China

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China has an awesome consumer story. Yet lately you can’t pick up a newspaper, go online, or watch television without hearing continual moaning about the country’s slowing economic growth and the need for “rebalancing.” The reality is that Chinese consumers are going to continue to increase in wealth and complexity. And if you’re worried the country’s economic importance is declining, you’re probably looking at its performance the wrong way.

Why China’s consumers will continue to surprise the world | McKinsey & Company

Because it cannot ease credit conditions without encouraging a continuation of the worst kind of lending, the PBoC is trying to direct lending by targeting the types of lending it will support. To the extent that this lending flows into small and medium enterprises, agriculture, services, or other parts of the Chinese economy that are using capital efficiently, this is a good thing, but if capital continues to flow into large infrastructure projects, especially into the poorer provinces, it seems to me that this only leaves the country with a worse debt burden.

China and a friendly reminder to keep watching those capital outflows | FT Alphaville

A lawsuit filed by residents of a Chinese town against a chemical plant that they say is responsible for high levels of lead in the blood of local children is shaping up as a test of the central government's resolve to tackle pollution.

Lead poisoning lawsuit tests China's resolve over pollution

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Property sales rebounded in April, the steel industry's pessimism eased, electricity use is on the up and the price of iron ore is rallying. Even Tesla Motors says the worst appears to be over in China.

Are Those Green Shoots We're Seeing in China? - Bloomberg Business

China's leaders, caught off guard by a sharp economic slowdown and worried about the risk of job losses, are likely to resort to fiscal stimulus to revive growth after a run of monetary policy easings proved less effective, policy insiders said.

China looks to fiscal stimulus to fight slowdown

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For Chinese investors with a sense of history, the nation’s world-beating equity rally is looking long overdue for a reversal.

It's Time to Get Ready for the End of China's Bull Market - Bloomberg Business

China’s central bank is considering lending to policy banks through a new tool so they can buy bonds issued by local governments, a person close to the regulator says. The loans would have a maturity of at least 10 years, the source said. Other details of how this would work remain unclear, but the tool will be unlike anything the bank has used before, he said.

China mulls new monetary tool that ‘the world has never seen’ - MarketWatch

It’s the most dangerous hour in the Chinese stock market -- when the world’s biggest boom suddenly goes bust. The time is 1:20 to 2:20 p.m., and its losses stand out in a rally that added 545 points, or 15 percent, to the Shanghai Composite Index over the past 30 days.

At 1:20 P.M., China’s Great Stock Rally Mysteriously Falls Apart - Bloomberg Business

Over the next few months, Chinese provinces will start selling an unprecedented quantity of new bonds. Much of this debt will be new in name only: while most of the huge economic stimulus since 2009 was financed by unofficial, off-budget borrowing, this year RMB1trn of that will be transformed into official government debt. With the launch of this debt restructuring program, and the shift in monetary policy over the past several months, China’s strategy for managing its mountain of debt is finally becoming clear.

China’s plan to deal with its debt mountain | FT Alphaville

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Analysts have been scrambling ever since, updating predictions, then re-updating them and re-re-updating them as stocks blew by their target prices. The rally that outran their forecasts is now making their jobs even more difficult as they try to assess the prospects of companies trading at multi-year highs with the possibility of further government stimulus. “This market has been driven up by capital that’s flooded in, while you need to touch upon company fundamentals in your research notes,” Li Xiaolu, a Shanghai-based equity analyst at Capital Securities Corp., said by phone on May 13. “We can’t write baseless reports, so the current market makes it more difficult for us, and makes me hesitate. If a stock’s gain is beyond reasonable, it may continue to climb even if I cut its rating.”

When Predicting China Stocks There’s Only Wrong and Very Wrong - Bloomberg Business

This was entirely due to flows to China ETFs, which turned positive after several weeks of outflows," said Daniel Salter, head of equity strategy at Renaissance Capital. But the multi-year highs in the Chinese stock market follow an unexpectedly rapid slowdown in Chinese demand, where imports of goods declined by around 7 percent on the year in volume terms in the first quarter of the year – the fastest pace of decline since mid-2009.

China stocks hit 7-year high, but economic growth is still missing

"We are optimistic that growth should at least stabilise, or downwards pressure on growth should at least should ease somewhat – but the long-run picture is on-going structural slowdown in investment and that is not going to reverse any time soon," he said, adding that in the next few years growth is set to slow further. Senior economist at Oxford Economics, Adam Slater said while there had been a loosening of fiscal policy, the moves have "done little more than ameliorate what has been a rather significant overall tightening of monetary conditions over the last year or so," and current evidence pointed to decelerating growth.

China stocks hit 7-year high, but economic growth is still missing

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If China really is trying to drive down its currency in any meaningful way to gain trade advantage, the world faces an extremely dangerous moment. Such desperate behaviour would send a deflationary shock through a global economy already reeling from near recession earlier this year, and would risk a repeat of East Asia's currency crisis in 1998 on a larger planetary scale.

Ambrose Evans-Pritchard: China cannot risk the global chaos of currency devaluation - Telegraph

A surge of capital gushing out of emerging markets has risen toward $1 trillion over the past 13 months, roughly double the amount that fled during the financial crisis amid slumping confidence in the world's developing economies.

Emerging market capital outflows near $1 trillion

If there is a common theme running through these events, it is the way Beijing is emphasizing its openness in decision-making, in reporting and in explaining its actions. This is not the China of the past that tried to hide the truths of major natural or man-made disasters from its citizens. It is not the China that operated by secret agreements made only after a consensus of Party elders, or the China that tried to protect Party officials at the expense of the public.

China in midst of biggest crisis in decades - Business Insider

Sino-US ties are relatively significant in terms of trade and credit, according to Quinlan. US imports from China totaled $482 billion, or 16.9% of the total in 2014. Additionally, China's holdings of US treasuries have increased over the last fifteen years, totaling around $1.2 trillion at the end of 2014.

Metrics of US dependence on China - Business Insider

The situation in China is desperate but not serious, to borrow an old Viennese saying. Countries with a tight exchange controls and state banking systems may come to grief in the long-run, but they do not face the sort of financial collapse seen in the US and Europe in 1931 or 2008.

China's August scare is a false alarm as fiscal crunch fades - Telegraph

Credit growth jumped to a 31-month high in July. The monetary base has grown at a 20pc rate over the last three months, implying an economic spike later this year. It is worth remembering what has just happened in China. The country is recovering from a ferocious monetary and fiscal shock. The authorities refused to react as falling inflation caused one-year lending rates to ratchet up to 5pc in real terms from zero in late 2011.

China's August scare is a false alarm as fiscal crunch fades - Telegraph

Yet the "trade intensity" of China's economy is plummeting as the country moves beyond export-led catch-up growth. World bank data shows that exports peaked in 2006 at 36pc of GDP. They fell to 22.6pc last year.

China's August scare is a false alarm as fiscal crunch fades - Telegraph

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The People’s Bank of China’s daily fixing was set 0.15 stronger at 6.3986 a dollar on Friday. The nation has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation earlier this month, people familiar with the matter said Thursday. Policy makers are said to be trying to end a stock rout before a Sept. 3 military parade that will celebrate the 70th anniversary of the World War II victory over Japan.

China’s Yuan Advances Most Since April as PBOC Boosts Fixing - Bloomberg Business

“Even if we adjust our SGI upward (for too-little representation of services—lack of data), we believe actual economic growth in China is far below the official 7.0% year-on-year. And it is not improving.” The SGI is a weighted average of seven components including railway freight, airline passengers, and electricity consumption.

China’s economy may be in worse shape than people think - MarketWatch

Why have global markets reacted so violently to Chinese developments over the last two weeks? There is a strong case to be made that it is neither the sell-off in Chinese stocks nor weakness in the currency that matters the most. Instead, it is what is happening to China’s FX reserves and what this means for global liquidity. Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1). The global impact was indeed equivalent to QE: the PBoC printed domestic money and used the liquidity to buy foreign bonds. Treasury yields stayed low, curves were flat, and people called it the “bond conundrum”

Deutsche Bank: It's Chinese 'Quantitative Tightening' That's Been Slamming Markets Around the World - Bloomberg Business

China has injected $100bn of liquidity into the country’s financial system and cut interest rates to records lows in a "shock-and-awe" bid to restore confidence, but worries persist that even this may not be enough to avert a crunch as capital flight surges.

China cuts rates to stem crisis, but doubts grow on foreign reserve buffer - Telegraph

China is able to dig deep into its foreign exchange reserves — the world’s largest at $3.65 trillion as of July 2015 based on Chinese government data — to manage the yuan’s value. But Peter Conti-Brown, Wharton professor of legal studies and business ethics, wondered how much of the reserves China could use and how long they would last. “Before they go through those resources, we will see a dramatic panic about China’s ability to sustain the yuan’s value", he said.

Can China Defuse the Panic over Its Economy?

China is a large current account surplus country when commodities are excluded. Its slowdown means commodity exporters will be hit hard, but that doesn’t mean that the world economy is headed into a recession. Moreover, the global financial system was levered up on US subprime securities in 2008, whereas China’s credit bubble has been fueled by domestic savings. This means the wider spillovers to global financial markets should be limited. In other words, a financial crisis in China doesn’t imply a global crisis”.

This analyst believes China is not creating the next recession and sees the sell-off as a buying opportunity - Business Insider

Capital outflows from China have surged to $190bn over the last seven weeks, forcing the authorities to intervene on an unprecedented scale to defend the Chinese currency.

Record capital flight from China as industrial slump drags on - Telegraph

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There are at least three reasons why China’s growth might suffer a discontinuity: the current pattern is unsustainable; the debt overhang is large; and dealing with these challenges creates the risks of a sharp collapse in demand.

China risks an economic discontinuity - FT.com

The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

China Sells U.S. Treasuries to Support Yuan - Bloomberg Business

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.

China Sells U.S. Treasuries to Support Yuan - Bloomberg Business

The selloff in China has erased Trillions of dollars in market value, but it still hasn't made stocks cheap. Mainland shares are more than twice as expensive as their counterparts in Hong Kong.

China Stocks Cost Double Hong Kong Prices - Bloomberg Business

China’s central bank added to measures designed to shore up the yuan, making it more costly for traders of forwards contracts to bet on swings in the currency. The People’s Bank of China will impose a reserve requirement on financial institutions trading in foreign-exchange forwards for clients, according to six people familiar with the matter. The change, which takes effect on Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest for a year, said the people, who asked not to be identified because they aren’t authorized to speak on the issue.

China Orders Banks to Hold Reserves for Currency Forwards - Bloomberg Business

"This is a real threat. A hard landing in China is the biggest threat to the global economic recovery since the financial crisis," said David Joy, chief market strategist at Ameriprise Financial. The broader question is: Does China represent the same kind of systemic risk that the financial crisis did? Or are there reasons to believe China has the ability and willingness to avoid the worst-case scenario?

China is the scariest threat to stocks since 2009. Here's why - Sep. 1, 2015

In the last decade, China was a major growth driver for Korea," Morgan Stanley's Sharon Lam said on Tuesday. "Korean exporters are proud of their success in China, as witnessed by Korea overtaking Japan to become China's number one import source since 2013. Korea's success in the Chinese market was characterized by its brand name, technology, and marketing efforts. Unfortunately, China is no longer a positive factor for Korea and in fact it has become a negative drag.

South Korean exports, August 2015 - Business Insider

What it can tell you, Chanos said, is that China isn't really reforming its economy. It is not transitioning from an investment-based economy to a consumption-based economy as leaders have promised. Fixed-asset investment was 48% in 2010 when Chanos started looking at the economy. It's now down to 46%.

Chanos 5 things to know about China - Business Insider

"Chinese debt growth has been two to three times nominal GDP growth every year," he told Business Insider.  "This is problematic because we go into this year with debt three times GDP. If you do the math, and even if the country's GDP is growing at 5%, and debt is growing at 10%, in another six years we're going to be at 400% debt to GDP."

Chanos 5 things to know about China - Business Insider

China’s securities regulator asked brokerages to step up their support for share prices by contributing 100 billion yuan ($15.7 billion) to the nation’s market rescue fund and increasing stock buybacks, according to people familiar with the matter.

China Said to Ask Brokerages to Boost Market and Buy Back Shares - Bloomberg Business

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China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned. Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright "helicopter" money from the bank to avert a deepening crisis.

Citigroup braces for world recession, calls for Corbynomics QE in China - Telegraph

China, the Financial Times noted Friday, could exhaust its foreign exchange reserves within a year as it defends the value of its plunging currency, the renminbi. The paper’s arithmetic is correct of course, but the projection, which at first sounds alarming, is actually optimistic. Beijing might be broke in months—and maybe by the end of this year—despite now holding the world’s largest foreign exchange reserves. At the same time, the Chinese central government has been supporting stock valuations through various means, especially the direct purchases of shares. Beijing’s efforts to defend both stocks and the currency are severely straining its finances.

2015: The Year China Goes Broke? | The National Interest

Multiple indicators point to a growth slowdown that remains broadly in line with the leadership’s game plan, and the authorities can draw upon enormous financial resources and economic resilience. Particularly if planned reforms go forward, the Chinese economy should be able to continue functioning as a reliable driver of global economic growth.

What’s Behind Chinese Leaders’ Response to the Market Crisis?

Without growth, the Communist Party loses its political legitimacy, yet the old growth model is broken, and to achieve a new one, the authorities must cede the very power and influence that sustains them.

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

However, policymakers will gain little by running down China’s reserves at a pace of US$150bn a month. As a result, while the PBOC may adopt a strategy of continued intervention in the near term, say through President Xi Jinping’s visit to the United States later this month, it is not a viable course of action over the long term.

If something can’t go on forever, it won’t, China’s FX policy edition | FT Alphaville

Nouriel Roubini has cast aside his mantle as the lugubrious "Dr Doom" of the global economy, scathingly dismissing market panic over China as "manic depressive" behaviour by ill-informed investors. "China is not in free-fall," he told the Ambrosetti forum of world leaders on Lake Como.

Nouriel Roubini dismisses China scare as false alarm, stuns with optimism - Telegraph

Mr Roubini, who also runs Roubini Global Economics, said the contractionay fiscal policies that have held back recovery across the developed world since 2008 are finally abating.

Nouriel Roubini dismisses China scare as false alarm, stuns with optimism - Telegraph

Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of 'fair value', as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday.

For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman | Zero Hedge

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Analysts have been scrambling to calculate just how much firepower Beijing can realistically deploy to hold the exchange rate in line with its foreign exchange reserves now standing at $3.56 trillion. Société Générale estimates the People’s Bank of China’s war chest is realistically only $1 trillion.

Capital flight is Beijing’s new confidence problem - MarketWatch

The difficulty in running down this large cash pile is that every time the central bank intervenes to support the peg, it is withdrawing liquidity from the economy. It therefore must find some way to plug this gap. Beijing is expected to cut bank reserve ratio requirements further this year, which increases the amount they can lend to offset contraction from foreign exchange depletion.

Capital flight is Beijing’s new confidence problem - MarketWatch

And if quantitative easing has proved so positive for asset and equity prices, the reverse may now be true. China’s state-supported stock market and inflated property market now must fight against a continuing liquidity squeeze. What this also means is that any further signs of an accelerating shrinkage of foreign exchange reserves will be viewed as a negative or “risk off” for markets.

Capital flight is Beijing’s new confidence problem - MarketWatch

As of 2013, total assets were about 900% of gross domestic product, versus debt of about 220 percent... The data reflects China’s status as a nation of savers, at both the household and national level, and the rapid appreciation of asset prices over the last decade. Interestingly, real estate and bank deposits are the biggest household assets, accounting for 70 percent and 24 percent respectively in 2013, the analysis found. For readers unsettled by the plunge in China's equities, take heart from this: stocks accounted for only 2 percent of total household assets.

China Debt Crisis? The Other Side of the Ledger Suggests Not - Bloomberg Business

“if a 3% devaluation in China’s currency can trigger a global rush for the exits—as it did last week—a 20% drop could shake the world.”  This is an accurate assessment, but also overlooks the highest probability scenario that a 20% drop in the RMB just has not been recognized in the pricing yet.  What I mean by that is this: virtually all indicators point to the conclusion that the RMB is probably at least 10% over valued and in all likelihood 15-25%. Evidence abounds to support this conclusion.

Big and Small Thoughts to Start the Week | Balding's World

While there is much more scope for monetary policy intervention, China and the PBOC appear to be doing their best to destroy any appearance of competence by policy makers. First, China needs significantly lower interest rates.  Producer price deflation which is in its fourth year is nearly 6% causing real interest rates for even the best firms to be north of 10%.  Second, due to PBOC dollar selling, RMB is being sucked out of the economy quite rapidly.  This implies increasing liquidity in a variety of ways is of the utmost importance.

Big and Small Thoughts to Start the Week | Balding's World

Update: PBOC released FX decline for August today where they report a $94 billion decline to $3.56 trillion.  Given that Barclays Research had estimated a range of $86-122 and Deutsche Bank had estimated a post August 11 decline between $98-145 billion, the $94 billion is right in line if a little on the low side.  The decline is a little less then anticipated and while this is positive, I would be careful against rejoicing. All indications remain that capital outflows continue to accelerate, the offshore rate is diverging from the onshore rate by almost 1.5%, and the PBOC continues to intervene enormously to prevent further devaluation.  I doubt the market will see this as stabilization.  I would expect intervention to maintain similar levels in September.

Big and Small Thoughts to Start the Week | Balding's World

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China spent $93.9 billion in August, reducing its cash pile to $3.56 trillion. This is almost double the drop in July, when $50 billion was spent.... But the problem for China is that as it burns through its reserves at a faster pace, it signals to the market that the currency has further to fall — the currency needs propping up, meaning the demand is artificial. That's speeding up a capital flight from the country.

China burning currency reserves at record rate in August - Business Insider

Chen Long of  GavelKal Dragonomics writes “if a 3% devaluation in China’s currency can trigger a global rush for the exits—as it did last week—a 20% drop could shake the world.”  This is an accurate assessment, but also overlooks the highest probability scenario that a 20% drop in the RMB just has not been recognized in the pricing yet.  What I mean by that is this: virtually all indicators point to the conclusion that the RMB is probably at least 10% over valued and in all likelihood 15-25%. Evidence abounds to support this conclusion.

Big and Small Thoughts to Start the Week | Balding's World

Update: PBOC released FX decline for August today where they report a $94 billion decline to $3.56 trillion.  Given that Barclays Research had estimated a range of $86-122 and Deutsche Bank had estimated a post August 11 decline between $98-145 billion, the $94 billion is right in line if a little on the low side.  The decline is a little less then anticipated and while this is positive, I would be careful against rejoicing. All indications remain that capital outflows continue to accelerate, the offshore rate is diverging from the onshore rate by almost 1.5%, and the PBOC continues to intervene enormously to prevent further devaluation.  I doubt the market will see this as stabilization.  I would expect intervention to maintain similar levels in September.

Big and Small Thoughts to Start the Week | Balding's World

But some important episodes that foreigners decry as the result of government intervention are in fact the opposite.  Two developments this year have dominated the financial pages, but have often been misinterpreted.  One is the depreciation of the yuan against the dollar on August 11.  The other is the bubble in the Chinese stock market that led up to the June peak.

Misinterpreting Chinese Intervention in Financial Markets | Jeffrey Frankel’s Blog

The right-hand column (ICOR – incremental capital output ratio) shows how extremely unproductive China’s capital is compared to Japan, South Korea and Taiwan during their transformational expansions. And that Chinese capital productivity has actually worsened in recent years:

China’s challenges, explained in three easy charts | FT Alphaville

A rapid change in the ratio of credit to gross domestic product is more important than its level. That is partly because some societies are able to manage more debt than others; it is partly because a sudden burst in lending is likely to be associated with a sudden collapse in lending standards... 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