The Asian Crisis

[Aman A.K.A. Ahamburger]

I think this is filed under the, "no shit Sherlock" category?

China Has a Massive Debt Problem

China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.

President Xi Jinping’s government aims to wind down that burden to more manageable levels by recapitalizing banks, overhauling local finances and removing implicit guarantees for corporate borrowing that once helped struggling companies. Those like Baoding Tianwei Group Co., a power-equipment maker that Tuesday became China’s first state-owned enterprise to default on domestic debt.

Now hold that thought, and consider this: China’s also trying to prop up a $10.4 trillion economy that’s decelerating and probably will continue to do so through 2016, or so says the International Monetary Fund. The economy expanded 7 percent -- the leadership’s growth target for this year -- in the first quarter, the weakest since 2009 and a far cry from the 10 percent average China managed from 1980 throgugh 2012.

I seem to remember someone around here talking about fantasy Island a lot at one time. Well there you have it, China is on a collision course to learning how reality works.

[tyfighter3]

Yep, it looks like China has lost their Balancing pole on that tight-rope. I wonder how the US Company's that do Business with them will come out, let alone the Countries that do?

[Aman A.K.A. Ahamburger]

It will be interesting to watch it all unfold, that is for sure - talk about a banking panic starting in the east....

What makes me laugh right now is reading these stories about how these defaults are a good thing.. Yes, China opening the short selling market while simultaneously letting state owned firms and massive real estate companies default is a good thing alright..

[tyfighter3]

It's easier for them to write off their debt on company's than for them to do it for themselves.

[Aman A.K.A. Ahamburger]

I hear ya. That's what they think anyway. The idea that there is an easy way out of this is the funny part to watch.

[Aman A.K.A. Ahamburger]

Even the banks in China know the party is all but over.. Banks in China disobey order to support housing market

The bursting of China’s housing bubbleAs the economy slowed down, it was obvious that these sectors would also decelerate. But the slowdown in real estate has been much sharper, and now threatens a new front that could further add to the economic dilemmas facing the Chinese government.For it seems that the property bubble is clearly over in China, at least for the time being. Real estate prices in many Chinese cities have been falling continuously for at least seven months, despite several rounds of quantitative easing and various policy measures designed to boost the market.According to the National Bureau of Statistics, total property sales in China fell by 7.6 per cent in 2014. New land purchases by developers fell by 31.7 per cent year-on-year in the first two months of 2015........

[Aman A.K.A. Ahamburger]

Anyone remember how much of a canary in the coal mine Vegas was?

Wynn Macau Dips 7% as Parent Cut Dividend on City’s Casino Risks

[Aman A.K.A. Ahamburger]

I'm sure the Chinese markets are going to just love that latest round of interest rate cut. Of course this is completely ignoring what is really going on - like why they have to cut rates. But hey, lets keep pumping that debt bubble up!!


-Over Ten Billion Square Feet of Chinese Housing Are Empty
-“China is in a hard landing now”
-China gets backed into a corner by the ‘Impossible Trinity
-China exports unexpectedly fall in April

The great fall of China

Investors, many of them novices, have borrowed the equivalent of a quarter of a trillion dollars (up 50 per cent in three months) to play the market. Meanwhile it’s not unusual to see crowds gathered around sidewalk stalls where self-professed market experts offer stock tips like this: “When a Communist Party chairman takes office, I buy stock in companies from his hometown.”

Given the exuberance, you might think China’s economy is in great shape. But, in the eyes of Anne Stevenson-Yang, a highly regarded China expert, the situation is dire. As she recently warned at a conference organized by the Center for Strategic and International Studies, China faces one of two paths: either a drawn-out economic malaise, “a whimper,” or an acute crisis, “a bang.”

The director of research at J Capital, a firm whose clients are international investors, Stevenson-Yang is regularly sought for her understanding of Chinese industries and the health of its economy. She has lived in China for more than 25 years, where she’s earned a reputation for her extensive on-the-ground research. And what she’s seeing flies in the face of the stock-market hysteria. “The striking thing about China,” she says in an interview, “is how depressed everyone is.”

[Aman A.K.A. Ahamburger]

Keep spending those reserves! Keep cutting those rates!

China’s Economy Not Getting High on Stimulants

China’s got that sinking feeling. It will have to paddle harder to stay afloat.

The latest batch of data out about China’s economy Wednesday showed little sign of improvement despite several slugs of stimulus in recent months. Industrial production grew 5.9% in April, a step up from March’s 5.6%, but otherwise the slowest pace since the end of 2008. Fixed asset investment grew just 9.6%, versus 13.1% in March. And total outstanding financing grew just 12.4%, the slowest expansion on record, as banks fail to respond to easier lending conditions....

...Housing starts, however—a critical engine for growth in recent years—fell 16% in April from the year earlier. That is weak, but slightly less so than previous months. Buyers soaking up housing in China’s most vibrant big cities might be encouraging developers to start new projects again.

Nationwide, empty housing continues to be a burden. The inventory of unsold housing expanded 24% from the year earlier. And car sales, a key part of the economy that had remained resilient, grew just 3.7% in April, the slowest in more than two years.

[Aman A.K.A. Ahamburger]

It's safe to say that western banks know just how bad the situation in China is. The western media publications are trying to spin that the real estate market has bottomed in China, not unlike they did in 2008. The reality of the situation...

China home prices fall 6.1% year-on-year in April

Average new home prices in China's 70 major cities fell for the eighth consecutive month in April from a year earlier, down 6.1 percent....

....China's real estate investment growth continued to slow in the first four months of 2015 to the lowest since May 2009 as new construction weakened, and economists expect it to improve only after excess housing inventory is slowly worked off.

As we know from the data in the last post, housing inventory actually GREW by 24% over the last year. If fact, we know from the data that the only way for the backlog to clear up is if all construction stops. We know from common sense that if all construction stops, the economy falls off a cliff.

So in the classic, "catch 22" situation - to keep their property market growing they are forced to make riskier loans, with less down, and start relying on complex financial tools to try and mask the seriousness of the debt levels that is already choking off growth.

In other words, the story is the same as on the "Meltdown" documentary that I watched last night about the first half of the global housing bust. Funny thing is, I don't think the film makers knew they were making the first of a two part doc.

[Aman A.K.A. Ahamburger]

Nothing signals confidence in the market like when for the first time in history, China's sovereign fund cuts stakes in banks

[Aman A.K.A. Ahamburger]

Gee, I wonder why the sovereign fund has pulled money from the banks in China?

China Debt Markets Show Stress Amid Duck Supplier's Default

Just as Premier Li Keqiang is stepping up efforts to get more funds to smaller companies as economic growth slows, banks are balking. They have reduced lending for four straight months after bad loans jumped last quarter to the worst since 2008. China’s junk bonds were rattled last week after a bottle maker became the fourth company to default on local notes.

“Banks are now cautious and think it’s better to put their excess cash with the central bank than putting more money into the real economy,” Xuanlai He, a credit analyst in Singapore at Commerzbank AG, said by phone. “We can expect to see more defaults especially among the small- and medium-sized enterprises, which means there’s new emphasis on credit differentiation.”

Defaults Spread

An official at Zhong’ao who wouldn’t give his name declined to comment on the company’s debt repayment due next week.

Zhuhai Zhongfu Enterprise Co., a bottle maker in China for Coca-Cola Co. and PepsiCo Inc., repaid only 35 percent of the 590 million yuan principal for securities that fell due last week. In April, Cloud Live Technology Group Co., a restaurant operator-turned-Internet firm, failed to meet bond obligations and Baoding Tianwei Group Co. became the nation’s first state-owned enterprise to default on domestic debt.

In a sign that the stresses are affecting fundraising elsewhere, Hebei Iron & Steel Group Co. canceled a 1.5 billion yuan offering of debt that had been scheduled for June 1 citing market volatility, according to a statement to Chinamoney.

Defaults are spreading after Shanghai Chaori Solar Energy Science & Technology Co. last year became China’s first to miss payments on onshore bonds. Foreign investors are increasing scrutiny after Kaisa Group Holdings Ltd. became the first Chinese developer to default on its U.S. currency debt in April.

[Aman A.K.A. Ahamburger]

China is literally just one giant leveraged mess..

China in a Bubble Says BNP Paribas as Shanghai Tops 5,000

“How long the bubble can continue to inflate is the key question--but necessarily unanswerable. Inherently irrational, bubbles usually last longer than expected,” the bank says. “The good news is that the inevitable bursting of the bubble is unlikely to have too pronounced a macroeconomic impact. Equity bubbles are less pernicious than credit and housing bubbles, where fixed liability and long duration ensure a much longer-lasting fallout.” The bad news? “China is already laboring under the influence of an epic housing and credit market bubble, which has only just begun to deflate,” BNP says.

[Aman A.K.A. Ahamburger]

Forget the escalation in the Ukraine over the last 48 hours. Forget that the I.S. is about to open a new front in central asia. Forget Greece. This is - by far - the biggest news that has emerged over the last couple of days...

China’s MSCI reality check is too big to ignore

Now cracks are appearing as debt keeps being rolled over. Debt restructuring has proven problematic, and analysts say credit risks are beginning to choke the banking system.

Société Générale notes that while new bank loans grew by 900 billion yuan in May, outstanding loans didn’t move up at all. This is because new credit is now being used to cover liquidity tensions instead of funding productive investment. With interest costs now amounting to 15% of GDP, this is understandable.

Further, they add, credit risk is getting in the way of monetary-policy transmission, and what is needed now is debt restructuring, not more easing.

China has made efforts at such debt restructuring but has done little to put in place a regime for dealing with insolvency. Last week, the central government doubled the quota on its local-government debt swap, bringing the total to 2 trillion yuan. After earlier resistance from banks, this time the government resorted to ordering the banks to buy bonds. And this comes just weeks after banks were told not to stop lending to insolvent state projects.

It promises to be a fraught process as China seeks to remove the implicit guarantee on state debt without undermining wider confidence in the banking system. Signs are that China will struggle to keep easing monetary policy, never mind avoid a banking crisis.

As a result, investors need to pay more attention to another aspect of China that is too big to be ignored: its debt.

[Aman A.K.A. Ahamburger]

Greece? How about the "housing market is stabilizing". If fact, it's getting so strong we have to lower interest rates because our stock market is popping.

Does China's Central Bank Know What It's Doing?

If you think the U.S. Federal Reserve has a problem communicating its intentions, spare a thought for the People's Bank of China. In the space of a few days, China's central bank has changed policy twice, and the message was largely unintelligible both times.

Does that matter? One answer: Over the past two weeks, thanks partly to confusion over monetary policy, China's stock market has suffered its biggest drop in almost 20 years....

...On Thursday, with the stock market already down from its peak, the central bank subtly eased policy with a technical maneuver involving so-called reverse-repurchase agreements. This left investors wondering, "Is that it?" They'd thought a cut in interest rates was coming; when they concluded it wasn't, stocks plunged. Afterward, on Saturday, the PBOC not only cut the benchmark interest rate but also eased its reserve requirements -- the first time it has done both at once since 2008.

So the central bank went from a surprisingly mild adjustment to a surprisingly dramatic one with a stock-market crash in between....

...The messages from China's financial authorities have been mixed in other ways, too. They've been trying to fine-tune the rules on margin trading -- tightening them in some respects, relaxing them in others. They want to discourage stock-market speculation with borrowed money -- but without causing the market to tank. They recognize the dangers of inflated stock prices -- yet continue to talk the market up. The PBOC has been trying to expand the flow of lending to enterprises -- while also squeezing the supply of short-term liquidity to banks. And so on.

So in other words, the CPC is a dog chasing its own tail trying to spin their way out of a debt and liquidity trap..

[Aman A.K.A. Ahamburger]

Jun 29, 2015 10:19:02 GMT -5 Aman A.K.A. Ahamburger said:

So in other words, the CPC is a dog chasing its own tail trying to spin their way out of a debt and liquidity trap..

China’s central bank can no longer save China

The big problem is that the People’s Bank of China explicitly targeted the plunging stock market, and yet the Shanghai Composite SHCOMP, -5.44% kept falling, revealing that the PBOC was not in control. Even after Tuesday afternoon’s sharp rebound, the index is still flirting with bear territory, taken as a 20% drop from the recent high.

Now that the PBOC has played its hand — and revealed it to be a weak one — the next question is: What else is beyond its control?

Better question, what is in their control??..

The apparent feebleness of the PBOC is all the more stark when we have grown so used to big-country central banks, from the ECB to the Bank of Japan, flooding asset markets with liquidity to force them higher.

One explanation is that the basic transmission of monetary policy is no longer functioning in China.

According to Daiwa Research, China is now facing a liquidity trap due to the size of its debt and deflation pressures, meaning that traditional monetary tools such as bank lending are not working.

This is pushing the PBOC to ever-more-drastic approaches to monetary policy. Last weekend’s double whammy of rate and reserve-ratio cuts came on the heels of a scrapping of the 75% bank loan-to-deposit ratio, a policy that had been in place since 1995.

But perhaps the most critical reason China’s central bank has less firepower than its peers is because the economy is leaking money.


This situation arises because Beijing is increasingly coming up against the “Impossible Trinity,” as noted earlier in this column.

The Impossible Trinity is a key economic theory that states that if a government has exchange-rate and interest-rate targets as well as free capital flows, it can only control two — but not all three — factors at the same time.

As China cuts interest rates and seeks to maintain a loose peg to the dollar DXY, +0.14% it is unable to control capital flows.

Daiwa notes that money outflows have been accelerating, while at the same time, the PBOC has continued to intervene in the foreign-exchange market to stabilize the yuan. The problem here is that by buying its own currency, it effectively commits an act of tightening and defeats its own monetary-stimulus efforts.

Meanwhile, further Chinese rate cuts risk being counterproductive as they could accelerate money outflows, particularly if the U.S. Federal Reserve is now finally poised to move in the opposite direction with rate hikes.

[Aman A.K.A. Ahamburger]

After a 30% drop in Shanghai over the last 3 weeks, China says hostile foreign forces blamed for bursting stock market bubble. But....the housing market is "recovering". This market plunge couldn't be because the monetary system is broken and companies are trying to raise capital anyway they can, nope - no way.

In a sign that things are really getting out of control for the Communists, China adopts sweeping national-security law.

[Aman A.K.A. Ahamburger]

In one of the most brilliant moves in financial history, China Tells Investors: Go Ahead, Bet the House on Stocks - literally.

Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities. That means if share prices fall enough, individual investors who pledge their homes could be at risk of losing them to a broker.

[Aman A.K.A. Ahamburger]

I'm pretty sure something very disruptive was going on in Europe's banking system at this time as well...

China Brokers Dust Off Wall Street’s Playbook From Crash of 1929

On Wall Street in 1929, it was the great banking houses of J.P. Morgan and Guaranty Trust Company.

In China today, it’s names like Citic Securities Co. and Guotai Junan Securities Co.

They’re separated by 86 years and 7,300 miles, but Chinese financiers are turning to the same playbook used by their American counterparts to fight a crash that’s wiping out stock-market fortunes on an unprecedented scale.

Investors in China are hoping it works out a lot better this time around.

When five of America’s most-powerful financiers met at the House of Morgan at 23 Wall Street on Oct. 24, 1929, the immediate impact of their plan to pool resources and prop up the market was encouraging: the panic of Black Thursday gave way to a recovery and the New York Times lauded the bankers for putting a floor under share prices.

The boost to confidence didn’t last long. The rout resumed by the following Monday, with the Dow Jones Industrial Average losing 13 percent. The gauge would go on to drop another 34 percent over the next three weeks, as the attached chart shows.

The support measures in China may also have a fleeting impact, according to Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong.

A group of 21 Chinese brokerages pledged on Saturday to commit 120 billion yuan ($19.3 billion) to a large-cap stock fund, designed to stabilize shares after the biggest three-week rout in the Shanghai Composite Index since 1992. The move coincided with a flurry of other market-boosting measures, including a halt to initial public offerings and regulatory moves to discourage short sellers.

With daily turnover on Chinese markets approaching 2 trillion yuan, the support fund may be too small to have a meaningful long-term impact, according to Hong. It also does little to boost confidence in small-cap stocks, some of the biggest losers during the rout.

“This 120 billion yuan won’t last for an hour in this market,” Hong said by phone from Beijing Saturday.

[Aman A.K.A. Ahamburger]

One would think that turning the whole economy into a subprime crisis 2.0 over the last week, while having enough empty floor space to completely cover Madrid, would be a big enough hurdle. However, the biggest problem is that for all their efforts, the commies haven't truly addressed the root of it all.. The fact that debt levels have choked off growth on all angles. Stay .

China Stock Plunge Leaves Market More Leveraged Than Ever Before

The outstanding balance of margin loans on the Shanghai and Shenzhen bourses climbed to 4.4 percent of overall market capitalization on July 2 from 3.6 percent on June 12, before the rout began, as the attached chart shows. The data doesn’t include unregulated borrowing, which Bocom International Holdings Co. estimates at around $322 billion. That would increase the debt to market cap ratio to more than 9 percent.

[bimetalaupt]

,

WHAT MORE CAN YOU SAY: THEIR MARKETS HAVE LOST 30% THIS YEARS. NATION AL TRADERS TRADE ON THE LAST WORK OF THE NATIONAL CHINESE PRESS NOT PE OR PEG!!!!

FLOW5 AND I Talked about how under capitalized the Banks were.  Again it is a house of cards and un-used homes.

Thank-you for par exultant thinking and data: God Bless you and yours,

Bruce aka BiMetalAuPt  

[Aman A.K.A. Ahamburger]

Déjà vu, eh ? Maybe it's because I'm young, but I just can't believe how the mistakes of the past... ah well, opportunity for the contrarian and all that..

Thank you for the kind words. Ditto.

Talk about trading? Or the end of the slow motion plane crash... Over 20% of listed China stocks now in trading halt.

It's truly amazing to watch these commies try to stop the inevitable.. Next thing they will be arresting stock traders and individual investors as a "matter of national security".. The special unit in charge of arrests - the Plunge Protection Team.

[Aman A.K.A. Ahamburger]

We have now broken a record for China.. The next step, the entire market will be halted??

China companies rush to suspend their shares; 40% of all stocks now in halt

Oh and I wonder what people that wanted to sell their homes when the market "was" in trouble will be thinking now that the market has "stabilized"? Oh ya, sell!!

Further proof that systemic issues are too big for ANY TYPE of intervention, even when the whole thing unfolds in slow motion.

[tyfighter3]

The people of China want to be capitalist but the Ruling Party are What? That's the Reason why they are in the mess they are in now. It just can't work.

[Aman A.K.A. Ahamburger]

That's exactly it. The fact is that communism has never worked - anywhere. China is the next on that list and it's fitting because even MAO knew Communism was never a long term plan, lol...

I do love how in a nation of 290 million traders - most of which are small retail clients - they think having companies billions in the market to create a 10% jump in 2 days is not going to do anything but create a larger exodus when 30 or 40 million traders recover some of their losses.

I mean, the money people have lost on margin in the last three weeks must just be staggering!

[resolution]

Looks like an awful lot of margin financing. It's really ramped up this year.  I would hate to be the little guy that thought the government was guaranteeing the market and borrowed to invest a few months ago.

Longer term investors look ok since they are still up 75% for the year.

[Aman A.K.A. Ahamburger]

The thing about China's market is that it's not old enough for their to have been any long term investors yet. 85% of "investors" in China are small retail clients, they don't have a financial industry like we do in the west. The market still has yet to hit 2007 highs, so essentially every investor in China has gotten screwed. Then there is this..



The idea that because the the market has "recovered" the last two days with CPC essentially locking it down and dumping cash into half the market is pure lunacy - new car sales today is the reality.

Their banking system is completely broken and compared to the size of their economy now, the trillions in reserves is nothing but a drop in the black hole of debt that is the Chinese economy.

Stay because their way out is the global conflict that is right in the path of China's new silk road they have to create to save themselves over the long term.

[Aman A.K.A. Ahamburger]

Oh, some reading on the Chinese economy - if you haven't read these that is.

-The Latest Numbers From China Show the Government Is Facing a Huge Challenge

-China's economy is worse than Beijing admits and demand is plunging for the first time on record

[Aman A.K.A. Ahamburger]

Jun 29, 2015 10:19:02 GMT -5 Aman A.K.A. Ahamburger said:

Greece?

Forget Greece, China's Great Depression is the real risk

The kind of slump that followed the 1929 Wall Street crash can no longer be ruled out, says Jonathan Rogers.

You wait ages for a crisis and then two come along at once. It’s now all about China and not Greece and the former’s recent stock market price action over just a few days resembles the kind of free-fall we haven’t seen since the worst of the global financial crisis.

I wonder if Nobel prize economics laureate Paul Krugman is smiling right now since he has for quite a few years warned of China facing its “Great Wall” in the form of an economic collapse...

... you have to wonder if Mr Krugman’s bold call will be vindicated, since this is the man who predicted with uncanny accuracy the Asian financial crisis of the late 1990s just months before it kicked off.

China’s staggering stock market implosion over the past few weeks bears the hallmarks of the classic 1929-style Wall Street Crash, with euphoria followed by panic and despair.

That infamous collapse heralded the Great Depression, although the exact causal relationship between the Crash and the subsequent economic slump is still a matter of debate amongst economists: did A (the crash) cause B (the slump) or did it merely anticipate it?

THERE ARE ECHOES of 1929 in what’s happening in China’s stock market: stratospheric price rises in a short period of time, funded by margin lending and a mass of retail investors.

Many of these investors have never owned stock before but were using the magic tool of leverage to climb onto a bandwagon driven by the relentless engine of greed. The latter has been replaced, for the time being at least, with its bedfellow, fear....

...In response to the rout the Chinese financial authorities have come up with desperate measures in a bid to push markets back up to key support levels. The announcement made last Wednesday by the People’s Bank of China that it would provide market liquidity via any means, including collateralised lending and bond issuance had echoes of ECB governor Mario Draghi’s promise at the height of the eurozone debt market crisis to do “whatever it takes” to stabilise markets.

Those words had the intended effect and brought stability to the eurozone debt markets, effectively ending the crisis. Will the same thing happen in the Chinese equity markets in response to the PBOC’s intervention? I’m not sure. Unlike bond markets, which are largely in the hands of institutional investors, a critical chunk of China’s listed equity is in the hands of retail buyers, who are easily infected by panic. Halting margin calls may ease the turmoil, but should the PBOC push markets back up many retail investors might simply see it as an opportunity to minimise losses and rush for the exits...

...the classic capitulation of the Kindleberger-Minsky model of financial crisis in this column before.

There are five stages to this model: stage one involves a displacement, such as a war, the introduction of new technology or financial deregulation. Then comes a boom, such as we have seen in Asia since the region’s financial crisis. Stage three involves leveraged growth, based on underlying euphoria. Stage four involves industry insiders selling, before speculators rush for the exits in stage five, which is characterised by panic and revulsion.

It’s not hard to argue we’ve seen all these stages in China and that we are now at stage five....

...The paramount concern for China’s leaders is averting social unrest. It’s long been received wisdom that this is a threat in China should GDP growth fall below 7% and stay there for a prolonged period. No one mentioned a stock market collapse as the potential propagator of social agitation, although perhaps as the Chinese stock markets pushed into three-fold gain territory in barely a year it should have been flagged.

If Krugman is right, then we will shortly be witnessing China’s equivalent of the Great Depression unfold. That has huge implications for global financial markets, since China has been the world’s growth engine for a long time, contributing 23% to global GDP growth from 2000-2013.

But to stay with the topic of China: will this usher in the logical conclusion of the tenet offered in so-called “modernisation theory?”

The theory holds that prolonged economic prosperity brings with it demands for greater political freedom. Could crisis in China bring demands for the replacement of authoritarianism with democracy? That won’t be music to the ears of the Chinese government, but it’s something that investors need to bear firmly in mind.

[Aman A.K.A. Ahamburger]

The only piece of fiction this week bigger than China's GDP number... Wait, China's GDP number this week was the biggest work of fiction of the last five years - at least..

There's a dead giveaway that China's growth numbers are fake

"Singapore's GDP declined 4.6% last quarter," Miller said. "Singapore's numbers you can trust. That's a good sense of how much the Chinese economy has slowed down."

Singapore's GDP was dragged down by a huge slowdown in manufacturing — down 14% in the second quarter of this year. And this swoon was caused mostly by a lack of demand from its neighbor, China.