The China housing crisis builds up steam

This morning has brought news of something which would bring a chill to the heart of any central banker. It comes from China as we note this from Reuters.

 So far this year, the Shanghai stock index is down 14 percent, the CSI300 has fallen 12.4 percent while China’s H-share index listed in Hong Kong is down 4.8 percent. Shanghai stocks have declined 8.1 percent this month……The Shanghai stock index is below its 50-day moving average and below its 200-day moving average.

Not much sign of any wealth effects there at least not positive ones and there were signs of trouble in another area of asset prices too.

An index tracking major developers on the mainland slumped 4.4 percent following a near 5 percent drop the previous session, as a weakening yuan raised fears of capital outflow that could weigh on asset prices.

Actually they have missed something that Will Ripley of CNN did not.

China’s benchmark Shanghai Composite slid into bear market territory Tues, closing down more than 20% below its January high. Chinese stocks have come under pressure in recent weeks from concerns over the strength of the country’s economic growth & an emerging trade war w/ the US.

Of course the definition of a bear market is somewhat arbitrary and Chine’s stock market does tend to veer from boom to bust. But in  these times of easy monetary policy central bankers place a high emphasis on asset prices. This will be reinforced by the falls in the share price of developers as it reminds of the housing market and debt issues.

The Housing Market

Over the weekend the South China Morning Post offered an eye-catching view from Christopher Balding.

Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product.

There is something for Mark Carney to aim at as those of us in the UK have time to mull a familiar issue.

Keeping housing prices buoyant and development robust is thus an overriding imperative for China – one that is distorting policymaking and worsening its other economic imbalances.

At first I was not sure about his definition of a bubble.

Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot.

However suddenly it looks very bubbilicious.

That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Not surprisingly, this has put home ownership out of reach for most Chinese.

More than out of reach you would think as it must be multiples of out of reach. Also countries way beyond China’s borders face the issue below.

 Politically, homeowners have come to expect their property values to rise continually in a one-way bet;

There is a rather familiar response at least for UK readers.

Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals.

My first thought is that there is a clear opportunity for Gwen Guthrie to translate her hit into Mandarin.

Bill collector’s at my door
What can you do for me, oh?……

‘Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Or to put it more formally.

Wages in China simply aren’t high enough to keep up with the credit fuelled rise in asset prices, and thus developers can’t earn a reasonable rate of return by renting out units.

In terms of the numbers the circle seems to be something of a rectangle.

 In big cities, such as Beijing and Shanghai, yields are hovering around 1.5 per cent (compared to an average of about 3 per cent in the US and 4 per cent in Canada). ……Worse, developers are heavily weighted down with debt, much of it short-term. Many are paying out 7 to 8 per cent bond yields, with debt-to-equity ratios of around 380 per cent.

So the circus requires house price rises of at least 6% per annum to keep the show on the road. But wait there is more and something which to western eyes seems rather extraordinary.

Typically, renters borrow from banks to make an upfront, one-time payment to developers that covers, say, five years.

A rental mortgage is a little mind-boggling. Perhaps though we should have a sweep stake for predict how long it is before we get those in the UK?! Also it is a case of the familiar establishment response to trouble which is to give that poor battered can another kick.

The upfront payment from the bank to the developer provides some short-term cash-flow relief. But otherwise, all it does is delay debt repayments attached to the unit and shrink the loss on unsold inventory.

On a deeper level I wonder how many ( well paid) jobs rely on can kicking and relate to operations which are unviable in profit/loss or balance sheet terms but generate cash for now. How many banks for example or shale oil?

At this stage it all looks rather like the cartoon characters which have to run ever harder just to stand still.

 New starts and land purchases have grown strongly through the first five months of 2018. Investment in residential real estate is up 14 per cent and development loans are up 21 per cent. Far from reducing leverage, banks are jumping back into the speculative bubble: Mortgage growth is now at 20 per cent.

A response

On Sunday, the People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for what some banks must keep in reserves by 50 basis points (bps), releasing $108 billion in liquidity, partly to spur lending to smaller firms. (Reuters)

The PBOC operates under a model where it adjusts quantity rather than price or interest-rates. It mostly leaves the latter to influence the value of the Yuan although of course interest-rate moves affect the domestic economy as well. In terms of time you could argue the UK moved away from that in 1973 but anyway the Thatcherite changes of 1979 ended it. In essence it is allowing the banks to raise what is called the money supply ( as it is really money demand) and no doubt some and maybe much of it will be heading in the direction of the housing market in spite of the claim that it is for business lending. In that they are very much like us western capitalist imperialists so shall we call it lending to small businesses in the property sector?

Oh and speaking of the Yuan.

The dollar bought 6.5240 yuan at the close of trading in China, meaning the yuan fell 0.4% on the day, reaching its lowest level since Dec. 28, according to Wind Info. The Chinese currency weakened further on Tuesday morning in Asia, hitting 6.5409 against the U.S. dollar. ( Wall Street Journal)

Care is needed though as whilst the Yuan has slipped over the past week it has still done better against the US Dollar in 2018 than the Euro or the UK Pound £

Comment

There is much to consider here. After all there have been scare stories about the Chinese economy before but it has managed to carry on regardless. The catch is that the western economies did this in 2005, 2006 and some of 2007 before it all went wrong. The size of the housing and development sector invokes thoughts of what took place in Spain and Ireland although of course China is much more systemic.

Meanwhile interestingly China seems to have spotted a way of making debt work in its favour. It started well.

Every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes. ( New York Times)

But only really ended well for China.

Mr. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December.

Rather like the UK and Hong Kong?

 

 

 

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Trade Wars what are they good for?

This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.

Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )

This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.

While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.

The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.

Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.

According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.

 Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.

The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?

Thinking ahead

Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.

In April 2018 the euro area current account recorded a surplus of €28.4 billion.

Which means this.

The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.

 

 

So the Euro area has a big current account surplus and it is growing.

This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion

There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.

Trade what is it good for?

International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.

Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.

Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)

Although like in so many other areas things are not what they were.

However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.

Although last year was a good year for trade according to the WTO.

World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
in 2016.

How Much?

Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.

About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Actually there were further gains too.

When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.

So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.

Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.

Comment

This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.

Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,

That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.

Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.

These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.

This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.

So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.

 

 

 

 

 

 

The issue of house prices in both Australia and China

Earlier today there was this announcement from Australia or if you prefer the south china territories.

Residential property prices rose 1.9 per cent in the June quarter 2017, according to figures released today by the Australian Bureau of Statistics (ABS)……..Through the year growth in residential property prices reached 10.2 per cent in the June quarter 2017. Sydney and Melbourne recorded the largest through the year growth of all capital cities, both rising 13.8 per cent followed by Hobart, which rose 12.4 per cent.

So we see something which is a familiar pattern as we see a country with a double-digit rate of inflation in this area albeit only just. Also adding to the deja vu is that the capital city seems to be leader of the pack.

However there is quite a bit of variation to be seen on the undercard so to speak.

“Residential property prices, while continuing to rise in Melbourne and Sydney this quarter, have begun to moderate. Annual price movements ranged from -4.9 per cent in Darwin to +13.8 per cent in Sydney and Melbourne. These results highlight the diverse housing market and economic conditions in Australia’s capital cities,” Chief Economist for the ABS, Bruce Hockman said.

The statistics agency seems to be implying it is a sort of race if the tweet below is any guide.

“Sydney and Melbourne drive property price rise of 1.9%” – how did your state perform?

Wealth

There was something added to the official house price release that will lead to smiles and maybe cheers at the Reserve Bank of Australia.

The total value of Australia’s 9.9 million residential dwellings increased $145.9 billion to $6.7 trillion. The mean price of dwellings in Australia rose by $12,100 over the quarter to $679,100.

Central bankers will cheer the idea that wealth has increased in response to the house price rises but there are plenty of issues with this. Firstly you are using the prices of relatively few houses and flats to give a value for the whole housing stock. Has anybody made an offer for every dwelling in Australia? I write that partly in jest but the principle of the valuation idea being a fantasy is sound. Marginal prices ( the last sale) do not give an average value. Also the implication given that wealth has increased ignores first-time buyers and those wishing or needing to move to a larger dwelling as they face inflation rather than have wealth gains.

This sort of thinking has also infested the overall wealth figures for Australia and the emphasis is mine.

The average net worth for all Australian households in 2015–16 was $929,400, up from $835,300 in 2013–14 and $722,200 in 2005-06. Rising property values are the main contributor to this increase. Total average property values have increased to $626,700 in 2015–16 from $548,500 in 2013–14 and $433,500 in 2005-06.

If we look at impacts on different groups we see it driving inequality. One way of looking at this is to use a Gini coefficient which in adjusted terms for disposable income is 0.323 and for wealth is 0.605 . Another way is to just simply look at the ch-ch-changes over time.

One factor driving the increase in net wealth of high income households is the value of owner-occupied and other property. For high wealth households, average total property value increased by $878,000 between 2003-04 and 2015-16 from $829,200 to $1.7 million. For middle wealth households average property values increased by $211,200 (from $258,000 to $469,200). Low wealth households that owned property had much lower growth of $5,600 to $28,500 over the twelve years.

As you can see the “wealth effects” are rather concentrated as I note that the percentage increase is larger for the wealthier as well of course as the absolute amount. Those at the lower end of the scale gain very little if anything. What group do we think central bankers and their friends are likely to be in?

Debt

This has been rising too.

Average household debt has almost doubled since 2003-04 according to the latest figures from the Survey of Income and Housing, released by the Australian Bureau of Statistics (ABS).

ABS Chief Economist Bruce Hockman said average household debt had risen to $169,000 in 2015-16, an increase of $75,000 on the 2003-04 average of $94,000.

The ABS analysis tells us this.

Growth in debt has outpaced income and asset growth since 2003-04. Rising property values, low interest rates and a growing appetite for larger debts have all contributed to increased over-indebtedness. The proportion of over-indebted households has climbed to 29 per cent of all households with debt in 2015-16, up from 21 per cent in 2003-04.

They define over-indebtedness as having debts of more than 3 years income or more than 75% of their assets. That must include rather a lot of first-time buyers.

Younger property owners in particular have taken on greater debt.

Also the statistic below makes me think that some are either punting the property market or had no choice but to take out a large loan.

“Nearly half of our most wealthy households (47 per cent) who have a property debt are over-indebted, holding an average property debt of $924,000. This makes them particularly susceptible if market conditions or household economic circumstances change,” explained Mr Hockman.

So something of an illusion of wealth combined with the hard reality of debt.

Ever more familiar

Such situations invariably involve “Help” for first-time buyers and here it is Aussie style.

In Australia every State government provides first home buyer with incentives such as the First Home Owners Grant (FHOG) ( FHBA)

In New South Wales you get 10,000 Aussie Dollars plus since July purchases up to 650,000 Aussie Dollars are free of state stamp duty.

China

If we head north to China we see a logical response to ever higher house prices.

Local governments are directly buying up large quantities of houses developers haven’t been able to sell and filling them with citizens relocated from what they call “slums”—old, sometimes dilapidated neighborhoods. ( Wall Street Journal).

We have discussed on here more than a few times that the end game could easily be a socialisation of losses in the property market which of course would be yet another subsidy for the banks.

The scale of the program is large, accounting for 18% of floor space sold in 2016, according to Rosealea Yao, senior analyst at Gavekal Dragonomics, and is being partly funded by state policy banks like China Development Bank. ( WSJ)

Will they turn out to be like the Bank of Japan in equity markets and be a sort of Beijing Whale? Each time the market dips the Bank of Japan provides a put option although of course there are not that many Exchange Traded Funds for it to buy these days because it has bought so many already.

Comment

There is a fair bit to consider here so let me open with a breakdown of changes in the situation in Australia over the last decade or so.

This growth in household debt was larger than the growth in income and assets over the same period. The mean household debt has increased by 83% in real terms since 2003-04. By comparison, the mean asset value increased by 49% and gross income by 38%.

Lower interest-rates have oiled the difference between the growth of debt and income. But as we move on so has the rise in perceived wealth. The reason I call it perceived wealth is that those who sell genuinely gain when they do so but for the rest it is simply a paper profit based on a relatively small number of transactions.

If we move to the detail we see that if there is to be Taylor Swift style “trouble,trouble, trouble” it does not have to be in the whole market. What I mean by that is that lower wealth groups have gained very little if anything from the asset price rises so any debt issues there are a problem. Also those at the upper end may be more vulnerable than one might initially assume.

High income households were also more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low income households (in the bottom 20%).

Should one day they head down the road that China is currently on then the chart below may suggest that those who have rented may be none too pleased.

Never Tear Us Apart ( INXS )

I was standing
You were there
Two worlds collided
And they could never ever tear us apart

China faces up to a ratings downgrade

This morning we have received news about the world’s second largest economy. The Ratings Agency Moodys issued this statement.

Moodys Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook from negative to stable.

As you can see from the statement this was not a complete surprise as the outlook had been negative although in some ways the timing was as not so long ago the IMF had told us this. From Reuters on the 18th of April.

The IMF upgraded its estimate for China’s 2017 growth to 6.6 percent from 6.5 percent, which it made in January. It also raised its forecast for growth next year to 6.2 percent from the previous 6.0 percent.

This added to the upgrade it has given China in January when it had raised the economic growth forecast for 2017 from 6.2%. In fact only on the 9th if this month the IMF had repeated this message.

In China, the region’s biggest and the world’s second largest economy, policy stimulus is expected to keep supporting demand. Although still robust with 2017 first quarter growth slightly stronger than expected, growth is projected to decelerate to 6.6 percent in 2017 and 6.2 in 2018.

 

This slowdown is predicated on a cooling housing market, partly reflecting recent tightening measures, weaker wage and consumption growth, and a stable fiscal deficit.

Although whilst it was relatively upbeat the IMF has warned about credit expansion.

Why did Moodys act?

As the quote from the Financial Times below shows Moodys are concerned about the financial system in China.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” Marie Diron, the agency’s associate managing director for sovereign risk, wrote in an announcement on Wednesday.

Indeed if we look at the statement they expect China to go along at least part of the journey that us westerners have travelled.

While China’s GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus.

Of course their economic growth is officially recorded at higher levels than ours but it looks like the Chinese will have to accept a sort of new normal where economic growth is lower just like we have.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016.

If we look at the situation in terms of the national debt to GDP ratio we have looked at for Greece and the UK this week already then it looks as if China is currently in a lot better place.

Moody’s expects China’s direct fiscal debt to reach 40 per cent of gross domestic product by the end of next year and 45 per cent by 2020. ( Financial Times).

However in a development which is very familiar just like us Westerners the Chinese do all they can to keep what is public-sector debt off the official books.

In addition, it notes that China’s reliance on disguised fiscal spending through off-budget special purpose vehicles owned by local governments is likely to persist. The Financial Times reported this month on a confidential World Bank assessment warning of risks from so-called local government financing vehicles.

Moodys are expecting further growth in this area.

Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

Let us look at the wider debt burden in China which is something I looked at back on January 5th.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

Moodys thinks that this will happen going forwards.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors.

I would counsel caution about the use of averages here as not only can they be misleading without an idea of dispersion it could be signalling a group going over the cliff together.

Debt and Demographics

Should debt continue to rise then China will share a problem that is affecting more than a few of the evil western capitalist imperialists. From my article on January 5th.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

Commodity prices

Mining.com updates us on the trends for Iron Ore.

The Northern China import price for 62% Fe iron ore fines was $61.90 a tonne on Monday, down more than 20% year-to-date on growing fears of an oversupplied market.

There is quite a bit going on as the Chinese increasingly use scrap iron in production but it is hard not to think of the Iron Ore which was used as collateral in financial deals as we looked at some time back.How much of that is in today’s 5% fall in the price of Iron Ore futures is hard to say. Dr.Copper rallied at the end of 2016 after several years of decline but seems to have mostly flat lined in 2017 at around US $2.50.

The outlook

This month’s business surveys recorded something of a slow down.

The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a further slowdown in growth momentum at the start of the second quarter. This was highlighted by the Composite Output Index posting 51.2 in April, down from 52.1 in March, and the lowest reading for ten months.

The ratio between the numbers here and official levels of economic growth are very different to what we see in the west but any slow down will not be welcome.

Comment

There are a few things to consider here. Firstly we are unlikely to see much of a fall in bond prices and rises in yields in response to this as used to happen. The Chinese bond market is almost entirely ( ~ 96% ) domestically owned making it rather like Japan meaning that any selling by foreign investors is not that likely to be significant. Also these days central banks mostly intervene to stop such things don’t they?

Moving onto the economy we see that monetary conditions are the issue and for this to end well the Chinese will have to make a much better job of dealing with a credit boom than we did in the west. Will they be able to continue to tighten policy if economic growth slows further? As to outflows of money we are regularly assured these days that they have pretty much stopped but to my mind there is a worrying signal which is the continuing rise in the price of bitcoin.

The average price of Bitcoin across all exchanges is 2326.72 USD ( @bitcoinprice )

Finally these things are not the same without an official denial are they? From Xinhua News.

China’s Finance Ministry on Wednesday dismissed a decision by international rating agency Moody’s to downgrade China’s long-term local currency and foreign currency issuer ratings.

 

Of China, Bitcoin, football and innovative finance

This week was one when those who consider themselves to be the world’s elite wanted us to concentrate on events at the World Economic Forum in Davos. However this has gone rather wrong for them as the main news items this week turned out to be the Brexit speech given by Prime Minister May in the UK and of course the inauguration of Donald Trump as the new US President later today. These matters were referred to in Davos as George Soros explained how his profit and loss account would have been so much better except for those pesky voters in the UK and US. Bow down mortals, was the message there. The “open society” he proclaims seems to mean being open to agreeing with him.

China

We have found ourselves looking East quite a few times in 2017 and this morning we saw another instance of a thought-provoking action. From Ioan Smith.

| has cut RRR 1% at Big 5 banks HAS CUT RRR BY 1% temporarily to ease “seasonal liquidity pressure” – source

So the People’s Bank of China has eased pressure in the monetary system by reducing the amount of reserves the big banks need to hold. Reuters has given us more detail on this.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by one percentage point, taking the ratio down to 16 percent.It will restore their RRR to the normal level at an appropriate time after the holiday, according to sources……….The five biggest lenders are Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB), Bank of China, Bank of Communications Co (BoCom) and Agricultural Bank of China.

 

This adds to other moves on the monetary system as I explained on the 5th of this month.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

We have seen signs of this in two areas since. The first was the collapse in the price of Bitcoin as China applied capital controls. There has been more news about this in the last 24 hours. From the Wall Street Journal.

Chinese banking regulators said two bitcoin exchanges in Beijing improperly engaged in margin financing and failed to impose controls to prevent money laundering, a development that could hurt trading of the virtual currency in its biggest market.

The action by China’s central bank signals heightened government scrutiny of bitcoin trading on the mainland, which has been allowed to expand largely unfettered since 2013.

This chart of Bitcoin volumes is quite something.

As ever there is debate about the exact numbers but I think we get the idea.

Also we have seen it in the world of football where after two extraordinary trades where £60 million was supposedly paid for Oscar and Carlos Tevez is being paid around £1 per second. Yet suddenly limits on foreign players suddenly were tightened and as a Chelsea fan I was very grateful for that! Plenty of food for thought there for Roman Abramovich as in essence football was how he got plenty of money outside Russia.

GDP

This morning the Financial Times tells us this.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

It is extraordinary how quickly they come up with their GDP numbers, it is almost as if they make them up. This of course is a counterpoint to headlines of the number being a “beat”. I also note that China seems to have learned something from the western capitalist imperialists.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven-years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

That is an issue that has caused plenty of trouble in western countries. Also I see one economist has had a bad day.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Industrial Production and Retail Sales

The first was extraordinary and yet also represents a slow down. From Investing.com.

In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 6.0%, from 6.2% in the preceding month.

Many countries would give their right arm for industrial production growth like that but for China the noticeable fact is that it is now less than GDP growth. Meanwhile the economy seems to have shifted towards consumption

In a report, National Bureau of Statistics of China said that Chinese Retail Sales rose to an annual rate of 10.9%, from 10.8% in the preceding month.

The rest of the world would quite like China to make such a switch as it would reduce its trade surplus but can it manage it?

Financial Innovation

We have come to be very nervous of the word innovation after its use by Irish financiers. But take a look at this from the South China Morning Post last week.

Step one: Pledge a mainland asset with a mainland bank for a standby letter of credit (SBLC) which is a promise by the bank to pay. Use the SBLC to get a HK$8.8 billion loan in Hong Kong.

Since it’s a deal to pay off a piece of land publicly auctioned by the Hong Kong government, approval from the mainland regulators will be easy.

Step two: Pledge the Kai Tak land with the banks in Hong Kong. Many may find the bid – 70 per cent above market estimate – rather risky. Yet, it won’t be too difficult to find banks to provide a HK$3 billion loan which is only 40 per cent of the land cost.

Step three: Pledge the HK$3 billion cash with a bank in Hong Kong for a SBLC.

Step four: Use the second SBLC as security at a mainland financial institution to purchase debentures and bonds with annual returns of over 6 per cent or above.

Step five: Pledge the HK$3 billion worth of debentures with mainland banks for another SBLC. Given a routine discount of 30 per cent for financial products, the bank will issue a promise to pay HK$2 billion.

Step six: Use the third SBLC as collateral and get a HK$2 billion loan in Hong Kong. Repeat step three to five and so on so forth.

These steps may sound a bit complicated. But in many cases, these steps are all done among the mainland and Hong Kong branches of the same bank, though occasionally several banks are involved to dodge regulatory hurdles.

By the end of it you can “have” up to 25 billion Hong Kong Dollars of which 14 billion have left China.

Comment

As you can see there is much to mull about China as for example we have a wry smile at this week’s claim at Davos that it is all for free trade. On the surface we are told that everything is fine yet beneath it there is ever more debt and a rush to send money abroad. Later this year the Yuan is likely to fall again and the whole cycle will begin again.

Later we will find out a little of what President Trump plans so it could be quite a day. We already seem to have moved from fiscal stimulus to cuts as we await some concrete policies.

 

Signs of trouble in China are to be seen in the Yuan ( Renminbi ) rally

As 2017 opens we find ourselves regularly looking east and today it is the turn of China to attract our attention. There is much going on both above and below the surface but let us begin with the good news part. So far the Chinese economy continues to grow if the Markit business surveys are any guide and it looks as though there has been a pick-up. On Tuesday we were told that the manufacturing sector was doing well.

Manufacturing companies in China reported the strongest upturn in operating conditions since January 2013 at the end of 2016. Production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work.

If we focus in on reported output then the figures were even better.

Notably, the rate of output growth accelerated to a 71-month high, with a number of panellists commenting on stronger underlying demand and new client wins. This was highlighted by a sustained increase in new business during December

There is always an oddity in the Chinese numbers and what I mean by that is small PMI reading changes – the latest number was up to 51.9 – seem to have a much larger effect than elsewhere. For example the official manufacturing statistics show growth of around 6% in 2016 from PMI numbers that in the western world might indicate 0.6% growth.

The two worries in the report were a fall in employment which is odd with such output growth and a familiar rise in input costs of which the symbol is the higher price for crude oil.

Services

This morning there was good news to be found here as well.

The headline Caixin China General Services PMI was up 0.3 points from a month ago to 53.4 in December. The sub-indices of new orders, input costs and prices charged all went up.

This meant that the overall picture was positive as well.

Moreover, the Composite Output Index posted up from 52.9 in November to a 45-month high of 53.5 at the end of 2016. China ended 2016 on a positive note, with both manufacturers and service providers seeing stronger increases in business activity compared to November.

Thus we see some good news and the likelihood that the official economic target of 6.5% economic growth will be declared seems high.

Pollution

Here is one clear problem if you will forgive the malapropric effect of the word clear in these circumstances. Over the holiday break I noted pictures sent from China that were reminiscent of the film Blade Runner in the way that the air was polluted. Added to it was this from mrtoga yesterday in a reply to the Financial Times.

I am sitting in Beijing today and the PM count outside is at 529.  Might be the most hazardous day of this winter.

He seems to think that Shanghai is better although some have replied from there that they are not so sure! We need to find a way of putting such a level of pollution into the GDP (Gross Domestic Product) numbers as a subtraction and not as an addition ( via any clean- up costs). What is the price of having to do this?

How realistic is this?

Whilst we should have a slice of humble pie due to problems with western data there has to be an issue with declaring 6.5% GDP growth with this. From the Financial Times.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

So as the demographic decline begins to build-up we are simultaneously seeing high rates of growth? Productivity must be surging as opposed to the malaise seen by the capitalist imperialists.

Debt

The numbers from the FT tell their own story as ever more seems to be required to keep the game alive.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

The Monetary System

We are seeing issues arise this year or more accurately a continuation of past ones. Let us start with the value of the Yuan/Renminbi today. From Bloomberg.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

The yuan gained 1 percent at 2:53 p.m. in Hong Kong, taking its two-day move to 2.3 percent, the most in data going back to 2010.

There are two Chinese currencies the onshore and offshore and this squeeze has widened the gap between them. What we are seeing is an attempt by the Chinese authorities to “burn” those who are in their opinion trying to push the Yuan lower too quickly. There have been various official moves of which the first warning sign was the change in the trade-weighted basket from 11 to 24 currencies then others appeared.

Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency………Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

Higher Interest-Rates

Some chilling numbers are being reported by Bloomberg.

Overnight yuan deposit rate jumps to 80% in Hong Kong

Actually Reuters have it at 96% but a lot of care is needed with annualised overnight numbers. But as we return to earth we do note a difference to the falls we saw at the end of the year in much of the western world due to in essence a lack of demand for money.

In other signs of yuan scarcity, HSBC Holdings Plc raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily……

In a world where it is news that US Libor has reached 1% that is relatively high.

Comment

Some of what we are observing is normal for China in that in the gap between our New Year and their they squeeze the exchange-rate. However whilst some of the economic signals are good there are clear dangers in doing this sort of thing. Whilst China may be happy to punish foreign currency speculators there are problems with affecting borrowers with higher interest-rates. The lesson of the credit crunch era is that such things can have big impacts.

Meanwhile it would appear that I am not the only person wondering ( see my post on the 29th of December) about the involvement of Chinese capital in the recent rise and rise of Bitcoin.

Capital flight anyone? That only means that the current Yuan rally looks set to be a type of Pyrrhic victory.

TipTV Finance

Here are my views on the Bank of England from yesterday.

 

http://tiptv.co.uk/will-higher-inflation-force-central-banks-raise-rates-not-yes-man-economics/

 

 

 

 

The impact of Bitcoin and negative bond yields

As we approach the end of 2016 the natural tendency is to look ahead to 2017. We will soon find ourselves afflicted by a litany of forecasts for the year ahead. I say afflicted because this has been an “annus horribilis” for establishment forecasters but those that I am in touch with seem to have learned little if anything at all. Accordingly the theme “same as it ever was” seems set to turn into a “road to nowhere” for them. However we will take a different tack as the holiday break has thrown up a couple of disturbing signals in the world monetary system.

Bitcoin surges

When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.

Actually for some I note that threshold city has already arrived. From BTC Manager.

Bitcoin has surpassed its all-time high in two major currencies, the Euro and the British Pound……With the largest weekly volume in almost 12 months, bitcoin looks to continue to soar against the Euro. With a break of the all-time high at €872.90, there are no previous fractal levels to gauge where the market will take us next. However, the best bet is through the use of simple psychology. Buyers will look to cash out once the price has hit a psychological resistance, a big, round number where profits will be locked in and buying interest starts to fade.

So it is interesting to note first that standard analysis ” it might go up or it might go down” applies as much to newer markets as it does to older ones! As ever the possibility it might stay the same is ignored though. But those of you who use the Euro as a currency have seen a considerable devaluation against Bitcoin in recent times which means those of us who use the UK Pound £ have had a particularly poor 2016 against it.

On the Coinfloor exchange, BTC-GBP was at £479.00 week ending June 26, 2016, following our open letter to Britons. Fast forward to the close of 2016, BTC-GBP is looking to break above the £800 mark and is taking aim at the psychological £1000 level. With a break above the all-time high, there is no precedent and £1000 could be a conservative estimate for the long-term, but we will see some exhaustion from bulls at this level.

Looking at the chart a past colleague of mine would be very upset if I did not point out that it looks very much like what he called a “bowl” formation. This means that it needs to continue to accelerate or otherwise it will then be like one of those cartoon characters which run over a cliff edge by mistake. Or to bring things up to date like the Toshiba share price this week as it has now eroded nearly all the gains of 2016.

There is another perspective we can find and StockTwits helps us out with this.

 Some care is needed with the word never as Botcoin was invented on the 31st of October 2008 and is thus a child of the credit crunch era. But the current situation does give us food for thought as the immediate knee-jerk response that it is replacing gold in some fashion does have issues. Let me point out the one which occurs to me which is that discoveries on other planets and moons apart the supply of gold is fixed whereas Bitcoin and especially cryptocurrencies in general is not. ( Just to add that the latter remains true but @BambouClub has pointed out that Bitcoin is limited to 21 million units).

Also those of you who like me watched the BBC 4 documentary on Fleetwood Mac last night which of course featured the “Gold Dust Woman” Stevie Nicks will wonder about any impact on music and this is before the backing vocals she did for John Stewart?

There’s people out there turning music into gold

Somehow I don’t see “Bitcoin Dust Woman” quite cutting it do you?

Why is this happening?

If you follow the advice of go west young (wo)man then you have a long journey as the real pressure is to be found in the East. Let us first take a stop over in India where the Demonetisation debacle continues.  From LiveMint.

Mumbai: Demonetisation has boosted the digital platforms for payment, which has helped the National Payments Corporation’s (NPC) RuPay card usage at merchant terminals soar seven times since 8 November, taking the daily volumes to over 2.1 million.

As we look at the ongoing issue it is not hard to see the motivation for people wanting to escape the Indian monetary system entirely and thus moving towards currencies like Bitcoin. As I pointed out on November 11th.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Although of course many were left out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Here is a link to the details of Demonetisation.

https://notayesmanseconomics.wordpress.com/2016/11/11/the-war-on-cash-continues/

China

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops! If we move to this morning there are other signals to be found. From the Wall Street Journal.

The yuan dropped 7% against the dollar this year…….

Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas.

The People’s Bank of China is increasingly replacing deposits and indeed finance in the banking system in a move that has not gone so well for us western capitalist imperialists. But the fundamental point here is that with such a large flow of funds ongoing we see two clear effects. The first is the rise in the Bitcoin price as it would take only a minor proportion of the move to put it in a boom and the second is that the world financial system looks unstable one more time.

Negative Interest-Rates in the UK

One of the forecasts for 2017 will no doubt be for higher bond yields. After all it has to be right one year! But more seriously if we just look at the UK something else is in play and it covers a few areas. It started with this before Christmas. From Bloomberg on December 16th.

The U.K. Treasury sold one-month bills at an average negative yield for the first time ever on Friday, with investors bidding for more than seven times the amount on offer,

That got worse just before Christmas and today a former respondent on here Shireblogger who now contacts me on Twitter pointed out this.

UK gilts just hit a record low 2 year yield at 3.3 bps. ( @bondvigilantes )

What we find ourselves observing is a safe haven problem of sorts as @NelderMead points out.

a year end desperation for collateral. QE creates the priv deposits & takes away the collateral to back ’em

Another “side effect” of the “Sledgehammer” of Andy Haldane and Mark Carney. Are they available for comment and I do not mean a diversion onto green issues?

Comment

So there you have it. After all the central planning and “reform” what we see are yet more signs of stress in the financial system. So much for certainty about 2017 as we expect inflation yet again in the use of the words “unexpected” and “surprise”.

Share Radio

I will be on after the 1 o’clock news today with quite a bit to discuss I think.