Posts Tagged ‘China’

The Yuan is pegged to the US Dollar within a band.

As the US Dollar gains strenght and Chinese competitiveness declines – it was just a matter of time that China intervened on its currency.

And naturally it has done that with a bang…the over the counter USDCNY plunged the most since Lehman crash!

The devaluation has been approx -1.9% (April 2013).

These has two meaning ….the Chinese are forecasting a FED rate increase in September (and further USD strengthening) and also that Chinese issues are much bigger than the world thinks.

There are also quite a lot of consequences from internal (Chinese deflation and Chinese corporate debt being the largest) and external (how the other regional reserve banks, mainly Bank of Japan and Bank of Korea).

Another extremely complex piece of the puzzle to take into considerations.


What a splash.

All luxury brand (BMW etc ), airlines,  which came to rely on the Chinese consumer got it really badly.

Practically everything imported became more expensive for Chinese and this will hit particularly hard all Asia including Australia.

The major beneficiaries are naturally Chinese exporters, specially in the technology sector


The Chinese issue

Posted: July 9, 2015 in Uncategorized
Tags: ,

Finally the media are starting to realize that what is happening in China could have much more effect on the world than Greece.

Is it a Global Financial Crisis number 2? It can’t be excluded, but the Chinese Government has the largest financial reserves in the world (on that side they already started dumping the US Treasury bonds they have – creating a different issue), it can impose rules on investors that cannot be imposed in a democratic society (they just forbade to sell share in a company to anyone with more than 5% stake in a company) and other measures.

Even if the Chinese Stock Market is quite closed, remember that China is now the economic engine of the world (for example is the number 1 market for BMW). And specially for Australia the consequences could be devastating.

But they are definitely panicking.

It is also interesting how the Chinese newspapers have started blaming foreign of short sale attacks (typical strategy of a non democratic state) and, at the same time, there has been a massive cyber attack on the New York Stock Exchange and Airlines (picture from Norsecorp thanks to Zerohedge).

Capture cyber attack

Until a year ago the Chinese market cap was hovering between USD $1 and USD $2 trillion. At the top, 12 June, was circa USD $11 trillion in little more than 1 year.

More importantly, before the Chinese stock market was a mixture of gambling, savings and very few investors as investments where passing through the State Sponsored Enterprises and the Government.

Now the stock market is at the centre of the strategy of PremierXi Jinping to transform China from a low cost -export led (so foreign market forces dependant like they learned in 2008) to a high tech – consumer led economy (think about Xiaomi, Tencents, Alibaba).

So it is almost driving the economy to an American model. But the American model brings also wild highs and great crisis, which usually the Chinese Government never tolerated.

So this market crash has a lot to do with internal politics and the “teenager years” of China.

Personally I do not think that China will collapse, it will more in an American Style Quantitative Easing induced rally – but China is very different from anything else and 80% of investors are  retail and momentum driven (flock like ducks).

So this needs to be watched much more carefully than Greece as pretending to be an expert on China and of what happen inside it is a pure fantasy.

What a day crash!

Good news, I checked the various markets and there is no sign of contagion “Lehman Brother” style.

This means that, at this stage, we are in for a serious bout of volatility, but not a 2008 style event.

Italian and Spanish market are off, but with no sign of crisis.

This is the hard part of the negotiations. PM Tsiparas knows that PM Merkel needs Greece in the Euro to keep the Euro weak (over 50% of German GDP is exports) and he is gambling the entire country on this.

What happens will depend a lot from Sunday referendum.

People say that Greece is little as Lehman Brothers was. A big difference is that Lehman Brothers debt was held by the private (whereas  now Greece debt is the EU or IMF) and Lehman Brothers was managing a great part of the world derivative market.

More to the point  in the US the Plunge Protection Team is at work, Draghi is thinking to increase the European QE (and more QE means devaluing the Euro – which would eliminate the problem of a stronger Euro provoked by a Greek exit….smart eh?).

Also China is now thinking QE.

At the end this could really the final bottom, for the mother of all rally, also for gold.

And on top of it….with this crisis the Fed first rate hike is likely to be pushed further out.

The jury is not yet out….but at this moment in time it seems we will have just a set back

The blog of the Wall Street Journal reports that in Season Joy City (reported as a remote Bejing suburb – in reality Tripadvisor says that is the 11th Bejin attraction with one of the best shopping centres) offer “buy one floor. receive a free floor” plus no down payment for two and a half week and free kitchen and 4 air conditioning units.

Barclays says that the downturn is more serious than 2008. Gavekal (fund manager with Bejing research house) says that developers are in a real hurry to sell.

On my behalf, I was talking to a friend that does business with China (in relation to property fittings) and deals with approximately 50 factories. They were all begging him for new work.

If these kind of  news hit the mainstream media….this rally would stop in a second.

As they are trying to make you believe Ukraine is settling down (which is not)…another issue is picking up.

– In the Paracels Island Vietnam said that a Chinese vessel intentionally rammed 2 Sea Guard Vietnamese boats and fired water cannons injurying a number of Vietnamese sailors (China is trying to establish a rig there). China has approximately 80 boats around there with confirmed 7 military grade

-In the Spratlys Philippines police arrested Chinese fishermen.

-In the Pag-Asa island (Spratley, technically Philippines) China is reported to have started building an airstrip under heavy naval protection

This happens while the Philippines has just signed a new cooperation agreement with the US and there is a joint naval US/Philippines military exercise. Vietnam is seeking alliances with the US and Russia.

China is desperately trying to distract his citizen by the massive problem that the Chinese property developer are experiencing.

If you think that nothing can happen…a bit of history

In 2007 a Chinese ship fired on a Vietnamese fishing vessel, killing 1

In 1988 China attacked the Spratlys killing 80 Vietnamese  border guards and seizing 7 atolls

In 1979 China invaded a part of Vietnam (as punitive mission against Vietnam invasion of Cambodia’s Khmer Rouge rule (backed by China).

Will Chairman Yellen (US Fed) save the market also this time?

The Good:

GDP decreased to 7.4% better than the forecast 7.3% – but still below the original growth forecast of 7.7

The Bad:

The sequential GDP Q1 is 1.4% – so the sequential GDP should be a meager 5.7% if you can do a simple sum  (which, most probably, is the reality).

Delving in the numbers

Retail sales better than forecast (still down)

Other sectors (Industrial Output, Real Estate, Fixed Asset) are down

The ugly:

In usual fashion China (if you believe) collected and analysed GDP data from all the country in just 15 days. Often not even companies can get their balance sheet ready in 15 days.

Between now and end of June there are USD32 billion of mainly shadow banking products due for renewal in the midst of a credit contraction (-19%)

A Chinese Retired General had an interview about China-Japan relationships. Apart the usual China is stronger than Japan kind of marketing spin, what chilled me is that he clearly stated that China does not believe that the US would defend Japan in case of war. And you cannot speak about something like that in China without the authorities consensus.

The issue is that all the hypothesis of the Western strategies of low probability of war between China and Japan hinges on the fact that China is scared by a US intervention. If they really think US would not intervene the chances of an armed conflict escalates considerably. And China taking a hint from Syria, Crimea could really think that.

But I would not be so sure as Japan is a critical friend of the US and has a “protection pact”, that, if foregone, would cripple even NATO. The US just moved considerable reinforcement to their Okinawa (Japan) base.

On the Russian side, all is calm in the media. In reality the massive troop build up near Ukraine is still there and now there are exercises also near Estonia and Latvia – while US/NATO  are redeploying fighter jets in Estonia and Poland, US military contingent has been redeployed also in Romania and quite a few US warship entered the Black Sea apparently in breach of a Montreal Agreement (which limits the tonnage and number of ships allowed, so the Russian formal protest says)

China is having a major problem and already in Hong Kong some of the mansion bought by Chinese millionaires have been sold for 50% less as the rich have to sell fast to avoid bankruptcy (HSBC stress test).

So what?

Well the statistic says clearly that the latest surge in Australian real estate price has been driven by Chinese buyers and speculators (it is very easy to avoid the foreign ownership rules). Credit Suisse estimates that Chinese investor spent USD24 billion in the Australian Real Estate in the last 7 years (mainly Sydney and Melbourne)

So if the turmoil in China continues, the Chinese will start selling guess what…after Hong Kong there is Australia and Canada.

So if you do not want the value of your real estate to keep where it is or growing….don’t let the Chinese neighbour go home.

PS lot of the houses bought had a collateral …commodities…so it would be a vicious circle

The PBoC doubled the yuan trading bands.

This is a signal that the Chinese government is undeterred of making China more like a normal market.

Until now For EX investing in China was extremely easy. You invested and you knew that the Yuan would be rising against US Dollar. Very easy money for professionals. 

Now this is a signal that the one-way bet will not  so easy any more.

Which means

Hot money (speculators) will likely to leave China

Chinese exporters (and shadow banking)have a welcoming space to breath

So in all, probably not much will change and it is a good thing…a step towards total freedom.

But it also highlights that China will effectively behave more like a Western country – let the market do its work – letting go bankruptcy some companies and saving the one too big to let fail.

Good for the long term, but volatile in the short term.

The difference lays on the difference on the Social Contract between the State and the Citizen in China and in the West.

The Theory of Social Contract in modern time has been attributed to the Political Philosopher Locke (UK, AD 1689), but in reality the ground of this theory has been formed by Plato, The Republic Book 2.

The idea is that the individual is prepared to give up his brutish and egoistic nature to a superior power, in exchange of “protection”.

In the West this “protection” is, in essence, having (or believing to have) freedom and democracy.

In China this “protection” is, in essence, having a guaranteed full employment (stated by the Government at 4.6%)

If this contract is broken most probably a revolution will ensue.

This is important for the market because in China the political class will accept the pain of tackle the Shadow Lending unless it threatens directly the employment level. At that point they will intervene (as they can due to the massive cash reserve).

But not before as the shadow lending is actually threatening the normal industry and so the employment level.

As you see they are between an rock  and  a hard place.

So they have to do it. Hopefully they can manage it.

Again, as I said before, this is one of the consequences of the unwinding of the  2008 GFC special measures (China has a massive stimulus in 2008)