One of the few silver linings surrounding the hard-landing Chinese economy in recent weeks has been the surprising resilience and strength of the Baltic Dry Index: even as Chinese commodity demand has cratered in 2015, this “index” has more than doubled in the past few months from all time lows, and at last check was hovering just over 1,100.
Many were wondering how it was possible that with accelerating deterioration across all Chinese asset classes, not to mention the bursting of various asset bubbles, could global shippers demand increasingly higher freight rates, an indication of either a tight transportation market or a jump in commodity demand, neither of which seemed credible.
“The punchline: Sheng warned about the risks of local government debt, saying that 2 trillion yuan ($322.08 billion) in bond swaps may not be able to fully cover maturing debt, according to the report.
What he really said, as paraphrased by Bloomberg, is that “local governments tended to not report all their debts when audited in June 2013, thus the 2 trillion yuan debt swap plan arranged this year may not cover all debts due, Sheng cited as saying.”
It was almost exactly two years ago, when during China’s long-forgotten attempt to actively deleverage its economy (remember that? good times…) we commented on the country’s s first attempt to estimate what its local government debt is since June 2011.
Anyone with a nose for markets will tell you that the Chinese government’s attempt to rescue the country’s stock markets from collapse is far from succeeding.
Bubbles collapse, period; and government interventions don’t stop them. Furthermore, we are beginning to see a crack widen in the foundations of China’s capital markets that could end up undermining the whole economy.
Since the government owns the banking system, some of the knock-on effects will doubtless be concealed. A consequence for China is that domestic financial instability could threaten her current plans for the international development of her currency. Here the timing couldn’t be worse, because in a few months the IMF is due to announce its decision about the inclusion of the renminbi in the SDR. The odds were in favour of China succeeding in this quest, on the basis that China was deemed to have fulfilled the necessary conditions, and the IMF itself has been supportive. Continue reading »
To get a sense of the complete devastation in the world of commodities, consider the curious case of Australia’s Isaac Plans coking coal mine, which was valued at $630 million in 2011. It sold on Thursday for $1. it gets worse: based on data from Citi Research, 90% of all M&A that miners did since 2007 has been written off. The commodity bubble has officially burst – feel free to thank China.
On Friday, we highlighted a “secret” NSA map which purports to show every Chinese cyber attack on US targets over the past five years. “The prizes that China pilfered during its ‘intrusions’ included everything from specifications for hybrid cars to formulas for pharmaceutical products to details about U.S. military and civilian air traffic control systems,” intelligence sources told NBC, who broke the story.
The release of the map marked the culmination of a cyber attack propaganda campaign which began with accusations that North Korea had attempted to sabotage Sony, reached peak absurdity when Penn State claimed Chinese spies had taken control of the campus engineering department, and turned serious when Washington blamed China for what was deemed “the largest theft of US government data ever.” “Whether all of this is cause for the Pentagon to activate the ‘offensive’ component of its brand new cyber strategy remains to be seen,” we said yesterday.
As it turns out, the Office of Personnel Management breach will indeed be used to justify a cyber “retaliation”against China, because as The New York Times notes, “the hacking attack was so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.” Here’s more:
The Obama administration has determined that it must retaliate against China for the theft of the personal information of more than 20 million Americans from the databases of the Office of Personnel Management, but it is still struggling to decide what it can do without prompting an escalating cyberconflict.Continue reading »
“The robots have produced almost three times as many pieces as were produced before. According to the People’s Daily, production per person has increased from 8,000 pieces to 21,000 pieces. That’s a 162.5% increase.”
A few hours later we find out that it was because as CNBC reported in its sequel, another farmer has lost it all… and more. As CNBC’s Eunice Yoon reports, just a few weeks after his glorious gamble in China’s manipulated market, the farmer “trader “now owes – thanks to wonders of margin calls and leverage – as much as he originally invested.
From the hope-filled exuberance of early June to Yang Cheng’s utter hopelessness, “I have lost everything,” after he followed the government’s ‘grand plan’ to open the economy and encourage stock market speculation. Continue reading »
Just as Japan thought they could go back to pre-Plaza Accord growth rates by holding on to the old ways in the 1990s, the Chinese will expect the growth miracle to return in 2016 with the “right” policies. It will not. It is all a mirage though. Just as in Japan, the Chinese will not allow the market process to do its magic to get the economy back on a stable footing. Draconian measures to stop the recent stock market rout are a clear testimony of that. In other words, the Chinese economy will resemble that of Japan, and it will do so very soon, if it is not already there. China is heading straight into a zero growth environment, and will be mired there for years to come.
After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ever since China’s stock bubble burst in late June, with the subsequent crash nearly taking the Shanghai Composite red for the year, overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%, closing nearly at the lows, and tumbling some 345 points for its biggest one-day drop since February 2007 and its second biggest crash in history!
The selling was steady throughout the day, but spiked in the last hour on concerns China would rein in its market-supporting programs following IMF demands to normalize its relentless market intervention. According to Bloomberg’s Richard Breslow: “fear that the extraordinary support measures employed to hold up the market may be scaled back caused heavy afternoon selling resulting in a down 8.5% day.” Of course, one can come up with any number of theories to explain the plunge: for example the PBOC did not buy enough to offset the relentless selling. Continue reading »
On the heels of a veritable bloodbath in Chinese equities overnight which saw the SHCOMP slide a harrowing 8.5%, the entire world is now beginning to take a hard look at the notion that dramatic bouts of selling pressure are aggravated and perhaps triggered by an unwind in the multiple backdoor margin lending channels that allowed investors to skirt official restrictions on leverage and helped to drive the market’s world-beating rally. Here is the complete guide to China’s CNY4 trillion shadow margin edifice.
Late last month, we suggested that the pressure on Chinese equities – which at that point had only begun to build – was at least partially attributable to an unwind in the country’s CNY1 trillion backdoor margin lending edifice. Precisely measuring the amount of shadow financing that helped drive Chinese stocks to nosebleed levels is virtually impossible, as is determining how much of that leverage has been unwound and how much remains or has been restored, but BofAML is out with a valiant attempt to not only identify each shadow lending channel, but to quantify just how much leverage may be built into the Chinese market. The figures will shock you.
Over the first half of the year, we’ve built on several narratives that we believe are critical when it comes to understanding how the intersection of geopolitics and economics is set to shape the world going forward.
One of these narratives revolves around the extent to which three China-led ventures are set to supplant traditionally dominant supranational lenders on the way to embedding the yuan in international trade and investment. Continue reading »
If you are looking for a “canary in a coal mine” type of warning for the entire global economy, you have a whole bunch to pick from right now. “Dr. Copper” just hit a six year low, Morgan Stanley is warning that this could be the worst oil price crash in 45 years, the Chinese economy is suddenly stalling out, and world trade is falling at the fastest pace that we have seen since the last financial crisis. In order not to see all of the signs that are pointing toward a global economic slowdown, you would have to be willingly blind. In recent months, I have been writing article after article detailing how the exact same patterns that happened just before the stock market crash of 2008 are playing out once again. We are watching a slow-motion train wreck unfold right before our eyes, and things are only going to get worse from here. Continue reading »
“With so many retail investors in China’s stock market, a collapse of share prices affects people’s savings, incomes and welfare. Many no doubt invested because they were confident in the government’s capacity to rescue the market. This may explain, in part, why Beijing intervened so quickly when the market plummeted. Still, while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market.”
The quote featured above is from an FT op-ed penned by none other than everyone’s favorite bazooka-wielding, ex-Goldmanite Hank Paulson and as you might have gathered, there’s something particularly amusing about the former Treasury Secretary’s message to China. Continue reading »
On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.
We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.
Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation
Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.
JPM conclusion is actually quite stunning:
This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).Continue reading »
After a modesly positive open, Chinese stocks have pushed back into the red after Chinese business sentiment collapsed in July. The MNI China Business Indicator fell a straggering 8.8pts to 48.8 in July (below 50 signifying pessimism) – the lowest since January 2009. It appears the encouraging bounce after the massive creduit injections into June has been eviscerated and future expectations also dropped 6.4 to 54.1 in July (below the long-run average). While bad news is good news for much of the rest of the world, for China, as it continues to try to project a strong underlying economy to sustain its still extremely rich stock market, bad news is bad news.
Weakest business sentiment since Jan 2009…
and stocks are not getting a bounce from the need for moar stimulus that this implies…Continue reading »
Chinese Gold reserves jump 604 tons from 1,054 tons last reported in 2009 to 1,658 tons. Many gold observers ask: “Is that it”? Since 2009 China has mined over 2,000 tons of gold and imported over 3,300 tons of gold through Hong Kong*. Where did it all go?
Yes, “timely measures” or, as the emergency plunge protection deployed by the PBoC is called outside of China: “unprecedented government intervention,” or perhaps more appropriately “outright manipulation.” Continue reading »