2012-07-31

China subway frenzy

In Journey to the West, whenever the Monkey King shows up and announces his desire to dispense justice on some devil, the devil's underlings rush to their leader saying, "Disaster! Disaster!" Whenever a central government bureaucrat learns of a new subway plan, they ought to do the same.

Subway costs feared to go off the rails
"Construction will cost at least 1 trillion yuan in total," said Chen Xunru, a member of the Chinese People's Political Consultative Conference, who conducted research into subway construction and delivered a speech on his findings to the CPPCC's annual meeting in March.

Experts are concerned that the construction could strain the resources of some city governments and plunge them heavily into debt.

They are also worried that the cities may not have taken account of the possible long-term costs of operating and maintaining the network. Moreover, there are concerns that the large-scale move toward construction has resulted in a shortage of trained professionals, which in turn could lead to reduced safety levels.
The latter costs are the unseen costs associated with government directed investment, be it Chinese or American. Whenever there's an investment or spending surge, there's often not enough qualified workers (and often equipment), or if there are, they are pulled off of private sector work, raising costs in the economy.

In the case of subways, a political desire for prestige projects is driving malinvestment:
However, the belief that a subway system is a symbol of a modern metropolis means smaller cities are also keen to build. "They see subways as their chance to polish their civic image and look like a modern city," he said.

Amid the raging competition between many similar-scale cities, some lost their ability to think rationally. "Some cities are mapping subway networks that will cost their entire combined income for five years," he said.

According to Chen, a large proportion of the funds come from the government - usually around 40 percent - and bank loans. "Subways can barely attract investors, because the (low) ticket prices are set by the government to benefit the public," he said.

...The fact is that it's difficult to make money from subway operations, and only Hong Kong's metro system is profitable, he added.
Even in China's densely populated cities, subways are not profitable.
Ying Minghong, board airman of Shanghai Shentong Metro Group Co, said that only Line 1 is profitable. The income from ticket sales and advertising covers its daily operating costs, but is not enough to pay for maintenance or the interest on its loans. The city's other lines are in debt.

..."I doubt there are more than five people in our company and the local government who know how much money the Shanghai metro loses every year. The problem is that it's not a simple mathematical question of adding the government's yearly subsidy and subtracting the metro's annual operating costs," said Yang.
And let's not forget the government subsidies for car purchases. In a drive for GDP growth, the government is counteracting it's own policies.

New Chinese stimulus is a "Great Leap Forward"

Even the Chinese financial press is skeptical of the latest infrastructure projects, such as Hubei's plan to build 1185 km of highway over the next eight years as part of a ¥4 trillion plan for a 9 province expressway, dubbing the new stimulus an infrastructure investment "Great Leap Forward."

These projects need financing and the financial system is already strained from top to bottom: Chinese are draining money supply through dollar hoarding and the banks are seeing rising NPLs. it was the 2008 stimulus that sucked capital out of the private economy and sent "black market" interest rates to over 100% per annum in Wenzhou. That same stimulus left many non-performing loans on the books of banks, some already qualify as NPL, with others becoming non-performing as the economy weakens. Another round of the same type of stimulus will be even less effective than the 2008 stimulus, with fewer profitable projects left on the shelf, thus even more NPLs down the line.

This is central planning at its worst and the net result will be inflation. Exports to Europe and America weak and market sentiment on the yuan has turned. The seeds for a serious renminbi devaluation are being planted.

基建投资“大跃进” 湘鄂赣皖共建“祖国立交桥”

Here's English coverage:
China's local governments go their own way
Beijing’s announcement came after the bold $130 billion investment plan revealed by Changsha last week, a large industrial city in central China. There are doubts about whether the city had enough financial firepower to implement the ambitious plan.

“Financing is a problem,” said Zhang Zhiwei, Nomura’s Chief China economist. “To what extent this plan can be realistically implemented largely depends on access to bank loans,” he told the Financial Times.

Answering the question of financing is the WSJ: Chinese Banks Step Up Lending to Local Governments Amid Stimulus
The shift reflects a change in priorities for China as growth has slowed. To support the economy, Beijing has turned to boosting investment such as infrastructure projects which are often overseen by local governments and funded through lending by state-owned banks.

Much of the lending is channeled through local-government financing vehicles--platforms set up by those governments to get around legal limits on their direct borrowing from banks.

"Last year we selected one out of 10 platforms to lend to, but we can choose three to five out of 10 now," a banker at a major state-owned bank told Dow Jones Newswires.
Note the changing priorities:
Last year, Chinese banks abruptly cut back on lending to local governments, as concerns mushroomed that they had borrowed too much and couldn't keep up with payments. But now, responding to new policy guidance from above, Chinese banks have begun to loosen up.

However, banks and regulators are still being more cautious than during the stimulus-driven lending binge of 2009 and 2010, trying to differentiate between credit-worthy local-government projects and others.
That's like differentiating between subprime borrowers. The credit worth borrowers are the private businesses starved of capital. Instead, China will once again begin a massive wave of capital destruction. At some point, even financial repression cannot hide the mounting losses.

China changes junk shares regulation

New rules will only allow a 1% price increase on the day and a 5% price decline for shares marked for Special Treatment (ST). What qualifies a share for special treatment? One major cause is two straight years of losses. Three years of losses can lead to delisting.
Junk shares plunge after Shanghai bourse announces new proposal

This Chinese article 上交所:细则明年初实施 不排除调整风险股涨跌幅比例 states that there are 62 firms with 1-year of losses (FY 2011), 15 companies with two years of losses, and 1 firm with three years of losses and facing delisting.

2012-07-29

China launched ¥4 trillion stealth stimulus in May

So says Lang Xianping on his Weibo account. He says the central government launched the stealth stimulus in May, which would help make sense of the June uptick in housing and PMI. Local governments have been furiously implementing the stimulus: Changsha (Hunan) has an ¥829 billion stimulus spread across 195 projects. Xian is planning 9 more subway lines, in addition to the 6 already in operation or planned, which will combine for a total 15 lines and 550 kilometers of rail. Guizhou suddenly announced ¥3 trillion spread over 2300 tourism related projects.

Lang Xingping closes by saying this is like giving a terminally ill patient a shot in the arm, after a period of excitement, [the economy] will sink into an even deeper crisis and the bill for these chaotic investments will be paid by the common people.

See China Cities Roll Out Stimulus as Changsha Targets $130 Billion for English coverage.

郎咸平
中央政府五月悄悄推出新四万亿之后,一如所料,地方官员也开推政绩工程,疯狂建设。例如,长沙自行推出高达8290亿元的195个项目,西安要在规划的六条地铁之外再建9条地铁,贵州竟要投资3万亿发展旅游。这情况就好比给病入膏肓的病人猛打强心针,最终会在短暂兴奋后,陷入更深危机,这些乱投资又得老百姓买单。

No euro short squeeze coming


2012-07-27

Birthrates decline, as socionomics forecast

First the thesis:A Socionomic View of Demographic Trends
When aggregate feelings of friskiness, daring and confidence wax, people engage in more sexual activity with the aim of having children. When these feelings wane, so does the desire for generating offspring. It takes about nine months between the procreative impulse and a child’s birth, which is why, at least at market bottoms, annual data on births lag annual data on the stock market by one year. Figure 2 shows the same data, lagged by one year to reflect conceptions. The result is not an extrapolation or theory, nor is it the result of elaborate exercises in data fitting, as we find so often with hypotheses that demographics drive the economy. We know that a procreative decision or impulse is required nine months prior to a birth, so there is no theoretical presumption in repositioning and renaming this data.10 Now the two major lows line up exactly.

Let’s investigate the relationship at market tops. As you can see from the slash marks imposed upon Figure 2, the rate of procreation has declined prior to major tops in the Dow Jones Industrial Average. This is precisely the same behavior exhibited by indicators of market breath and rates of change for stock averages, which always peak and begin declining before the major blue-chip averages top out. To visualize the similarity, let’s graph the relationship between procreative activity and the success of the broad stock market, not just the blue chips.

Today's news: Americans put off having babies amid poor economy

2012-07-26

Baoshan steel index still trending lower

It's not far from breaching the 900 level now.

Beijing flood damage exceeds ¥10 billion

Although headlines say 37 dead, the total is already 61 and may still rise further. Damage is over ¥10 billion in just one suburb, albeit by far the hardest hit and making up the vast bulk of the losses.
Beijing floods leave 37 dead as more rain forecasted

More rain is forecast, but the forecast is for about 1/20 of what fell on Saturday.

Here's an article looking at the social mood: Chinese government slammed after flood
Fangshan, a rural district on the southwestern edge of Beijing, was decimated by a torrent of muddy floodwaters, raising suspicions that hundreds of dead may still be unaccounted for. A stretch of the G4 expressway leading through the area was submerged under several feet of brown water with dozens of vehicles marooned underneath.

The collective frustration of millions of Chinese is being shared on the country's frenetic Twitter-like microblogging platforms - outpacing the ability of censors to scrub away criticism of the government's response to the rainstorm.
The article goes on to incorrectly time the Wenzhou accident, it was last year.

I've heard of more than 100 cars being submerged at the deepest spots, the bridge that saw waters about 20 feet above the highway and almost to the overpass.

2012-07-25

Chinese tax growth rates plunge

Tax revenues are up in China (except for property sector taxes), but the growth rate has plunged from almost 30 percent to less than 10 percent due to tax cuts and a slowing economy.

Slowing Economy Sharply Weakens China's Tax Revenue Growth
Tax revenues rose only 9.8 percent year-on-year to reach 5.49 trillion yuan (866.76 billion U.S. dollars) in the world's second-largest economy during the first six months, according to the MOF.

Elsewhere: China to Expand Value-Added Tax Reforms
Under the reform program, which was implemented in Shanghai at the start of this year, certain service sectors would move from paying a business tax that is levied on total revenue, to a value-added tax, lowering their overall tax burden.

The reform is seen by analysts as part of a patchwork of measures to boost growth in China's slowing economy, while advancing long-term reform goals such as developing the services sector.

Beijing mayor and deputy mayor resign

Beijing's mayor and deputy resign
Beijing's mayor and his deputy have resigned from their posts following the 34th session of the Standing Committee of the 13th Beijing Municipal People's Congress.

The resignations of Guo Jinlong and Ji Lin were accepted by the committee during the meeting on Tuesday morning.
There's been a lot of negative sentiment expressed on the Internet since Saturday's deadly rains, made deadly by the lack of warning and very poor drainage systems.

Yuan replacing Hong Kong Dollar

Yuan payments on rise while HK dollar slips
The Hong Kong dollar, which in 2010 was in seventh place, had dropped to 10th as of June, and has been overtaken by the Swiss franc, Swedish krona and Singapore dollar.

Chan Tze-ching, a senior adviser with the Bank of East Asia (SEHK: 0023), said the Hong Kong dollar's drop might be related to the growth in yuan trade settlement in Hong Kong.

While the yuan is not yet fully convertible, China has moved over the past three years to ease the rules to encourage more international firms to use its currency to settle trade and investments.

2012-07-24

Greentown still on the edge of bankruptcy

China still has yet to see a major bankruptcy due to the real estate tightening. If the government wins its battle with the market, Greentown is a likely casualty.

Red Flags Fly at Indebted Developer Greentown
The grim reaper was standing at the door in December when Shou Bonian, CEO and vice chairman for real estate developer Greentown China Holdings Ltd., was saved by an angel investor.

Rival developer SOHO China swooped in with 4 billion yuan for a 50 percent stake in a Greentown commercial project on The Bund in Shanghai that, Shou said, was just one day away from deadly default.

Shou had pleaded directly with SOHO Chairman Pan Shiyi. "If you don't sign," he warned him, "I'll die."

A Shou colleague recently told Caixin that without the rescue deal Greentown – one of China's 10 largest property developers – "truly would have died."

Yet today, more than six months later, indebted Greentown is still struggling to survive.

Chinese netizens angry about Beijing storm drains

The Beijing government calls the weekend's storm unprecedented, but actually there were similar storms last year. Other parts of the city saw more serious flooding, but in my part of the city, the flooding was similar to what happened last year. And also what happened two weeks prior......

No Excuse for Response to Beijing Storm
This is not the first time Beijing has had an "unprecedented" rainstorm. On June 23, 2011, Beijing was also inundated. It was also a day as dark as night and traffic ground to a standstill. However, just one year later, the government is again using the term.

The city's underground sewage system is directly responsible for the flooding. Within of Beijing, it seems that the Forbidden City still has the best drainage. For a system built during the Ming and Qing dynasties, with extra work done after 1949, it works effectively despite its 600-year age. No matter how heavy the rain, there is no flooding in the Forbidden City. I wonder if one should celebrate the wisdom of our ancestors or be ashamed of our own stupidity?

There was a wave of skepticism regarding the quality of Beijing's drainage system in 2011. The Beijing Drainage Group admitted that only the drainage systems of the eastern and western sections of the city moat, Tiananmen Square and the Olympic Park are up for the challenge of once-in-a-decade rainfalls, while most other areas can f

2012-07-23

U.S. government stages Batman theater attack to further gun control legislation

Americans are always coming up with conspiracy theories about historical events, but it usually takes time for a conspiracy theory to develop. In the case of the Batman shooting, it only took two days for a full conspiracy theory to develop and spread far and wide.

“As I was sitting down to get my seat, I noticed that a person came up to the front row, the front right, sat down, and as credits were going, it looked like he got a phone call. He went out toward the emergency exit doorway, which I thought was unusual to take a phone call. And it seemed like he probably pried it open, or probably did not let it latch all the way. As soon as the movie started, somebody came in, all black, gas mask, armor, and threw a gas can into the audience, and it went off, and then there were gunshots that took place.”

– “Witness: Someone let gunman inside Colorado movie theater,” CNN, July 20, 2012

Colorado Batman shooting shows obvious signs of being staged
A decent AR-15 rifle costs $1,000 or more all by itself. The shotgun and handgun might run another $800 total. Spare mags, sights, slings, and so on will run you at least another $1,000 across three firearms. The bullet-proof vest is easily another $800, and the cost of the bomb-making gear is anybody's guess. With all the specialty body gear, ammunition, booby-trap devices and more, I'm guessing this is at least $20,000 in weapons and tactical gear, much of which is very difficult for civilians to get in the first place. Comment added: Don't forget the cost of all the training (thousands of dollars) and the bomb-making equipment. Holmes reportedly had 30 improvised grenades, mortars, binary liquids that explode when mixed, wires, exotic bomb equipment... this gets expensive very quickly (even if you can source this equipment!).

The mere manufacture of an explosive booby-trap device is, all by itself, a felony crime by the way. And remember: "Aurora Police Chief Dan Oates said Holmes' apartment is booby-trapped with a 'sophisticated' maze of flammable devices. It could take hours or days for authorities to disarm it,"

THE 'LONE GUNMEN'
Unfortunately, with an administration that has openly claimed a legal right to assassinate Americans without trial and is known to have engaged in a similar, but much larger false flag operation in “Operation Fast and Furious,” you cannot rule out the possibility that this incident is more than a lucky break for the government. Potential echoes of “Fast and Furious” can be seen in Holmes’ purchase of the weaponry utilized; where did an unemployed graduate school dropout find the money to obtain a rifle that costs around $1,250 and an estimated $1,500 in ammunition? One can’t help but ask such questions in times like these.

Right-wing blogs were already up in arms about the UN Arms Trade Treaty, which is coming up for a vote. Here's a post from July 20, the day of the shooting, but posted before the shooting occurred: Will Obama sign the Arms Trade Treaty?

Here's a post from July 10, from Forbes: The U.N. Arms Trade Treaty: Are Our 2nd Amendment Rights Part Of The Deal?

Trust in the U.S. government is as low as it can be and much of the nation is on edge about a UN Treaty that would abrogate American's right to self-defense. Whether the conspiracy is true or not (and there is at least a lot of evidence that suggests this wasn't the work of one man), it has caught fire thanks to negative social mood.

2012-07-21

The end of local government land finance in China?

The Ministry of Finance has begun an investigation into local government land revenues, with speculation that it could lead to the end of local government land revenues. (财政部着手摸底地方土地收入 或为土地财政终结信号) It comes as there's speculation that Hangzhou will become the first city in China to miss its finance targets, as it is reporting negative revenue growth. Hangzhou saw land prices rise 10-fold in the previous decade and its land sales revenue surpassed those of Shanghai and Beijing in 2009.

Hangzhou's target for 2012 land revenue is ¥43 billion, but they've only collected ¥10.6 billion through June. (Three years ago, they recorded a national record with ¥120 billion in land sale revenues.) Hangzhou government revenue was only¥46 billion in the first half of 2012, down 2.7% from 2011. The linked article says the government needs to see revenue grow at 29% to hit its ¥86 billion target for the year. I assume that Chinese government revenues are lumpy and front loaded, since they have achieved over 50% of their target with half of the year gone, but revenue growth will slow over the rest of the year. Even Beijing and Shanghai are running below their targets, but the faster growth rates needed aren't as wild as Hangzhou's 29%. Chinese bureaucrats like to collect more taxes in the first half of the year and then push the receipts into the second half as a cushion. If they have excess revenues in the second half, they push them into the next year. This is not unlike a publicly-listed company that shifts revenues and earnings in order to smooth their earnings numbers.

Nation sees fall in land revenues
China posted significant declines in land sale revenues in the first half of this year, according to data from the Ministry of Finance released on Saturday, but the government has vowed not to relax tightening measures imposed on the property sector.

Revenues from land sales tumbled 27.5 percent year-on-year to reach 1.14 trillion yuan ($180.24 billion) in the first six months, ministry data showed.

However, income from land sales still contributed to about 17.8 percent of the country's total fiscal revenue in the first half of this year, which stood at 6.4 trillion yuan, up 12.2 percent from a year earlier.
A year ago revenues were about ¥5.7 trillion, with land revenue about ¥1.6 trillion, or 28% of the total.

For those looking for a stimulus package, the drop in land sales revenue is running at half a trillion yuan, or nearly $80 billion. That much stimulus would need to go to local governments just to keep their spending on target.

China Local Government Finances Are Unsustainable, Auditor Says
About 60 percent of revenue raised last year by 54 counties investigated by the National Audit Office wasn’t derived from taxes, Liu Jiayi, the head of the agency, told a meeting of the legislature yesterday, according to a transcript of his speech on the audit office’s website. Total fiscal revenue at those counties rose 17 percent to 112 billion yuan ($17.6 billion) last year, Liu said.

China shelved a plan earlier this week to allow local governments to sell bonds directly amid concern that the companies they set up to borrow money will default on some loans. Debt racked up by local governments and their entities stood at about 10.7 trillion yuan at the end of 2010, with 17 percent maturing this year and 11 percent next year, according to an audit office report released last year.

“The proportion of non-tax income in fiscal revenue is relatively high at county-level governments, pointing to relatively poor stability and sustainability,” Liu said, without specifying the other sources of revenue.
One can see why the central government may be thinking of reforming the way local governments finance their operations.

Euro shorts hold steady

ProShares UltraShort Euro (EUO) is an ETF offering 2X the daily inverse of the euro. It has been a winner, but should do very well if the euro cracks the $1.20 level.

China's 3000 wealthiest households lost nearly $100 billion

China's wealthiest 3000 households lost roughly $93 billion in wealth in the past year, with much of the losses blamed on falling stock prices. Most of the list is made up of Internet and real estate company founders.

The top table is the 2012 top 10 wealth figures, with 2011 on the bottom. The first category is their name, the second is their company, the third the percentage of wealth in equities and the last their total wealth. For 2012, I calculated the percentage decline in wealth for those who stayed on the list. Some of the companies on both lists are Sany, Baidu, Suning, Evergrande and Tencent.

2012-07-20

China pukes steel, slams Asian market; what else will China puke?

The Baoshan Steel Index tends to move slowly, with changes of 1 or 2 points on most days, as it is an index of prices from contracts, not a financial index. Still, like the Baltic Index, it's prone to periods of volatility and we are appear to be entering another such phase. Prices are currently at their lowest since December 2009.

Here's the result of collapsing prices in China, themselves result of weak demand: China's rising steel exports slam Asian producers
Europe used to soak up most of China's steel exports, but the region's protracted debt woes have forced producers like Baoshan Iron & Steel to turn their shipments to destinations closer to home. The wave of cheap Chinese exports has fuelled price undercutting among Asia's top mills, which are expected to report profit slumps for the three months to June.

POSCO, backed by billionaire investor Warren Buffett, is expected to see its operating profit fall by a third from a year ago, analysts say.

"Before, China was exporting 2 million tonnes per month and now it is suddenly 5 million tonnes. Given that domestic demand in their respective countries is already not particularly strong, they (local steel producers) are clearly afraid," said Helen Lau, a commodities analyst at UOB-Kay Hian in Hong Kong.
That's one heck of a swing to hit the market. Chinese speculators have accumulated copper, nickel, coal and other commodities, what's going to happen in those markets if China starts exporting those hoards?

China's Baosteel cuts main steel product prices for August
Baosteel's pricing decisions are generally regarded as a bellwether for the industry. While demand generally weakens in China's hot summer months as construction projects slow, sluggish economic growth and a fragile global economy are putting particular pressure on the company this year.

China's steel industry is expected to see low demand in July and August until a seasonal pickup in September, and expectations of more efforts by Beijing to boost the economy are unlikely to provide an immediate boost to steel prices, analysts say.
That drop off at the start of the chart above came as the real estate market felt its first chills. If the expected pickup doesn't arrive, prices will crumble.

Whooping cough at 50 year high; social mood to blame

CDC: Whooping cough rising at alarming rate in US
Whooping cough has generally been increasing for years, but this year's spike is startling. Health investigators are trying to figure out what's going on, and theories include better detection and reporting of cases, some sort of evolution in the bacteria that cause the illness, or shortcomings in the vaccine.

The vaccine that had been given to young children for decades was replaced in the late 1990s following concerns about rashes, fevers and other side effects. While the new version is considered safer, it is possible it isn't as effective long term, said Dr. Anne Schuchat, who oversees the CDC's immunization and respiratory disease programs.

Some parents in California and other states have rebelled against vaccinations and gotten their children exempted from rules that require them to get their shots to enroll in school. Washington state has one of the highest exemption rates in the nation. But the CDC said that does not appear to be a major factor in the outbreak, since most of the youngsters who got sick had been vaccinated.

2012-07-19

China real estate faces big test

Here's a table from today's paper:


The above table is month-to-month changes in home prices for 70 major cities, the bottom year-on-year. The first column is rising home prices, the second unchanged, and the third falling.

You can see that prices were down YoY in June, but they were up from May. Lately, an explanation for the recent warmth in the real estate market is comments by Wen Jiabao saying the economy must now focus on stable growth. Bulls take the statement to mean Wen wants growth, therefore real estate policy will be eased. Instead, the government continues to stress that real estate policy will stay restrictive.

Nothing goes down in a straight line and June could easily be a blip on the way to larger losses, which is the most likely path. Real estate bulls were burned in 2011 when they ignored the government and if the recent burst is really driven by this false hope, it is just a flashback, a momentary return of bullish excitement before the bear returns with greater force.

2012-07-18

Baoshan steel index nears July 2010 lows


Maotai bubble continues to burst, but Maotai stock hits a new high

The headline to this article (53度飞天茅台狂跌千元 批发商称10天卖不了1瓶) says the 106 proof (53%) Maotai price fell 1000 yuan from it's peak of ¥2300, and a wholesaler went 10 days without selling a single bottle. The reporter can't find ¥1300 bottles though, the cheapest are ¥1450 and up. One Wholesaler said he bought at around ¥1800-1900, if he sold at ¥1400-1500, he would go broke.

The retail stores are ghost towns. The reporter went in one store to find the clerk playing computer games and failing even to say hello. The retailers say they are looking forward to Chinese New Year, which is still 6 months away!

However, while the wholesalers are facing bankruptcy (due to chasing high priced bottles during the bubble), the company is reporting rising profits and the stock recently hit a new high: Moutai sales skyrocket in first half

You can click the Maotai tag below (600519) to see previous articles. I expected Maotai stock to crumble, but by May it was clear that this thesis wasn't panning out.

According to this February 2012 China Daily article, Maotai was planning to raise prices from ¥620 to ¥900 per bottle. This Chinese article from today says Maotai planned on raising prices in April, but has pushed that out to December.

With prices still retailing at ¥1500-plus, Maotai can still see earnings increase if the retail price falls. However, if prices keep sliding, it will eventually cut into their revenue growth.

Earnings were only ¥8.44 per share in 2011, with the price at ¥244, the P/E is about 31. That number is justified if growth rates hold up, but the 2011 earnings are out of line with previous years. It doesn't mean the stock is richly valued, though it is richly valued compared to the Chinese stock market, which is only about 15% above its 2008 low.

U.S. social mood: threats to movie critics

Movie reviewers critical of the new Batman movie have come under attack.

Rotten Tomatoes suspends comments on 'Dark Knight'
The aggregating Web site RottenTomatoes.com suspended user comments on movie reviews of "The Dark Knight Rises" after commenters reacted harshly to negative reviews of the film and made profane and threatening remarks about the critics who wrote them.

Matt Atchity, the site's editor-in-chief, said Tuesday it was the first time RottenTomatoes.com has suspended user comments, adding postings about "Dark Knight" reviews would likely be restored by the end of the week.

2012-07-17

Militant nationalism rising in China; odds of military conflict rise

Liu Junluo recently warned of a potential regional war in Asia, and both social mood and developing events are increasing the odds of some type of military confrontation.

Every single day, the South China Sea dispute is either headline news or, if not the headline, it's the next top story. It has dominated the airwaves for weeks now, and has equal space with news about China's weakening economy (now dubbed stabilization).

In this article by Minxin Pei, he puts all the dots on the table, but fails to connect the one that leads to conflict.
Beijing plays divide and conquer to win in South China Sea
But after recovering from its greatest diplomatic setback since Tiananmen, the Chinese government seems to have settled on a counter-strategy. Contrary to expectations of a more flexible negotiating approach - embracing a multilateral approach, declaring adherence to the United Nations Convention on the Law of the Sea and signing a code of conduct - Beijing refused to budge.

China has opted for a negotiating position that seems increasingly untenable and counterproductive. A possible reason is that Beijing understands that its much-criticised "nine-dotted line", which essentially claims the entire South China Sea as Chinese maritime territory, cannot be supported by existing international law.

...Beijing is obviously aware that its strategy, in the short term at least, incurs huge diplomatic costs. To offset these costs, China has tried to gain support from some South-East Asian nations so that the other claimants are not able to forge a regional alliance on this issue to isolate China.

...Because China has ample economic resources to achieve this goal, it may have already succeeded to a considerable degree.In last week's Asean summit of foreign ministers in Cambodia, the regional bloc was unable to reach a common position on the South China Sea dispute, a clear victory for Beijing.
China's economic policy cannot be divorced from it's military policy. An economic collapse would be tantamount to a diplomatic collapse for China, which relies on soft power to achieve diplomatic goals. Increased aggression from Beijing may be a result of its weakening economy, with a couple possible of reasons. Since it will need some other way to press its claims if the economy weakens and the military is increasingly nationalist, a stronger military posture is likely. Furthermore, they may be deflecting from the weak economy: when there is internal strife, turn the attention on diplomatic issues. This would be the more benign scenario, but still carry the risk of an accidental escalation.

If China's economy collapses or slows to the point where it hinders their diplomatic position, Beijing may increasingly rely on military power and/or it's rivals may sense the opportunity to press their case. Minxin Pei closes by warning naval skirmishes could result from accidents, given that confrontations with fishing boats and other vessels are occurring more frequently.

Another possibility, one I believe more likely, is that the weaker China's economy becomes, i.e. the more negative social mood becomes, the greater the likelihood of skirmishes, and if China's economy collapses (GDP growth of near 0% or negative), a skirmish would have a not-small probability of escalating into a larger military conflict.

More background is available here: South China Sea issue divides ASEAN

2012-07-15

China housing supply: in surplus?

I've seen many China bulls argue that demand for housing in China is very high and there's actually a shortage of good housing. There is a case for this because much of the old housing is low quality and incomes have risen rapidly. People want to trade up and that helps support demand.

However, every housing bubble was explained as a supply shortage. The article below discusses Australia and rent-seeking organizations, in this case real estate companies that produce research showing the need for more housing. It also mentions the U.S., Spanish and Irish market.

Beware the rent-seeking organisation: don’t be dudded by housing data
The non-existent housing shortage probably comprises the most popular argument used by the bubble deniers to justify astronomical housing prices. As Australia is apparently suffering from a chronic deficit of dwellings, demand is greatly outstripping supply, leading to rising prices.

The problem with this argument is it can’t explain why prices started to rise in 1996 and have skyrocketed onwards, especially during 2001-2004. Annual population growth between 1996 and 2005 registered at approximately 1%, but dwelling growth (adjusted for demolitions and discontinuations) was greater over this period. In fact, 2007 was the first time since 1950 that population growth was higher than dwelling growth. If the housing shortage argument was correct, housing prices should’ve started to rise from 2007 onwards, not 1996.

The shortage argument, however, is not new. Every country that has suffered through a housing boom followed by a crash (a bubble) in recent years have always had its so-called ‘experts’ claim that prices were based upon fundamental valuations due to dwelling shortages.

Take the US as a case study. Leading institutions such as the Federal Reserve, National Association of Realtors, California Building Industry Association and Harvard University’s Joint Center for Housing Studies produced sophisticated studies to show that the $8 trillion housing boom was caused, in part, by dwelling shortages. These studies were authored by professors, PhDs, and businesspeople, all with extensive knowledge and experience but with conflicts of interest that could fill a small book. Yet, their expertise was as illusory as the shortage when the housing market crashed. The same again occurred in Ireland and Spain to the point where these three countries are now bulldozing entire neighborhoods to reduce some of the massive oversupply.
Rapidly rising incomes may make China a special case, but there are now fewer young Chinese as the one-child policy has started kicking in for the 18-22 age cohort. In terms of housing demand, the growing middle class must offset the shrinking youth population. By 2020, the population of 30-year olds will begin declining. Additionally, there is still excess demand in the housing market due to investment demand, which means the growing middle class must pick up that slack as well. If China's real estate market doesn't cool down, investment demand and a shrinking population will lead to a massive supply overhang in a few years, likely before the demographic effects fully kick in.

2012-07-13

The death of the dollar is greatly exaggerated; China dollar bulls edition

Many analysts and pundits see news of the Chinese settling trade in the yuan and think the end of the dollar is near, but they couldn't be more wrong. What's going on is bullish for the U.S. dollar!

In Rmb internationalisation: a myth?, FT Alphaville quotes from a paper by Yu Yongding:
The true motivation behind the PRC importers to use the yuan for settlement is the existence of opportunities for exchange rate arbitrage.
Chinese exporters are settling their trades in yuan in order to purchase U.S. dollars in Hong Kong, where the exchange rate is more favorable. They are not paying for imports with yuan, nor are they charging their customers in yuan, they are only settling in yuan because they can earn a little extra from arbitrage.

The yuan continues to reform, but it requires financial sector reform, the same as the rest of the Chinese economy.

Yu Yongding's paper: Revisiting the Internationalization of the Yuan.

Euro shorts still below peak as euro crumbles


Chinese yuan slides

Chinese GDP numbers are out and the bulls see positive signs in the data. If the bulls are right, China is going to inflate its way out of the economic doldrums, possibly reigniting the housing bubble.

One-year non-deliverable forward contacts have the yuan at 6.42. The yuan closed at 6.3789 per U.S. dollar; the fixing was 6.3247.

2012-07-12

Guangdong slows; jewellery sales slump

Friday morning pre-GDP news:

Guangdong growth alert for mainland
Guangdong Governor Zhu Xiaodan on Wednesday conceded that the provincial economy grew a "weaker than expected" 7.4 per cent in the first six months of the year. Exports grew only 6.9 per cent, a slowdown which is already spilling into the second half. Zhu told his subordinates to have "a higher level of crisis awareness" as other key economic indicators, such as fixed asset investment, retail sales, and the government's fiscal revenue were worse than anticipated and were below national averages.
Guangdong is one of the faster growing provinces, although the article quotes predictions of 7.7% GDP growth for all of China in Q2.

Elsewhere, I warned that China has a gold bubble because investors are very speculative, treating the metal like a hot stock.
Sales decline hits jeweller's shares
Chow Tai Fook said in a filing on Wednesday night that same-store sales in its Hong Kong and Macau stores dropped 1 per cent for the three months to June, despite a 5 per cent increase in volume. This is a sharp decline compared with the 48 per cent growth in same-store sales recorded for the fiscal year to March.

"While the weakness may not be totally unexpected, the reported sales growth and same-store growth were still notably below the market and our estimates," said Catherine Lim, an analyst with Citi Research.

...A spokeswoman at the Hong Kong Retail Management Association said mainland consumers have cut spending on jewellery, apparel and cosmetics in their shopping trips to Hong Kong this year.

To deal with the challenging market environment, Cheng said the company had adjusted the product mix to meet consumer demand.

Chow Tai Fook has expanded aggressively across the border in recent years, which has strained its cash flow.

The retailer received net proceeds of HK$15.4 billion in its initial public offering but said it held only HK$10 billion in cash at the end of March.

Liu Junluo: PBOC will hike rates later this year, in the middle of the Great Depression, regional war coming to Asia

Liu Junluo's latest blog post argues that the central bank is helping the stock market decline and supporting the trade surplus, in order to reduce consumption and attract deposits into the banking system, with the ultimate goal of covering up bad debts.

He argues that the central bank should have allowed inflation to accelerate in 2011, but instead has created a man-made deflationary crisis. He says that in 2012Q4 or 2013Q1, the PBOC will hike interest rates. He doesn't explain why, but he expects the Great Depression will again rear its head during this time. Why would a country hike rates during a depression? Either to attract capital into the banking system or to defend the currency, or both.

中国央行在2012年四季度~2013年一季度将进入加息周期

Google Translate version (with very slight edits, mostly still terrible Google Translation): China's central bank will enter a rising rate cycle in the fourth quarter of 2012 to 2013 first quarter
Mr. Guo Shuqing task is completed, not a large number of Chinese stock market participants in the 2400 points along the zoom, the Chinese stock market fell to 2000 points and 1800 points, a relatively large rebound. Chinese stock market traders zoom lever, in the future, it will easily in the Chinese stock market .


The two previous blog, has written very clearly. December 16, 2011 blog "2012 China's macro-policy will continue to hope that the large-scale stock market fell and the new book announcement " is written to the - now, more and more intense as the European debt crisis of self-direction" China's macroeconomic policy is nothing more than the need to rely on the Chinese stock market in the 2012 to continue the large-scale fell to solve the Chinese central bank's bad debt exposure. In 2012, China's economy faces an "election year", is to continue to manufacture hard big crash of the Chinese stock market to reduce the Chinese residents' consumption of local products and foreign products, the acceleration pushed up China's household savings rate, to reach out to expand the trade surplus, good this astronomical figure of bad debts hidden good to the next term, or let the bad debt exposure are far behind even the Empress, and then handed over to the new term? So, you do not see Jinglian, Li Yining, and the Chinese central bank talk and action, you are still a living economy "idiot".


A result, the 2012 , China's trade surplus is 31.7 billion U.S. dollars, far more than expected. 2012 1 to 2 months, the trade deficit to 2012 years, until March rebound. Chinese investors are China's trade surplus only, it is important contributors. In this way, you should like the film in the cinema to see an intrigue to see our Mr. Guo Shuqing do our best to show.


So, 2012 , I made ​​Sina microblogging a microblogging - China's central bank cut interest rates, is it good? Chinese people today, is certainly to be every day of the positive destroyed, has always been to eat people do not spit out the bones "feel good" a person to grasp the logic of economics and the social division of labor is very important. Chinese stocks will make many people unknowingly ruin, or broken up the fate. The ignorance is so sad, perhaps, so far the evolution of society is the need for most people, to destroy the financial markets. Otherwise, there is no way to explain! Why would anyone buy a stock, buy a house. Liu Jun Luo, July 5, 2012, Thursday.


The question now is, in mid-2011, I expected China's central bank by the end of 2011 or start of 2012 to urgently loosen monetary policy. Today, China's central bank is not only done, but haphazardly to do.


So, there should be a problem - the Americans will not let the Chinese central bank raise rates in the 2012 fourth quarter ~ 2013 in the first quarter?


Now, the Chinese central bank's monetary easing will continue, however, is coming to an end.


The world economy has entered the Great Depression; we are living in the middle of the Great Depression; the Great Depression of the tail of - a large number of ​​people go bankrupt; a large number of ​​people jumping off buildings; a large number of ​​people are unemployed and the danger of regional wars in Asia.


2010 to 2011 , I criticized the Chinese central bank's monetary policy is a serious strategic error, because the real problem of the Chinese economy is a long-term catastrophic deflation. However, the 2010 to 2011 the Chinese central bank's monetary policy is strong anti-inflationary, China's central bank monetary policy is actually artificially serious strengthen China's economic deflation. Therefore, China's central bank will soon have to choose the strength to raise interest rates to solve the problem they have committed a serious strategic error. We have entered the economic world incurable. 2013 years, the most the threat of human fear - Asia regional outbreak of war.


The blog is written, because the economic situation all step by step into the run. I do economic research, economic trends are very difficult to change, So do not waste time writing repetitive words. How to operate their own money, as I have already made it clear. Able to escape this hell on earth "economic catastrophe, that is, you good luck thing.

Liu Jun Luo
2012

Another factor for yuan devaluation: capital losses

In Red Capitalism, authors Walter and Howie show that the Chinese financial system is an extension of the Communist Party, used for the benefit of the ruling members. Investment losses are put onto the bank balance sheets, which are then transferred to the central government. China bailed out the banks at the end of the 1990s, and it continues to implement policies in the banks favor. Another bailout is also likely, should NPLs surge.

If the yuan is close to fair value, however, the implication for the currency is devaluation because China's source of funds is the foreign exchange reserves. China socializes investment losses through the banking system and via currency devaluation, but as foreign exchange reserve growth slows, tapping this capital will result in devaluation of the yuan (since deflation is counter-productive).

Here's a post from FT Alphaville China as a post-capital economy discussing the bull and bear case for China.
Here follow extracts from an absolutely fascinating note from Australian analyst James White at Colonial First State, which argues extremely convincingly that none of the usual economic arguments apply to a country that has transcended the conventional role of capital. In short, nobody does financial repression like the Chinese.
What does Mr. White have to say?
In China, capital is just one piece on the board where the aim is to raise living standards of all households. As a result, capital is used and treated remarkably differently, often to the consternation of external observers and investors. It is not a matter of aggregating up the investment decisions of individual firms and households to predict macro-economic outcomes, as was done by some economists prior to the sub-prime crisis in the US. The government’s role is paramount. Despite claims of dramatic imbalances (investment spending has made up to 45% of GDP in recent years, compared to below 15% in some developed economies), investment is driving sustainably higher economic growth. This high investment economy has led to some important outcomes that support the economy’s growth model.
Unlike in developed markets, where the aim is to generate a return on capital, the politically managed Chinese economy views capital as one piece of the puzzle. And it can afford losses in part because it is the state:
First, and most obviously, the government has the ability to fund losses on individual capital projects through the accumulated financial reserves, totalling at least $3.2 trillion. Second, and most importantly, the Chinese government, as ultimate capital allocator, can recoup returns from projects by capturing the positive externalities from projects in the form of higher tax revenues created by higher levels of activity.
Without getting into the long-term results of such a policy, the implication is that China can continue this policy for some time, but capital losses will accumulate and be socialized, as discussed above.

Foreign reserves will not accumulate at their historic pace—unless there's another round of global coordinated money printing led by the Federal Reserve launching QE3. Since those reserves back the currency, depleting them in order to bailout the banks would be deflationary if the central bank took yuan out of circulation. In a bailout situation, deflation would lead to more losses and larger bailouts. Instead, they will take dollars from the reserves, but leave the renminbi in the economy.

Inflation of the money supply by itself doesn't lead to currency devaluation—there are more factors at work—but China's approach to capital may eventually express itself in the exchange rate.

China's foreign currency loan-to-deposit ratio sinks again; gold, oil and monthly FX reserve changes

The People's Bank of China released Q2 data today, showing the foreign currency loan-to-deposit ratio declining again. Chinese firms have been "hoarding" U.S. dollars and there may be a large net short position at the corporate level. The short positions come in part from U.S. dollar borrowing; now firms are holding U.S. dollars because they do not expect yuan appreciation and others are repaying their dollar loans. The result is a plunging foreign currency loan-to-deposit ratio-a slide larger than the decline in 2008.

The yuan was weak in May and stabilized slightly in June, now we see that this weakness coincided with a decline in China's foreign exchange reserves. We saw a similar situation in November-December of 2011, when the yuan was weaker and FX reserves declined.

Below are charts of gold and oil against the yuan. Hugh Hendry proposed the 2008 oil bubble was related to the value of the Chinese yuan (Yuan and Oil-The Bubble Connection?) and that once the yuan stopped appreciating, this carry trend ended, sinking oil prices.

Gold replaced oil as a favorite of Chinese traders post-2008, and while they haven't blown oil or gold into a bubble, there's definitely some correlation. The yuan has slightly depreciated in 2012 and both oil and gold are down for the year.

The story here is less about China, however, than it is about the global economy. Manufacturing is at the higher stages of production and the sector leads the broader economy. China's economy was hurting in early 2008 and it's stock market both plunged and bottomed first (along with many other emerging markets). Combined with economic data from the developed world and the continuing crisis in Europe, the parallels with 2008 are growing stronger.




2012-07-10

Is the real estate bubble reflating? Now Beijing sees a new land auction high

Following last month's record auction in Guangzhou, Beijing sees a record price for residential land:
Record price paid for site in Beijing
Sinobo Group, a private local developer, won the Haidian site in a land auction with the 46th bid of 2.63 billion yuan (HK$3.21 billion), or 33,831 yuan per square metre. This surpassed the previous record for a residential site, in Shunyi district, which sold for 29,859 yuan per square metre in 2009.

The developer's offer included allocating 16,400 square metres of floor area for subsidised housing. Excluding this area, David Zhang, a director of research at Centaline China in Beijing, estimated the land price was 41,500 yuan per square metre, making it the most expensive residential site in the country.

..."The land supply in the 4th Ring Road area is very tight. Prices of nearby housing estates range between 60,000 and 70,000 yuan per square metre. Developers are optimistic about property prices in the area."

...Wang believes the winning bidder will have to sell flats there for 80,000 yuan per square metre to generate a reasonable profit.
Fourth ring is quite far from the city center and Haidian is underdeveloped compared to the eastern part of the city.

China's dollar short position

Earlier this week in Chinese hoard dollars, we saw that Chinese exporters are holding onto their U.S. dollars and repaying U.S. dollar loans.

FT Alphaville took an in-depth look at the numbers in China and those dollar shorts, and draws a similar conclusion to mine:
BoAML’s last attempt to downplay the importance of these shorts is to claim that none of this matters in the grander scheme of things because the shorts are ultimately a sovereign liability rather than a corporate one due to the state’s long-standing intervention in the FX market. And, as everyone knows, China on a sovereign level is definitely not dollar short.

But this again is missing the point. Which is that China’s short-term dollar liabilities are currently balanced by longer-term dollar assets. They represent a duration mismatch. That China can liquidate its holdings is obvious. It’s about how you interpret these liquidations if and when they happen.

That is to say, one should not regard them as dollar negative but rather as dollar positive.

One last unintended side-effect is the pressure the dollar shortage is putting on RMB liquidity in its own right. Dollar absorption, after all, has always provided a key RMB liquidity distribution mechanism for the PBoC. Hence the growing need for alternative PBoC liquidity measures such as reverse repos.

FT Alphaville had report on China's dollar short position (coming from the corporate sector) in late June: China’s remarkable short USD position. That post discussed Standard Charter's estimate of an $800 billion short position.

If China is short dollars, it means the banking system has excess renminbi. A closing of this position is deflationary, but the central bank started cutting interest rates and reserve requirements. Instead of draining yuan as dollars are pulled from the system, they are instead inflating the money supply, with the long-run consequence of devaluing the yuan. Whether the yuan is currently under, over or fairly valued will determine which direction it trades in, but the net effect is to weaken the yuan.

2012-07-09

Euro shorts contract ahead of decline in euro

Last week the euro shorts were "lightly smoked" as the euro rose in the face of a large decline in short contracts. The euro is extremely weak and buying, when it occurs, is mostly short covering. This snapshot from July 3 shows the euro just before it breaks to new 2-year lows.




2012-07-08

Chinese hoard dollars

In order for the yuan to devalue, Chinese must increase their preference for U.S. dollars.......and it is happening, as anticipated on this blog.

Below are the main points from a Chinese article on the topic, interspersed with my comments.
囤点美元 (Hoard dollars)

China's largest privately run shoemaker, Aokang, exports 40 million pairs of shoes to the United States and Europe each year. Previously, the firm would swap U.S. dollars for yuan on the same day they were received, but now, "[We] keep as much as possible, we even wish we could keep all of it."

In the wake of the PBOC's interest rate cuts, demand for U.S. dollars has increased as the interest rate spread between the two currencies narrows.

The CEO of Aokang used to ignore the renminbi exchange rate because it was in an appreciating trend versus the U.S. dollar, but now he views it online everyday. Other executives check the exchange rate changes daily.

Hoarding of U.S. dollars is helped by an April 16 change in financial regulation, when SAFE repealed the regulation that compelled businesses and individuals to exchange their U.S. dollar remittances for renminbi.

-------
Leaving the article for a moment, as far as I can tell, this news was not reported, as news outlets opted to focus on the widening of the trading band and allowing banks to short sell U.S. dollars. Chinese link:
强制结售汇制度退出历史舞台 企业和个人可自主保留外汇收入
. The law had been gradually weakened over time, but this year saw it's full repeal.
-------

A Dongguan shoe exporter has the same strategy as Aokang. Before, they would immediately exchange USD, EUR and JPY for CNY, but now they consider their business needs and the exchange rate before changing money. They slowly increased their retention rate of U.S. dollars from nothing to a current 40%.

Firms are also closing their dollar short positions. In previous years, Chinese firms would borrow in USD in order to benefit from the rising exchange rate and higher renminbi deposit rates. Now, they are reversing these trades and paying back dollar borrowings.

-------
Here's a chart of foreign exchange loans to deposits (all foreign currency is included, not only U.S. dollars) showing what's happening:
-------

The article quotes Wang Tao of UBS saying China has "oversold" $200 to 300 billion, while Citibank estimates it could be as much as $800 billion. China's SAFE reported a $3.7 billion foreign exchange settlement deficit in April, the first of 2012. (There was a deficit of $800 million in November and $15.3 billion in December of last year, when we last saw weakness in the yuan.)

Individuals and businesses aren't alone—although they are now allowed to short U.S. dollars, banks wish to hold net long positions in the U.S. dollar because all the major banks expect yuan depreciation in the short-term.

The central bank is also defending the renminbi when necessary (my edited translation):
Everbright Securities macroeconomic analyst He Yuanyuan found in the fourth quarter of last year and April this year, the central bank bought yuan and dumped foreign currency (expressed as a reduction in the total of foreign currency assets). This shows that China's central bank is in the market to support the RMB exchange rate, to prevent it from excessive devaluation. This shows from another perspective, the pressure of RMB devaluation.
Google Translation of the article: 囤点美元

Commentary

China is selling foreign exchange in order to defend the renminbi, which flies in the face of common wisdom that fears China dumping its U.S. Treasuries. The other side of the trade matters. It is the same with gold: common wisdom says buying gold will strengthen a currency, but look at India—massive gold imports are working to devalue the rupee. Various scenarios call for the U.S. to devalue against gold, but it is at the same time a gold buying strategy. If Chinese swap U.S. dollar assets for gold, oil or Japanese equities, the trade will weaken the dollar and may strengthen the yuan. If instead Chinese citizens or foreigners demand U.S. dollars, the other side of the trade is dumping yuan.

The takeaway is that the Chinese people have turned into U.S. dollar buyers, which will drain foreign currency from the central bank. Interest rates should be rising to defend the currency, but they are instead falling, opening up the potential for more significant devaluation later this year, most likely after the U.S. dollar strengthens and euro weakens.

There may be no major crisis in the currency, but that will depend on how much capital the central bank expends fighting devaluation. The country has moved from the dollar peg to a currency basket and advanced the internationalized the yuan, which will allow for more dollar outflows and depreciation should the greenback rally versus the yen and euro.

Finally, a yuan depreciation of 10% or more would be far from an FX crisis, but it would shock financial markets that remain overwhelmingly yuan bullish, especially because it will come in the midst of a global crisis. The psychological effects of a yuan devaluation expressed in the financial markets will far outweigh the economic impact.


U.S. hedge fund sees Chinese GDP growth at 3%

From Bruce Krasting:
It Ain't Priced In
I had an e-mail exchange with an old fried who now works for a large macro hedge fund up in Greenwich. The broad topic was the very long list of signs that the global economy is hitting the skids. He had this to say:

…certainly does not point to robust job growth…manufacturing activity globally really falling sharply..think weakness in Europe spilling over to those who export to the region..retail sales in Europe plunging…China growth may now be down to 3% in our view…U.S. q2 may be sub 1.5%..Europe- contraction…Brazil sub 3%...Australia slowing sharply...

I almost fell of the chair reading this. Say this group is right about China. What does it mean if its growth rate falls to 3%? A very hard landing for all manner of things, is the answer.

There have been many China bears the past year or so, but against these bearish views there has been a widespread belief that China will muddle through. My point is that China GDP = 3% is absolutely not priced into today’s market.
If one Connecticut hedge fund believes this, many believe it or are at least hearing it.

Is China losing control of the housing market? Or is this the housing market's last gasp?

Chinese leadership is running scared that the economy is finally out of their control as jawboning of the real estate market steps up.

China Must Prevent Rebound In Property Prices, Wen Says
Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

...“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said.
Not only will their efforts be for naught, they will have been to the detriment because the public will learn that the government, even when it uses all of its power to enforce an economic policy, cannot achieve its objective.

I find it strange that China bulls think the rise in the property market is bullish and signals a strong Chinese economy. Growth will resume in the housing sector, but rising property prices will be accompanied by higher inflation at a time when exports are suffering and there's a general slowdown, with credit growth contracting. High inflation in a slowing economy is a recipe for very high inflation—and rising crop prices in America will throw gasoline on the CPI fire. This is a political worst case scenario for the CCP.

Which is why the central government is dropping the hammer on local governments:

住建部:若房价大幅反弹调控松动 地方将被问责 (Housing Ministry: If prices rebound and regulations slacken, local governments will be held accountable)

Local officials are promoted based on a variety of criteria, one of which is GDP growth. Additionally, they rely on land sales to finance local government spending. The central government appears to be changing the formula, however, by threatening local officials who do not carry out Beijing's orders to reign in home prices.

China home prices could fall again
Recent gains in Chinese house prices might be a result of misguided expectations, according to economist Yi Xianrong of the government-affiliated Chinese Academy of Social Sciences, writing in the state media Thursday.

In commentary for the China Daily, Yi said the price rise has taken place without easy credit, making it strange in a historical context. "The current rise in house prices has, to a large extent, been a result of misinterpretation of the government's policies to stimulate the economy, an increase in real-estate speculation, and excessive concerns among ordinary home buyers that prices will continue to rise," Yi said.
I am in agreement with Yi, the real estate market is likely to turn down again. But the events of the past month and the government's response indicates that they're not sure they can pull it off. The use of rhetoric and now threats of punishment for local officials indicates that there's worry in Beijing. This may itself be a reaction to the bubble, and in keeping with socionomic theory, the Chinese government will ratchet up the restrictions on the housing market even as it is structurally weakening. Nevertheless, I still remain open to the potential for the central government to lose control of the economy, completely, with the housing market bubble reflating, inflation rising and the yuan depreciating.

2012-07-06

Finland is willing to leave the eurozone

Finland Would Rather Exit Euro Than Pay for Others
"Finland is committed to being a member of the euro zone, and we think that the euro is useful for Finland," Urpilainen told financial daily Kauppalehti, adding though that "Finland will not hang itself to the euro at any cost and we are prepared for all scenarios."

"Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," she added.

Urpilainen's spokesman Matti Hirvola stressed to AFP that the minister's comments did not mean Finland was planning to exit the euro zone.

"All claims that Finland would leave the euro are simply false," he said.
They're not leaving yet, but they've thought about it.

Martin Armstrong's predictions from 1998


PDF Link: 1998 Fall Seminar Tour

Fear of massive crop failures

Social mood strikes again:

What Happens If Record Heat and Crippling Drought Cause Widespread Crop Failures Throughout the United States?
If temperatures continue to stay this high and we don't start seeing more rain, farmers and ranchers all over the nation are going to be absolutely devastated. So what happens if we do see widespread crop failures throughout the United States? That is a question that is frightening to think about.

Below is a chart of two Teucrium ETFs, symbols WEAT and CORN.

2012-07-05

China reserve ratio cut coming?

They are already behind the curve. The question shouldn't be whether there will be a cut, but how large? The economy needs a shock here, if monetary policy is to work. (Not that generating inflation here wouldn't create a whole separate set of problems.)

If they cut this weekend though, it will spook the market. They will likely time a big cut with the release of bad data.

Will China Cut Reserve Ratios This Week?
The China Banking Association wrote in a front-page editorial in the China Securities Journal on Tuesday that the central bank needs to cut the banks' RRR, currently at 20 percent, to ease a short-term liquidity crunch.

The PBoC pumped about 143 billion yuan ($22.53 billion) into the banking system on Tuesday following a 125 billion yuan injection via two reserve repo offerings the previous week. The last time it injected liquidity into the market in May, it was followed by a cut in the banks' reserve requirements, triggering talk that this time around as well the central bank may follow up with a cut.

Bank lending was also weak in June. China's 'Big Four' banks issued 180 billion yuan ($28.3 billion) worth of new loans, the Shanghai Securities Journal reported on Tuesday, down about 28 percent from the 250 billion yuan in new loans the four banks issued in May.

Update: Within about an hour of posting this, China cut rates 0.31% for 1-year money (6.31% to 6%) and cut the reserve requirement by 0.25%. Deposit rates were cut from 3.25% to 3%. The minimum interest rate was also reduced to 70% (which means a bank could make a 1-year loan at 4.2%). In the previous month, that was cut from 90% to 80%.

These moves shore up liquidity and could ease the credit crunch, but it will not do anything to turn the economy around.

2012-07-04

China's spiraling financial bubble

Over at Steve Keen's Debtwatch are two articles on China's growing debt financing schemes.

The Looting of China by the Kleptokapitalist Bourgeoisie Roaders
Zoomlion has an interesting business model, it is similar in many of ways to Caterpillar, except whereas Caterpillar report falling sales, Zoomlion reports astounding sales growth with a fivefold increase in revenue since 2007. Zoomlion customers sometimes buy ten concrete mixers when they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion.

Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3 per cent YoY, down from 19.2 per cent recorded last year. Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day .
This is the type of financing that did in firms such as Lucent at the end of the Internet Bubble.

China’s Concrete Bubble
Chinese construction keeps trending down with Sany the worlds sixth largest heavy machinery maker reporting a rise in profit of 5.4% in the same quarter as a blow out in receivables of USD $1.39 billion and cash reserves falling by USD $535 million . Sany is clearly booking profits on 100% financed machinery while providing zero transparency on credit risk and delinquency . If the GFC has taught the world anything. then 100% ‘no money down” vendor finance should ring alarm bells. This all started about about 3 months ago when Zoomlion started to aggressively financing heavy machinery for anyone that wanted to sign up.
Concrete is a very good indicator of GDP growth and the slide in demand is a major red flag. The debt financing is accelerant should the economy slow sharply, which is a growing possibility.

Here's a look at the Baoshan Steel Index. As you can see, since peaking in 2011 there have been three price decline movements. The first was the cliff drop last fall (when the real estate slow down hit, Europe and U.S. debt crises were front page news), then a slow decline into February before a bounce into early spring. Since April 20, the decline has resumed at a steeper pace than the winter.
Chinese steel industry profits continue to shrink
The Economic Information Daily citing statistics from an industry association said the combined profits of China major steel producers dropped more than 94%YoY to CNY 2.53 billion in the first five months this year amid sluggish demand as well as severe overcapacity in the sector.

According to the report in May, the combined profits of the 77 steel mills surveyed by the China Iron and Steel Association slid 21.7%MoM to CNY 1.4 billion, even though the second quarter is supposed to be a peak season for the industry. Also in May over 30% of companies in the sector suffered losses.
Investors have priced a slowdown into shares of Sany this year (600031). Shares of Zoomlion (1157) have held up better, but they are both down sharply from their highs of years past.




2012-07-03

Germans turn on the euro

The Euro Endangers German Economy
In a situation reminiscent of the autumn of 2008, after the bankruptcy of investment bank Lehman Brothers, ailing banks are infecting the rest of the economy. "Cross-border financing is declining in Europe," says Michael Keller, managing partner of the Frankfurt-based management-consulting firm Keller & Coll.

Investment bank Morgan Stanley says that Europe's banks are undergoing a "Balkanization" that will have "serious implications" for the availability of loans and for growth in some countries. The euro, which was intended to stimulate growth in Europe, is becoming a divisive force in the crisis.

Particularly along the edges of the EU, weakened banks are bringing companies down with them. "Companies are only doing business in the peripheral countries of the euro zone if they can obtain the necessary financing locally," says consultant Keller.

2012-07-02

Real estate bounce in June

Keep in mind that housing is the main asset used by ordinary Chinese to hedge inflation risk.
Beijing home sales rebound in June
A property market rebound has been seen in Beijing as home sales in China's capital jumped to 25,602 units in June, 10.5 percent more than in May and 50.6 percent more than June 2011, new figures have indicated.
The trading volume of new homes in Beijing rose 14.1 percent month-on-month to more than 11,983 units in June, according to data released by the municipal commission of housing and urban-rural development on Sunday.
The average new housing price in Beijing in June was 20,678 yuan ($3271.8) per square meter, a 2.1 percent increase from the previous month, according to data from 5i5j Real Estate, a major housing agent in China.
Lower prices from developers and banks' reduction of interest rates prompted the rebound, according to Hu Jinghui, vice-president of 5i5j Real Estate.

The government's tightening policies have meant housing stock remains high. It is not necessary for home buyers to purchase in haste or make speculations, he added.

Real-Estate Prices Rise in China
According to a survey of property developers and real-estate firms, the average price of housing in 100 major Chinese cities rose in June from the previous month, after nine straight months of decline. The survey follows other signs that the Chinese market has bottomed out, including a pick up in real-estate investment in May and a far shallower decline in property sales during that month compared with April.
Assuming the economy isn't going to slow and do the job of lowering prices, will government restrictions work? The Chinese government looks smart because when an economy is growing strongly, it is relatively easy to redirect demand into other sectors of the economy. However, if things start going poorly, the wheels come off. A failure to stop rising home prices will be a signal that the real estate market cannot be stopped, that the government cannot control the economy and that homes remain a good inflation hedge. This could reignite the housing bubble.

Guangzhou Cars Sales Capped at 10,000 Per Month
The city of Guangzhou, a booming center of Chinese industry and economy, the capital of the administrative region of Guangdong, and China’s third largest city with 12.7-million inhabitants is imposing strict limits to the number of cars that can be purchased. According to autnews.gasgoo.com, local authorities will be limiting car purchases to 120,000 per year, which equates to just 10,000 per month.

Flashback to 2010: China's policy to encourage auto-buying shows effect
China's policy allowing car-buyers to enjoy both a purchasing tax cut and old-for-new trade-in subsidies, which took effect on Jan. 1, was generating good results with increasing applications and subsidy handouts, the Ministry of Commerce said Saturday.

Chinese government interference in the economy is starting to take its toll.

Violent protest in Shifang, Sichuan

Pictures of the protest are all over Weibo, posted below.

Sichuan Protest Turns Violent

Police in southwestern Sichuan province deployed tear gas against residents protesting a planned molybdenum copper plant in the latest case of environmental activism facing at times violent resistance from authorities.

Unrest in the small city of Shifang, famous for crafting cigars for Mao Zedong, comes roughly a year after massive protests rocked the northeastern city of Dalian. Unlike in Shifang, environmental protests in Dalian in August ended largely peacefully after local officials promised to close a controversial petrochemical plant.

Details of the protest Monday in Shifang were murky. The search term “Shifang” quickly became the most-searched term on Sina’s popular Weibo microblogging service Monday afternoon, with users posting photos and videos they say were from the protest.

“Save our homes and environment for the next generation,” read one protest banner, according to a picture posted on Weibo.

The exact size of the protest wasn’t clear, and city officials couldn’t be reached to comment. An employee at the emergency room of Shifang People’s Hospital said not many had sought treatment as a result of the protest, but declined to provide details.