon moves jobs to US, citing high taxes at home
The 70-year-old tycoon's decision to open a glass factory in the eastern American state of Ohio in October -- a rare case of jobs being exported from China to the US -- triggered an outpouring of criticism on social media.

The phrase "Cao Dewang has escaped" became a hot topic, generating nearly 10 million views on the Twitter-like Weibo microblog and many comments urging China to "not let Cao Dewang run away".

2016-12-22

Snider Sees RRR and Inflow/Outflow Correlation

As you can see on the chart immediately above, the more they pegged CNY the greater the internal illiquidity, leading to several cuts in the RRR later in 2008. Both directions established, we see also very plainly that the CNY rate is a quite good proxy for the “dollar”, or at least some part of it, whether that might be an Asian “dollar” or something even more specific.

These relationships continued on the other side of 2008, too, where in the initial “recovery”, or the times when it looked like it might turn into one, it was as if 2007 all over again. The PBOC began to raise the RRR in the middle of January 2010, a full five months before they finally let go of the CNY peg. We can easily assume that was the resumption of private “dollar” flow alongside the PBOC’s continued “selling UST’s” that also supplied “dollars.”

Though Chinese monetary policy restoration in the RRR paused after the “unexpected” return of potential mayhem in May 2010 with the “flash crash” and sudden interest in Greece, Bernanke’s QE2 later in the year pushed “dollar” flows back to the extreme (not because of the bank reserves created by QE, instead due to bank balance sheet retracement aligned with expectations, ultimately misguided, for QE’s future effects in the real economy and on volatility). Just like May 2007, in November 2010 the PBOC raised the RRR one day (November 16, less than two weeks after QE2 had officially been announced) and announced the next 50 bps hike just three days later.
The RRR hikes continued until the sudden re-appearance of global, unified eurodollar problems all over again in July 2011. The RRR was reduced importantly in the first half of 2012 (starting December 2011), just as the global economy slowed. It has yet to recover. Similarly, the RRR has been only lower ever since, as have, it should be pointed out, commodity prices in general. It demonstrates that the RRR is not really about “tight” or “loose” monetary policy in China, as it is so often described, rather it is an indication of this external/internal balance of “dollar” money and Chinese monetary responses to it.
In that way, the RRR is more of a signal than a lever, a bright sign that monetary problems have arrived rather than any kind of solution to them. The PBOC uses it less on the downside because after the initial monetary contraction phase the central bank looks to other ways to manage “dollar” imbalances. It is a temporary reaction, not a measure for chronic imbalance. That was how it was used in 2013, when the RRR remained constant all that year even though money markets in China went through some really significant turmoil (timed to “dollar” events, especially June 2013, on the EM side of the eurodollar).
The circumstances in 2016 are roughly similar, with some exceptions. Having suffered monetary contraction through eurodollars, the PBOC has been almost hyperactive in other capacities beyond the RRR. There remains disinclination because China itself remains a bounded ball of contradictions; monetary contraction, or at least insufficient expansion internally to fund everything within normal parameters, at the same time as great asset bubbles. Unlike 2013, however, the PBOC is this time using other parts of its balance sheet to offset “dollar” destruction, a very important distinction that demonstrates the gravity of the monetary situation.
Alhambra: Different ‘Dollars’ To Different Places Are Really Just the Same ‘Dollar’ At Different Times

Bitcoin Points to Yuan Slide in 2017

If you believe that the rally in Bitcoin is being driven by Chinese buyers, the chart is not promising for the yuan. Bitcoin is forming a massive 4-year saucer bottoming pattern that, if it completes, points to gains beyond $1200.

2016-12-21

Currency Curbs Temporary Forever

SCMP: China’s currency curbs merely ‘temporary’ to stem yuan’s outflow, central bank chief says
As a result of the yuan’s weakening, many Chinese companies and ordinary citizens had been devising schemes to take their currency out of the country before it deteriorates further.

Those measures may be subjected to adjustments once the currency markets are stabilised, Chan said Monday, after his meeting with Zhou.

Chan’s three-day trip to Beijing included visits to the China Banking Regulatory Commission, the Asia Infrastructure Investment Bank, as well as with Chinese vice premier Ma Kai, who formerly headed the National Development & Reform Commission.

By using administrative measures to control the currency, the Chinese monetary authority is exercising greater flexibility “to highlight that the overall direction of China’s financial reforms remain market-oriented, and remain unchanged,” said ANZ Bank’s China economist Qu Tianshi. These are just measures “put in place to stem the capital outflows,” he said.
Currency curbs will last until the yuan is stable, but most likely, undervalued.

Let Market Determine Yuan Says Growing Chorus in China

SCMP: To let the yuan fall or not? Beijing's big burning currency question
Against Beijing’s desire for a “controllable” depreciation, the government is losing control over capital flight, depleting foreign exchange reserve stockpile at an alarming speed, and failing to convince investors that there is “no fundamental basis for the continuous depreciation”.

Yu Yongding, a renowned Chinese economist who sat on the central bank’s monetary policy committee when the yuan was revalued in July 2005, said it was time for Beijing to reconsider the matter.

“The fear of the yuan’s depreciation has become a burden for us,” Yu told a forum over the weekend.

Yu, who for years has called for liberalising the yuan’s exchange rate over years, said China should give up foreign exchange interventions and safeguard its foreign exchange reserves so that China will “have sufficient ammunition” for future rainy days.

While Yu’s view is not in line with Beijing’s current policy, it is winning academic support.

Xu Sitao, the China chief economist at Deloitte, an auditing firm, said “the best strategy is to let the yuan fall in full, and the worst strategy is slowly depleting foreign exchange reserves”.
That's the policy I recommend. Acting early might cost a politician his job in a democracy, but Chinese officials aren't going to lose their jobs for being prudent. A large one-off devaluation that undervalues the yuan, creating demand and an appreciation trend following the move, is the best course of action. Of course there are political risks, but had China acted in 2015 or 2016 it would have begun the final washout phase for emerging markets, solved its debt problem, and ended up with Trump as President. Now it faces greater economic risk and greater political risk with an American administration ready to retaliate. Once again, Chinese officials missed their window for action. They are not alone though. The entire globe is engaged in a giant can-kicking scheme, hoping to avoid the final debt denouement.

2016-12-20

How DXY Moves to 120

ZH: Why Trump's "Border Tax Proposal" Is The "Most Important Thing Nobody Is Talking About"
A “border tax adjustment” would, roughly speaking, be equivalent to a 15% one-off devaluation of the dollar. Imports would be 20% more expensive, because corporates would have to pay the new 20% corporate tax rate on their value. Exports would be roughly 12% “cheaper”, because for every $33 of earnings earned from $100 of exports (we use the 33% gross margin of the S&P), there would be a 12% tax cost ($33 earnings*35% current tax rate) that would no longer be imposed on corporates. Taking the average impact on the prices of exports and imports is equivalent to a 15% drop in the dollar.

A border tax adjustment would be very inflationary. The price of exports doesn’t affect the US consumption basket so would have no impact on CPI. However, the cost of imports would go up by 20%, which based on a simple relationship between import PPI and US inflation would be equivalent to a 5% rise in the CPI. Corporates may of course choose to absorb part of the rise in import costs in their profit margins. But either way, the order of magnitude is large.

A border tax adjustment would be very positive for the US trade balance. Similarly to the dollar calculations, a border tax adjustment would be equivalent to an across the board import tariff of 20% and an export subsidy of 12%. Keeping all else constant and applying standard trade elasticity impact parameters to an average of the two estimates results in a more than 2% drop in the trade deficit equivalent to more than 400bn USD, or equivalently, an almost complete closing of the US trade deficit.
Close the trade deficit = starve the world of dollars. Short-term inflationary bounce as economy adjusts = higher interest rates = dollar bullish. Permanently shift U.S. economy in favor of exports = dollar bullish.

Can the PBoC stop outflows if the yuan devalues another 20 percent?

2016-12-19

2017 Will Be Worse for Turkey

A month ago I wrote: A Bad Year for Turkey, But Could 2017 Be Worse?

Now there is the assassination of the Russian ambassador.

Russian ambassador to Turkey assassinated by police officer 'in revenge for Aleppo'

The head-and-shoulders pattern of TUR has a target price in the low single-digits, a more than 90 percent drop from current levels. Given the price target, Turkey's increasingly religious government, Europe's growing nationalism, the United States potentially warming relations with Russia and Turkey's conflict with Russia, the geopolitical forecast points to Turkey potentially losing NATO membership. Or de facto loss of membership if NATO refuses to defend Turkey from Russian attack because it fingers Turkey as the aggressor. It's also possible the West could enact economic sanctions and send the Turkish lira into a death spiral.

Something much less dire could take place to produce a large drop in TUR, but Turkey's inability to stay out of the headlines suggests a bigger move, one that encompasses politics or security, is underway.

The Chosen Winners in the New 5-Yr Plan

Information technology industry: by 2020 the total output value of more than 12 trillion. Promote the integration of Internet of Things, cloud computing and artificial intelligence to various industries, expand the application of "Internet +" in the field of life and public services, implement the national data strategy, strengthen the information technology core industry, develop artificial intelligence, Economic management and so on. (Investment Opportunity: Promote the integration of triple play, further liberalize the competitive business in the basic telecommunication industry, relax the market access restriction of the integrated products and services, and promote the mixed ownership system of the state - owned telecom enterprises.

High-end manufacturing: strive to 2020, the output value of more than 12 trillion yuan. To create high-end brand of intelligent manufacturing, to achieve new breakthroughs in the aviation industry, bigger and stronger satellite and application industry, strengthen the leading position of rail transportation equipment, and enhance the international competitiveness of marine engineering equipment, improve the new material base support. (Special attention to the impact of high-speed rail technology on the regional economy: 500 kilometers per hour wheel and rail test trains, 600 km per hour maglev system and other new train research and development and industrialization, to promote 120-160 km per hour, seamless convergence with the urban rail transit ) Railway equipment)

Biological industry: By 2020, the scale of 8-10 trillion. The construction of new biomedical system to enhance the level of development of biomedical engineering to accelerate the development of bio-agricultural industrialization and promote the large-scale application of bio-manufacturing, biological services to cultivate new formats, innovative bio-energy development model.

Green low-carbon: the scale of output value in 2020 reached 10 trillion yuan. Scale application of new energy vehicles to promote the development of new energy industries, and vigorously develop efficient energy-saving industries, accelerate the development of advanced environmental protection industry, and further promote the recycling of resources. (Investment opportunities: to achieve the new energy vehicles in 2020 production and sales of more than 2 million, total sales of more than 5 million; nuclear power, wind power, solar energy, biomass and other energy consumption accounted for more than 8% of total industrial output value 1.5 trillion; wind power installed capacity of more than 210 million kilowatts; distributed photovoltaic power generation, photovoltaic power plants, solar thermal power installed capacity reached 60 million kilowatts, 45 million kilowatts, 500 million kilowatts)

Digital creative areas: by 2020 the output value of related industries reached 8 trillion. Innovative digital culture and creative technology and equipment, rich digital cultural creative content and form, enhance the level of innovation and design, and promote the development of related industries such as integration.

...Build in the eastern part of world-class strategic emerging industries Cities around Beijing, Tianjin and joint development, strengthening of Beijing, Tianjin economic and technological talents linkage, forming radiating Bohai Sea region and the northern hinterland of the development of strategic emerging industries Development Community; play leading role in the Yangtze River Delta economic belt of the Yangtze River to Shanghai, Nanjing, Hangzhou, Hefei, Suzhou, Wuxi and other metropolitan area as a fulcrum to build entire areas blend chain group pattern of industrial development; to Guangzhou, Shenzhen as the core , to enhance the international competitiveness of the Pearl River Delta city group of strategic emerging industries, extend the industrial chain and service chain layout, promote regional economic restructuring and development; promote the Shandong Peninsula city focus on the development of biological medicine, high-end equipment manufacturing, new generation of information technology, new materials and other industries and marine economy; around the major cities of Fuzhou, Xiamen , promote industrial development of the west side of the biological, marine, and other integrated circuits.

Relying on the industrial basis of the Midwest, and vigorously promote the Chengdu-Chongqing region, Wuhan metropolitan area, Xiangtan city group, urban agglomeration, the Guanzhong Plain City Group and other key areas of strategic development of new industries, and actively create conditions for industries to relocate to the eastern region; support Kunming, Guiyang and other urban development industries with comparative advantages, promote the economic belt of the Yangtze River region of industrial development.

Butt Silk Road economic belt construction, and promote the Tianshan Mountains, Lanzhou - Xining and other Northwest Urban Agglomeration development of special industries. Promote the northeastern region to develop robotics and intelligent equipment, optoelectronics, biomedicine and medical equipment, information services and other industries, Shenyang, Dalian, Harbin, Changchun, as a fulcrum to support the Northeast urban agglomerations create a leading strategic emerging industry clusters, drive Regional economic transformation and upgrading.
iFeng: 八大产业50万亿 这些地方投资机会来了

Home Prices Still Gaining in November

China's NBS reports home prices rose an average of 0.58 percent in its 70-city survey.

It once again posted mid-month numbers for the "hot" cities to show the slowdown into November. For the month, 5 of the 15 "hot" cities saw prices fall, but from the middle of November, 9 of 15 cities showed price declines.

Price gains have moved beyond the hot cities. I track 12 of the 15, and in November, they only accounted for 11 percent of the national price gain. In late 2015 and into mid 2016, these cities were driving most of the price increases. As recently as July, these 12 cities accounted for 65 percent of the national price gains.

NBS: 2016年11月份70个大中城市及11月下半月一线和热点二线城市住宅销售价格变动情况

2016-12-18

Chinese Banks Stopped Lending on Thursday

Reuters: China central bank presses banks to help with funds after interbank lending freezes: Caixin
China's central bank stepped in to urge major commercial banks to lend to non-bank financial institutions on Thursday afternoon after many suspended interbank operations amid tight liquidity conditions, Caixin reported on late on Thursday.
Remember that mortgage lending was more than 100 percent of bank lending back in July. The total lending to the household sector was 85 percent in November.

Caixin: China Bond Markets Roiled by Rumors, Fed Rate Increase
Several mutual funds in China suffered huge selloffs amid a bond market crash Thursday, and the funds scrambled for money as most banks tightened lending to non-bank financial institutions.

At 4:45 p.m. on Thursday, 15 minutes before the central bank's interbank high-volume payment clearing system closed, several fund management firms were still looking high and low for cash to pay panicked investors who were selling their money market funds.

...But the immediate cause of Thursday's crash was a rumor that one securities firm defaulted on 500 million yuan in bond payments — a rumor the company denied.

Caixin learned from several bankers that many commercial lenders, including the four largest state-owned banks, suspended granting loans on Thursday to non-bank financial institutions like securities and fund-management firms.
The takeaway isn't that it was a only a rumor, it's that a single rumor halted the bond market and the lending market.

PBoC Official: M2 Growth Below 12pc in 2017, RE Tax Delayed

Sheng Songcheng from the PBoC says M2 growth will be below 12 percent in 2017, and the real estate tax is difficult to implement in the next few years.

M2 growth is below 12 percent in 2016 (11.4 percent as of November), though it started the year hot. The 3-month rolling M2 growth rate hit 16.2 percent in March and then 14.1 percent in August before sliding to 5.2 percent in November.
Concern for the real estate market, Sheng Songcheng that the real estate tax because of complex design, difficult to launch within the next few years.

In addition, the current real estate supply problem is more prominent, Sheng Songcheng said that this is reflected in the majority of large and medium-sized cities in land supply declining year by year, the land auction "volume reduction", residential land and new residential supply.

iFeng: 盛松成:明年M2不会超过12% 房地产税几年内难出

2016-12-16

China Attacks Indonesia With Biological Weapon: Chili Bacteria

Negative social mood is a global phenomena and world leaders can only deal with it at the moment.

Reuters: China alarmed as chili 'conspiracy' heats up Indonesians
China's embassy in Indonesia has expressed alarm at media reports accusing China of using a "biological weapon" against Indonesia, after four Chinese nationals were arrested for planting imported chili seeds contaminated with a bacteria.

The headlines splashed across Indonesian media have sparked a wave of anti-Chinese sentiment on social media in a country with a history of simmering resentment towards its giant neighbor and a minority ethnic Chinese community.

Indonesian authorities said the imported chili seeds confiscated on a farm about 60 km (37 miles) south of the capital, Jakarta, contained the bacteria erwinia chrysanthemi, which is harmless to humans but can cause failure in crops.

It was the first time the bacteria had been detected in Indonesia, the state-owned news agency Antara quoted the head of the country's quarantine body as saying.

Indonesians are among the most avid users of social media in the world, and conspiracy theories about the intentions of the four Chinese nationals running the farm quickly spread.

"Haven't people realized that Chinese attacks on thiscountry are real in many ways. From drugs, illegal workers, now chili bacteria", said a twitter user with the handle @BoengParno.

Central Govt Finds Source of Economic Pain: Structural Imbalances

This was the bolded portion of an article covering economic work group's report:
The root cause of China's economic problems is a major structural imbalance, leading to poor economic cycle.

"Significant progress" will be made next year in key areas of structural change, including capacity, inventory, deleveraging, cost reduction, and filling holes.

Continue to promote the steel, coal industry to resolve excess capacity.

To focus on solving three or four lines of urban real estate inventory too much problem.

To control the total leverage ratio under the premise of reducing corporate leverage as a top priority.

It is necessary to reduce the tax burden of enterprises, insist on expanding the reform and opening up, and uphold the basic economic system.
iFeng: 中央直指中国经济问题根源:重大结构性失衡

Full release: 2016年中央经济工作会议全文发布

Western media didn't pick up on the structural imbalances, instead focusing on policies:
WSJ: China Makes Stability of Housing, Financial Sectors Its 2017 Priorities
China’s blueprint marked a contrast to the year-ago goal of fixing problems such as industrial overcapacity and high debt levels, deemed necessary for healthier growth in the long run. The new plan indicates the government will still press ahead with such reforms, but that they have taken a back seat to steadying the economy, according to Chinese officials and economists.

“The top priority is on maintaining growth while controlling risks,” said a senior government adviser. “The promised restructuring of the economy will be carried out, but only when overall stability is ensured.”
Reuters: China to strictly limit property speculation in 2017: Xinhua
China will strictly limit credit flowing into speculative buying in the property market in 2017, top leaders said at an economic conference on Friday, as reported by the official Xinhua news agency.

"Houses are for people to live in, not for people to speculate," Xinhua said, citing a statement issued by the leaders after the Central Economic Work Conference concluded.

"We must control credits in the macro sense," they said in the statement.

China will also boost the supply of land for cities where housing prices face stiff upward pressure, they said.
Bloomberg: China Plans Prudent, Neutral Monetary Policy for Next Year
China’s top policy makers said they plan prudent and neutral monetary policy and proactive fiscal policy next year as they seek to sustain a steady expansion with room for reforms.

Preventing and controlling financial risk to avoid asset bubbles will be a priority, along with deepening supply-side structural reform, according to a statement Friday from the official Xinhua News Agency issued after officials concluded the three-day Central Economic Work Conference in Beijing. Policy makers said they aim to ensure currency and liquidity levels are both kept basically stable.

China Seizes U.S. Underwater Drone

China seized an American oceanographic drone in international waters today, a sign of escalating tension between the two superpowers.

Independent: China's navy seizes US Navy drone in international waters of South China Sea
A Chinese warship has seized an underwater drone belonging to the US navy vehicle in international waters of the South China Sea, according to reports.

The incident has prompted a former demarche from the United States and a demand for its return, a US defense official said.

It is the first such seizure in recent memory and took took place on 15 December northwest of Subic Bay, just as the USNS Bowditch – an oceanographic survey ship – was about to retrieve the vehicle, an official told Reuters.
China jumped the gun since the Trump administration doesn't take office for another month. They waited a little more than two months to try the same thing with the Bush administration.

Chinese Policymakers Spin the Wheel of Suffering

What's the solution for high home prices?

iFeng: 中央首次明确房地产长效机制五大手段
Prior to the December 9 meeting of the Politburo, "next year to speed up research to establish in line with national conditions, to adapt to the law of the real estate market stable and healthy development of long-term mechanism."

In addition, the Central Economic Work Conference also said that to implement the main responsibility of local governments, cities with rising home price pressure should reasonably increase in land supply, increase the proportion of residential land, revitalize the city idle and inefficient land use. Megacities to speed up to ease some of the city functions, promote the development of surrounding small and medium-sized cities. To speed up the housing leasing market legislation, speed up the institutionalization, large-scale leasing enterprise development. Strengthen the housing market supervision and rectification, standardize the development, sales, intermediary and other acts.

China Pledges Yuan Stability in 2017, Like 2016

SCMP: China to chart stable yuan course and stem financial risks in 2017 amid US Fed headwinds
China’s leaders will try to keep the yuan on an even keel and pay more attention to “financial risks” next year, according to an official statement released on Friday after three days of top-level closed-door meetings.

The priorities determined at the annual Central Economic Work Conference come amid rising pressure on the yuan to depreciate and growing risks to the financial system in the aftermath of the US Federal Reserve’s rate rise.

China would “keep the yuan exchange rate basically stable at a reasonable and balanced level while increasing flexibility in the exchange rate mechanism”, state-run Xinhua news agency reported.

China will also “put financial risk prevention and control into a more important position” to curb asset bubbles and to avoid any systemic financial risks, according to Xinhua.
The yuan was stable in 2016, as long as you weren't watching USDCNY.

2016-12-15

Diversifying Away From the Dollar

The yuan fix for the day is 6.9508.
The yuan is trading in lockstep with the euro since August of last year.

In 2012 I wrote:
One of my main reasons for predicting a depreciating Chinese yuan (and I've been wrong for about 2 years thus far) is that I expect a U.S. dollar bull market against foreign currencies, and the PBOC's switch to a currency basket means it will break with the U.S. dollar. Previously, China was adding euros during the first and second round of the Greek crisis, which structurally weakened the yuan (based on my expectation of euro depreciation). The above article shows that the PBOC hadn't followed its rhetoric and is only now relying on the currency basket, which could go a long way to explain the depreciation in May. The wildcard in the basket is the yen.
If the dollar closes in on its old high versus the euro and hits 85 cents, it isn't the end of the world...but if the yuan follows it in lockstep, USDCNY will fall below 8.28......

ZH: China Dumps Treasuries: Foreign Central Banks Liquidate A Record $403 Billion In US Paper
Fast forward to today when in the latest monthly update for the month of October, we find that what until a month ago was "merely" a record $375 billion in offshore central bank sales in the LTM period ending September 30 has, one month later, risen to a new all time high $403 billion in Treasuries sold in the past 12 months.

...In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country's soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.
De-dollarization happens via deflation, not inflation. During deflationary periods, countries rely on domestic credit growth which at the time exacerbates local currency depreciation versus the U.S. dollar. The greenback's coup de grace will be inflation, but the structural seeds of de-dollarization are sown during deflation.

PBoC Halts Bond Futures, To Increase Liquidity Amid Rising Default Risk

Signs signs, everywhere signs.

WSJ: China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities
Chinese bond yields soared and authorities halted trading in some futures contracts for the first time on Thursday, as a global bond-market selloff worsened a day after the Federal Reserve signaled a quicker pace of interest-rate increases next year.
iFeng: 媒体:央行去债市杠杆目的已达到 将力避事态升级
Whether the bond market to follow the stability, will depend on whether the central bank to promote the "deleveraging" and follow-up Monetary Fund redemption situation can improve. Industry experts said that the adjustment for the bond market, not the debt crisis. The central bank's purpose is to promote the bond market orderly "deleveraging", I believe the central bank will increase liquidity in the short term, to stabilize the current financial situation of tension.
Yesterday's close, bond futures fell across the board. Among them, 10-year bond futures contract the main contract T1703 closed down 1.81%, the largest since the listing of the decline, reported at 94.555 yuan, 102,700 hand turnover. 5-year bond futures main contract TF1703 closed down 1.16 percent, at 97.595 yuan, traded 17,700 hands.

Reporters statistics found, T1703 from October 24 to 101.600 yuan has been reduced to December 15 of 94.555 yuan, 39 trading days, fell 6.93%.

Another market news that the liquidity in the interbank market continued tight situation, yesterday morning, a number of banks once interrupted the operation of the industry, the four lines of ICBC to split the bank only part of the funds.

With the bond market volatility intensified, Chenming Paper, Huayi Group, China's salt and other seven major issuers announced yesterday to cancel or postpone the issue of more than 60 billion total bonds.
Here's the T1703 contract being discussed. The contract bounced to 95.17 in early Friday trading, up 54 fen from the Thursday close.

How the Fed Sees Itself

Alhambra: What It Means That The Fed Declares That It Is Done
That leaves the second rate hike after all that has happened, and more so what didn’t (2016 was supposed to have been a remarkable economic improvement over 2015), projecting recovery that is in no way faithful to the word – nor, I am sure, what the mainstream is still claiming about it. The FOMC just added its two cents (in the format of idle, useless bank reserves, of course) that it agrees 15 months of contraction in IP is by these orthodox definitions as good as the Fed can make it, the new baseline trend for the US economy. Despite all the wreckage that remains after almost a decade of clearly broken promises, including how malaise has infected so far as to break out in social and political unrest, they are done.

Dollar Breakout

2016-12-14

Chinese Wonder When Mortgage Lending Will Slow

Mortgage lending is believed to be lagging the slowdown in real estate sales, but will catch-up as tightening policies remain in effect.
Surprised because, in the multi-market regulation and control policies introduced, the residents of housing loan data performance is still strong. Data show that in November new loans to the household sector in the long-term loans (mainly mortgages) proportion from October 75% further climbed to 84%, significantly higher than in September of 47%. Another surprising figure is that in the context of a continued devaluation of the yuan against the dollar, the future depreciation pressure is still great against the backdrop of November foreign currency loans but an increase of 20 billion US dollars, which is nearly two months of foreign currency loans for the first time positive.

When will mortgages slow down

CICC research analysis, in the purchase, limited credit and other efforts to increase the case, in November the financial data still mainly reflects the lagged performance of real estate-related financing, with the real estate regulation and tightening of funds and other factors, future loans and social integration Growth may be slowing down.

Orient Securities chief economist Shao Yu told reporters that the first financial, from the mortgage data, there is no obvious signs of falling, but the property market will certainly decline in trading volume. Because the strict property market policy will continue for a long time, or even ruled out may also be overweight. In this context, the attention of the policy may need to shift to the control of leverage and control of the bubble up.

iFeng: 11月居民住房信贷依然强劲 何时才能开始放缓

TSF Rises in November

85 percent of new loans went to the household sector.
Reuters: China bank lending heads for record as November new loans rise despite debt fears
Chinese banks extended 794.6 billion yuan ($115.10 billion) in new yuan loans in November and look set to lend a record amount this year as Beijing boosts the economy to meet growth targets despite worries about the risks of prolonged debt-fueled stimulus.

Lending continued to be driven by consumer loans, primarily home mortgages, despite a series of measures rolled out by the authorities to cool surging home prices and avoid property bubbles.

Off-balance sheet lending also unexpectedly spiked in November, raising concerns of tighter liquidity if regulators crack down on the shadow banking sector, economist David Qu at ANZ said.
Reuters: China Nov total social financing rises to 1.74 trln yuan

M2 Growth Slows to 11.3pc

M2 growth slowed to 11.3 percent year-on-year, and the 3-month rolling growth rate fell to 5.2 percent.

The rise in M2 lifted the ratio of M2 to reserves to 50:1, or about 13.8 percent reserves to M2 ratio.

The Next First Tier City: Tianjin? Wuhan?

Tianjin, Hangzhou, Wuhan and Chengdu have achieved many of the basic criteria for becoming first-tier cities, while Suzhou, Hefei, Nanjing, Chongqing and Xi'an are close.

The article runs through various criteria, such as population, economy, service sector, transportation links, innovation, prices, etc.
iFeng: 谁会是下个一线城市?天津武汉等四城最有潜力

2016-12-13

Socionomics Predicted Trade Tensions

Trade protectionism and economic nationalism finally emerged after years of economic depression and falling social mood. The breakup of the euro, EU, possibly the WTO, NATO (such as Turkey kicked out), major trade wars, etc. are still yet to come. The political upheavals in the UK and US are only the beginning of a global wave, not the end. Models using some form of socionomics or even simple historical ones, would provide a better forecast than most.

Some analysts are starting to wake up to the risk and price it into the models, with a substantial devaluation in the yuan now on the table solely due to political risk. One of the main currency risks I've cited in the past is political. China had a window to appreciate the yuan, but waited far too long. Then within a couple years of appreciating the currency, it re-pegged in 2008 during the financial crisis to prevent a yuan collapse. Then it restarted a slow appreciation in 2010, but by 2011 there were already cracks appearing, and by 2014 forex reserves peaked. The currency was on its way to weakening as the U.S. dollar began a major rally and political risk was rapidly rising due to an ongoing depression in the developed economies. Now China is caught in the middle of a roaring dollar bull market and very negative political risk. It has no good options, save for a major win-win trade negotiation with the United States.

SCMP: Be careful what you wish for Mr President, a stumble in relations could send China’s currency for a tumble
But “if the US were to engage in, or credibly threaten, trade restrictions on China, the probability of a free-floating renminbi in 2017 could be as high as 50 per cent,” SocGen said.

The yuan would in all likelihood then plummet in value.

“Given that China has a reasonably strong external position (current account and net international investment positions), a free-floating regime is unlikely to cause the renminbi to fall more than 20 per cent from current levels,” the French bank concluded.
What if yuan devaluation is a feature not a bug? As with the 2016 election, many supposed experts are using broken models to predict world events. If Trump can get China to devalue the currency by 20 percent, he has a slam dunk case (with the American people) when he proposes a 35 percent tariff on Chinese goods. If under a Trump administration, trade is a tool for national security, then it becomes even more likely a trade war is desired, rather than feared, because a drop in global trade sets back China's military modernization and expansion. The Logic of Strategy: Yuan Devaluation and the Road to Trade War

Related:
Good Bet: Protectionism Is Coming
Free Trade Will Lose The 2016 Election
WTO will fall apart

Back in 2012: China Daily agrees: the yuan can go down
There's a vocal chorus of people who assume that anytime China (or anyone for that matter) sells U.S. dollars, it is bad for the greenback and signals an end to the U.S. dollar's status as reserve currency. This is muddled thinking however, since it very much matters whether one sells from a position of strength or weakness. Thailand, Malaysia, South Korea and Argentina before them spent their foreign reserves trying to defend their currencies and no one thought that was bearish for the U.S. dollar, in fact it was extremely bullish. China's situation is different today. The most likely reason for them to support the currency is political—they want to avoid a trade war with the United States and Europe—but should the economy weaken or another global financial crisis erupt, they may be forced to defend the currency. Either way, the renminbi is much weaker today than it is popularly perceived to be and at risk, in the event of a "surprise" contagion, of a swift decline.
If you don't have political risk in your model, adjust your yuan targets to the downside.

New Business Op: Farming Shell Companies

SCMP: How farming publicly traded companies has become a part-time job for novices
The bright young man, whom Money Matters knew as a toddler, has been earning his own tuition fee for years. But creating a listing firm from a biscuit shop with only three outlets is hard to imagine.

His boss comforted him with what he called a standard formula - find three more outlets to add to the shop; make an e-bakery platform that delivers to mainland China and the financial numbers will be taken care of by the specialists.

“Don’t worry about money. Just go and locate the shops,” said his boss.

Some may find this ridiculous. Yet the reality is “shell farming” has become such a commodity that, greenhorns like George are hired to do the basics.

What used to be the specialities of those with money, knowledge and connections is now being done by accountants and lawyers with money pooled from the rich.

The return is good. A clean listed shell on the main board can easily fetch HK$600 million. Shower HK$200 million on a dozen businesses and if one makes it to the listing market, you will be enjoying a 200 per cent return within two to three years.

People's Daily Announces New Normal, New Direction for Chinese Economy

Economic growth from high-speed growth to medium-and high-speed growth, the mode of economic development from the scale of the extensive growth of the quality and efficiency of intensive growth, the economic structure from the incremental expansion to adjust the stock to do the amount of co-existence of the depth adjustment, The driving force for development from the traditional growth momentum to a new growth momentum.

Under the new normal to a new understanding

1. Why is there a speed change?

Because, to determine the potential growth rate of economic growth "can not" as in the past as high-speed growth. Because, after the total and the base becomes larger "can not do" as in the past, high-speed growth. But also because the resource environment "can not stand" as in the past as high-speed growth.

2. Why is there a structural optimization?

With the supply of capital, land and other factors decreased, resource and environment constraints strengthened, elements of input and energy pollution less service industry to come to the fore, the industrial structure will continue to optimize; with factor prices, savings rate, export and investment growth With the supply of labor reduced, the scarcity of human resources highlights, the income distribution structure will also be optimized continuously. With the rapid development of urbanization, the urban and rural areas will continue to optimize the structure; .

3. Why is there a power conversion?

In the past, low prices of factors of production became the driving force behind the rapid operation of China's "world factory". Today, the price of these elements has undergone a qualitative change, forcing the Chinese economy to shift to innovation-driven.

Under the new normal, China is still in the development of important strategic opportunities

Economic fundamentals have not changed for a long time, the economy has good toughness, sufficient potential, large room for maneuver has not changed, a good basis for sustained economic growth and conditions have not changed, the economic structure adjustment and optimization of the situation has not changed.

Looking to the future, China's economic operation can not be U-type, more can not be V-type, but L-type trend. After adjustment, the Chinese economy will enter a new stage of development with higher quality, better efficiency and more sustainability.
iFeng: 重磅!人民日报首提中国经济“新方位”

Fixed Asset Investment Still Led By SOEs, Services Still Lag

Fixed Asset Investment Steady in November

NBS: 2016年1-11月份全国固定资产投资(不含农户)增长8.3%

NBS: 2016年1-11月份民间固定资产投资增长3.1%