China

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Balance sheets matter. This is the biggest lesson of the financial crises that have rolled across the world economy. Changes in balance sheets shape the performance of economies, as credit moves in self-fulfilling cycles of optimism and pessimism. The world economy has become credit addicted. China could well be the next victim.

How addiction to debt came even to China - FT.com

Start with the sources of vulnerability. In economies with liberalised financial sectors, the driver towards disaster is far more often private than public imprudence.

How addiction to debt came even to China - FT.com

In an update of work on debt and deleveraging, McKinsey notes that between 2000 and 2007, household debt rose as a proportion of income by one-third or more in the US, the UK, Spain, Ireland and Portugal. All of these countries subsequently experienced financial crises. Indeed, huge increases in private sector credit preceded many other crises: Chile in 1982 was an important example of this connection. Ruchir Sharma of Morgan Stanley argues that the 30 most explosive credit booms all led to a slowdown, often a crisis. Thus, in seeking new vulnerabilities, we need to look for economies that have had sharp rises in private debt. China leads the pack, with a rise of 70 percentage points in the ratio of corporate and household debt to GDP between 2007 and 2014 (see chart). If we add financial sector debt, the rise in gross private indebtedness is 111 percentage points. With government debt included, it is 124 percentage points.

How addiction to debt came even to China - FT.com

The government forecast a budget deficit for 2015 equal to 2.3 percent of GDP, but Finance Minister Lou Jiwei said in March the real fiscal deficit would be 2.7 percent of GDP, the widest since 2009, after taking into account unspent amounts from previously allocated funds. Last year, government spending rose 8.2 percent, slower than the 9.5 percent goal.

China looks to fiscal stimulus to fight slowdown

Local governments alone face a debt-service burden of about 1 trillion yuan this year ($156 billion), according to JPMorgan Chase & Co. Revenue from land sales in the first seven months plunged 954 billion yuan from a year earlier, according to the government. Growth in fiscal revenue was 5.4 percent in the first seven months compared with 8.5 percent a year earlier using the same methodology, highlighting pressure on receipts.

China Stimulus Is Tough to Take Off in Land of Challenges - Bloomberg Business

China's manufacturers slashed prices at the fastest rate in six years in August as commodity prices fell and demand cooled, signaling stubborn deflation risks in the economy and adding to expectations for further stimulus measures. The producer price index (PPI) fell 5.9 percent in August from the same period last year, its 42nd consecutive month of decline and the biggest drop since the depths of the global financial crisis in late 2009, data showed on Thursday.

China deflation fears grow as producer prices sink most in six years | Reuters

China's management of the world's second-largest economy hasn't gone swimmingly of late, but authorities have succeeded in one vital though little-noticed mission. They've closed the gap between the market value of the yuan and its official daily value, known as the "fixing."

One Thing China Got Right - Bloomberg Business

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China is tightening capital controls following a devaluation of its yuan currency, media reports say, as worries about financial outflows rise. The State Administration of Foreign Exchange had ordered financial institutions to increase checks and boost controls on foreign exchange transactions, especially over-invoicing of exports which is used to hide capital outflows, the Financial Times on Wednesday quoted unnamed sources and an internal memo as saying.

China tightens capital controls: reports | Business Spectator

Everyone has been trying to figure out why the PBoC shed a record $94bn in FX reserves in August. But did you know their own spokesman has been offering an explanation to the market directly? Asked why the long-term sale of foreign exchange to Chinese banks this month, the PBoC spokesman replied

So where did that Chinese dollar liquidity end up? | FT Alphaville

Chief economist Willem Buiter now thinks the most likely scenario is one in which China tugs the world into a "global recession."

CITI: China is about to pull everyone into a 2-year 'global recession' - Business Insider

The progress of recent decades belies an industrial sector that in truth has become quite seriously uncompetitive by international standards. Many of China's factories need complete retooling to keep up with developments in robotics and other forms of mechanization. Yet if industry is to get less labor intensive, this only further steepens the challenge of employment creation.

China has created a monster it can't control - Business Insider

China's imports shrank far more than expected in August, falling for the 10th straight month. Imports fell 13.8 percent from a year earlier, more than the 8.2 percent drop economists had expected.

Futures rise on hopes of additional Chinese stimulus | Reuters

After a big sell-off in 1963, authorities intervened. In 1964 and 1965, two entities were established to prop up the market, documents compiled by the Bank of Japan show. Commercial banks helped fund the first vehicle, which spent 193.6 billion yen on shares, with the central bank pitching in after their money ran out. The second vehicle bought another 234.9 billion yen, with the BOJ shouldering 95 percent of the cost.

China's Turmoil Could be Just a Blip, If 1960s Japan Is a Guide - Bloomberg Business

Chang's client is one of the group of wealthy Chinese caught in between a rock and a hard place: Leave their assets in China to potentially weather additional market volatility and yuan devaluations — or put it in real estate that is now more expensive than just a few weeks earlier.

Chinese super-rich flood US real-estate market - Business Insider

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The economic slowdown in China has hit small manufacturers particularly hard - factory activity has declined to its lowest level since 2009 this year. Exports have slumped too - this week figures for August showed further weakness.

China's slowdown takes its toll - BBC News

Tens of thousands of flats here lie uninhabited, part of the estimated 70 million unsold homes that have been built across the country, for a middle-class population that never showed up. The Chinese government says this is all part of the plan to move from an export-led economy to a modern one based on services.

China's slowdown takes its toll - BBC News

At the heart of China's problem is the "impossible trinity" of international macroeconomics. The impossible trinity - or trilemma - is the idea that it is impossible for a country to have three things at the same time: a stable currency, the free movement of capital (i.e. the absence of capital controls) and independent monetary policy. A country can instead choose just two of the options from this policy suite.

China's impossible trinity - BBC News

At a time when disinflationary factors, such as lower commodity prices, are at work and when Western inflation is stuck around 0%, then the last thing the world needs is a Chinese devaluation which would risk turning a still benign period of low inflation into a damaging spell of deflation.

China's impossible trinity - BBC News

The textbook version of “impossible trinity” overlooks that the most important driver in China’s capital flows is not the deposit rate differentials between … China and the U.S., but the perceived China hard-landing risks and the expectation on yuan depreciation. … It’s possible that rate cuts by the PBoC could actually reduce capital outflow, if it lowers the hard landing risk and boost the return to China-related assets.

Macquarie: Why It's Futile to Fight the People's Bank of China - Bloomberg Business

As Michael Pettis, a professor of finance at Peking University and an all-round China expert, has stressed, both sides of the balance sheet need to be examined. The People’s Bank of China’s assets, namely U.S. Treasuries, generate a lower return than the interest rate paid to holders of Chinese debt. “That’s why Premier Li Keqiang said in 2014 that ‘foreign exchange reserves’ have become a big burden for us,’” wrote Hu and Peng. The real cost of the foreign reserve sales, as Barclays’s foreign exchange and rates team observed, is the deleterious effect on domestic liquidity when foreign assets are exchanged for yuan. As such, Macquarie adds that China’s central bank will need to reduce its reserve requirement ratio to boost liquidity, but the good news is that it has plenty of room to do so.

Macquarie: Why It's Futile to Fight the People's Bank of China - Bloomberg Business

Reform of underperforming state-owned enterprises is one of China's most pressing needs. But if not handled well, the restructuring could lead to hundreds of thousands of people being laid off and social instability. Xinhua said the plans included introducing "mixed ownership" by bringing in private investment, and "decisive results" were expected by 2020.

China unveils details of state-firm reforms as growth sputters - Yahoo Finance

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Current market perceptions of China are "thoroughly divorced" from the reality on the ground, according to the latest China Beige Book (CCB) survey, which has found that while the economy slowed in the third quarter, there are no signs of an impending growth collapse.

China's economy isn't collapsing: China Beige Book

Profit margins at Chinese firms improved in the third quarter while loan demand remained weak, a private survey showed , with the overall results suggesting the stock market crash would have minimal impact on the broader economy.

Chinese firms show resilience in third quarter: Beige Book - Business Insider

We have long grown accustomed to Chinese fakes. Fake watches. Fake DVDs. Even, recently, a fake Goldman Sachs. But what if something more fundamental were fake? What if China’s gross domestic product numbers were not all they were cracked up to be?

China’s economic facts and fakes can be hard to tell apart - FT.com

China's central bank and commercial banks sold a net 723.8 billion yuan ($113.69 billion) of foreign exchange in August, by far the largest on record, highlighting how capital outflows intensified in the wake of the yuan's devaluation last month. The previous largest outflow, in July, totaled 249.1 billion yuan ($39.13 billion). The figures are based on Reuters calculations using central bank data, the latest of which was released on Monday.

China sells record FX in August, shows pressure after devaluation | Reuters

Assuming that the euro and the yen stabilize against the dollar and the current account surplus remains near its current level, it would take more than two years of hot money outflows at the August pace for China to run out of reserves.  I doubt there is anywhere near that much hot money in China, and sentiment on China is not likely to remain so bearish for so long.

China Economic Watch | Is China Running Out of Reserves and Does It Matter?

They estimate that the peak of China's credit cycle will see about 1 in 12 loans, or 8.2%, becoming "non-performing," which is when borrowers are late with their interest payments and don't have a plan to pay them. That figure drops to around 5.5%, or a bit more than one in 20, if you take out the shadow banking system.

JP MORGAN: 1 in 12 Chinese loans will hit trouble when the bubble bursts - Business Insider

It is instructive then to look at China’s global role since the financial crisis. When the western economies were on their knees in 2007-08, the Chinese economy rode to the rescue. Although the actions of the Beijing government were primarily motivated by self-interest – avoiding being dragged down by the crisis – they also had the effect of saving the western economies from a fate far worse. Confronted by the near-collapse of their western markets,, which accounted for around half of Chinese exports at the time, China embarked on a huge $586bn stimulus programme to boost domestic demand and offset the loss in demand for their exports. It worked. The Chinese growth rate continued to expand at around 10% and thereby provided a major boost to the global economy.

It’s not the Chinese economy that’s on life support | Martin Jacques | Comment is free | The Guardian

Furthermore, following those dark days, the Chinese have allowed their currency, the renminbi, to steadily appreciate, by more than 25% against the dollar since 2005 and considerably more against most other currencies. As a result Chinese exports have become considerably less competitive and have fallen. Meanwhile its current account surplus has dropped dramatically, from 10.1% of GDP in 2007 to 2.1% last year. Imagine the effect on other economies if the opposite had happened and the renminbi had been devalued by 25%.

It’s not the Chinese economy that’s on life support | Martin Jacques | Comment is free | The Guardian

Housing investment and new project starts fell further in August; importantly, though, transactions stayed strong (up 15.6% year over year) and mortgage lending rose sharply (up 50% year over year, for the third consecutive month). Sales of household appliances and furniture improved, too. These trends are particularly encouraging because they point to a true market-based correction brought about by rising demand and a relative scarcity of supply. They reflect a fall in housing inventory and the fact that property developers—still nervous after the equities crash and last month’s currency devaluation—are not rushing to build. In our view, however, the market is ignoring these signals and underestimating the potential for a spillover effect from the housing sector into the rest of the economy.

China is getting ready to rebound - Business Insider

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Now consider China. President Xi Jinping is a chemical engineer, trained in Beijing. So far, so stereotypical. But look at the rest of the politburo standing committee which runs the country: only one has any international education, and it is training in economics at Kim Il-Sung University in North Korea.

China’s economic leadership | FT Alphaville

“China put in the investment that all the French and the US companies didn’t,” one Niamey-based energy expert told Business Insider. “They did what Exxon didn’t do in 30 years.” But Chinese investment can have a price. The standoff over Soraz shows how unprepared even fairly stable and democratic African governments can be in dealing with China.

Niger, oil, and Chinese investment in Africa - Business Insider

The latest figures on regional and local Chinese government debt show a 34 percent increase from June 2013 to 24 trillion yuan ($3.7 trillion) at the end of 2014, Moody's Investor Service said in a September report . That's 38 percent of China's 2014 GDP, Moody's says, and analysts fear the ballooning debt will be a hindrance to growth as regional governments spend it on underperforming infrastructure projects and struggle to find ways to repay it.

The next thing to worry about in Chinese markets - Yahoo Finance

"Bank investors quite rightly have shifted back to the fundamentals, and the main area of investor focus now appears to be back to the trend of asset quality deterioration," Macquarie wrote in its note. The problem isn't just that Chinese banks are carrying a lot of debt. It's that, because of its large shadow-banking system (debt held that does not appear on bank balance sheets), we don't know how much debt banks are actually holding.

The next big China worry on Wall Street - Yahoo Finance

After increasing relentlessly for two decades, China’s foreign exchange reserves started to decline about a year ago, and during the crisis month of August 2015 they plummeted alarmingly. Seen by many investors as a signal of waning confidence in the credibility of Chinese economic policy, a collapse in the reserves is now taken as one of the prime reasons to dump risk assets on a global basis.

The drain on China’s foreign exchange reserves | Gavyn Davies

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Everybody knows China has a debt problem. The hard part is getting a read on the size and distribution of the liabilities. Below are some key numbers, sourced from UBS: Total debt — excluding the central government — stands at 210% of gross domestic product, yet the headline figure is misleading. The bulk of this debt is issued by state-owned enterprises and local-government financing vehicles. Non-performing loans in China stand at just 1.5% of GDP. Yet this low number disguises a number of fault lines. Recorded NPLs are rising at 30% to 45% per annum. Loans deemed overdue but not yet impaired doubled this year — a sign of negative corporate cash flows and further debt troubles ahead. The official numbers don't include the biggest problem area: off-balance-sheet loans. Banks don't hold capital buffers against these loans. Instead, they treat them as investments. Total bad debts in the system amount to around 11% of GDP, UBS estimates. The problems are mostly concentrated in a few sectors saddled by overcapacity and changing regulations, such as stricter pollution controls. Infrastructure (22% of bank assets), manufacturing (16%) and real estate (at a likely understated 7%) are the main offenders. Caveat: Debt in these sectors is likely worse than it appears. The official numbers only cover the on-balance-sheet exposures of 70 banks.

Panicked capital flight a red herring - Business Insider

China's currency reserves have shrunk by $400 billion over the past year, official data show. Yet talk of panic-capital flight from China is a red herring, in my view. The decreasing reserves mostly reflect the rising US dollar, which shrinks the value of non-dollar reserves, and a switch by some onshore Chinese corporates to yuan financing rather than US-dollar financing — a welcome trend.

Panicked capital flight a red herring - Business Insider

We believe China will continue to post outflows for two reasons. First, interest rate differentials against the US declined by 200-250bp since January 2014. Even assuming no imminent lift-off in the Unites States any time soon, the flows will likely pull USD/CNY higher. We believe there is about USD400-500bn of pipeline demand in short-term international claims just to reverse some of the flows observed since 2010. We estimate that in August there were about USD100bn of outflows. As global FX reserves accumulation turns around, the same things FX reserve managers aimed to buy in the past ten years or so will also turn around as well; this includes a variety of short duration fixed income products and alternative currencies to diversify trade weighted index baskets.

Here’s looking at Chinese FX reserves releases | FT Alphaville

"China's real estate is starting to find a bottom. If you remember, the whole bear case for China was this collapse in real estate. They've had three months in a row of upticks in prices

Emerging markets expert: Why I’m bullish on China

Doomsday scenarios of a hard-landing in China may have transfixed market watchers, but the International Monetary Fund (IMF) remains relatively sanguine on the economic outlook.

IMF sees ‘some comfort’ on China economy transition despite stock slide

Beijing has yet to put together a credible response as to what should be done with zombie companies, the huge swath of unprofitable state-owned enterprises surviving on the good will of the Chinese government. Until it does, private companies in the world's second-largest economy will continue to fight an uphill battle for growth, and China's reform efforts will share a key characteristic with the mythical creature in question: not dead, but not really alive.

China Has No Good Plan to Deal With Its Achilles Heel - Bloomberg Business

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A growing section of financial market participants and journalists have speculated that recent numbers might be painting a more flattering picture of the world's second largest economy than is the reality. But according to research, China's economy is likely much bigger than official data suggest. In a report published by research institution Center for Strategic and International Studies (CSIS) last month, Daniel Rosen and Beibei Bao showed that 2008 GDP was actually 13-16 percent larger than official figures, while 2013 GDP stood at $10.5 trillion rather than the official $9.5 trillion.

China's economy is likely larger than you think

On Sept. 29, China’s national bureau of statistics said profits of government-owned industrial companies dropped 24.7 percent in the first eight months of the year. The state-owned enterprises performed worse than companies that had foreign investors, which eked out profit growth of 0.7 percent. Private companies did best, recording a 7.3 percent rise.

China’s State Sector: Bigger Than Ever - Bloomberg Business

China’s restaurant, cinema and travel sales surged in the ‘Golden Week’ national holiday, an indication that robust household spending remains a prop for a slowing economy.

China's 'Golden Week' Sales Shows Consumer Spending Strength - Bloomberg Business

The problem is major amounts of debt built up in the corporate sector, which is mainly made up of state-owned enterprises (SOEs). These quasi-state-controlled companies have become less and less productive as their debt loads have increased. Yao isn't the only one warning about this, of course, and China isn't the only emerging market with this problem. It's just that Chinese SOEs are holding more debt than corporations in other emerging markets, and they are levered up to their eyeballs.

China at risk of zombie economy - Business Insider

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China’s services sector output rose 8.6 percent in the July to September period, cushioning the nation’s slowdown and underscoring a transition away from reliance on the old growth drivers of construction and manufacturing. While financial services has emerged as a major prop for the economy this year, declines in the volume of shares traded and a lackluster property recovery pose challenges for the future expansion pace.

China Financial Sector Shrugs Off Stock Rout to Fuel GDP Growth - Bloomberg Business

Overall, today’s data suggest that while the economy is almost certainly not growing as rapidly as the official GDP figures claim, conditions nonetheless appear to have stabilised, with healthy service sector activity helping to offset continued weakness in industry. With stronger fiscal spending in the pipeline and credit growth accelerating, we continue to see some potential upside to growth over the coming quarters.

China still less terrifying | FT Alphaville

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But people either don't believe it – even Premier Li Keqiang recommended looking at better measures such as electricity output – or are worried that the huge wave of corporate debt built up in the post-2008 boom times will come crashing down soon.

CREDIT SUISSE executive survey shows concerns on Chinese growth - Business Insider

The Chinese government’s excess saving isn’t obvious because on paper the country is running a budget deficit of a little more than 2 percent of GDP. But that measure doesn’t take into account the income of state-owned enterprises and money paid into various government funds for housing, health care, and social security... The bottom line: The Chinese government is collecting so much money from the public that its bank deposits equal 32 percent of GDP.

China’s Trouble With Saving 21 Trillion Yuan - Bloomberg Business

The United States has 15.6 million millionaires, nearly half the global total, and is home to 48 percent of the world’s 123,800 ultra-high net-worth individuals. China has the second-highest share, the aforementioned 8 percent.

China still good long-term investment - Business Insider

The ranks of China’s wealthy continue to surge. As their economy shows signs of weakness at home, they’re sending money overseas at unprecedented levels to seek safer investments — often in violation of currency controls meant to keep money inside China.  This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver.

China's Money Exodus - Bloomberg Business

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Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults and adding pressure on policy makers to keep financing costs low.

China Has a $1.2 Trillion Ponzi Finance Problem - Bloomberg Business

China said it cracked the nation’s biggest “underground bank,” which handled 410 billion yuan ($64 billion) of illegal foreign-exchange transactions, as the nation tries to combat corruption and rein in capital outflows that have hit records this year. More than 370 people have been arrested or face lawsuits or other punishment in the case centered in eastern Zhejiang province, the People’s Daily reported on Friday, citing police officials. The case brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.

China Cracks $64 Billion `Underground Bank' Moving Money Abroad - Bloomberg Business

David Tepper says a yuan devaluation may be coming in China. John Burbank warns that a hard landing there could spark a global recession. Tepper, the billionaire owner of Appaloosa Management, said last week at the Robin Hood Investor’s Conference that the Chinese yuan is massively overvalued and needs to fall further. His comments follow similar forecasts from some of the biggest hedge fund managers, including Crispin Odey, founder of the $12 billion Odey Asset Management, who predicts China will devalue the yuan by at least 30 percent.

Masters of the Finance Universe Are Worried About China - Bloomberg Business

China's economic slowdown could pose risks for the euro area ranging from falling exports, capital outflows and exchange rate fluctuations, the European Central Bank (ECB) said on Wednesday. China is now the second-biggest economy after the U.S. and plays an increasingly major role in global trade. Its economy has slowed each year since 2010 and is seen continuing to do so until at least 2016, when the International Monetary Fund forecasts growth of 6.3 percent.

Why China ‘spillover’ poses risks for the euro zone