China is being hit hard by its economic virus

Today brings an opportunity to take a fresh look at the economic story of 2020 which is the impact of the Corona Virus on the Chinese and world economies. We can reverse our normal order and look at the financial market impact but before we do so I think we should also note the suffering and deaths behind this.

Jittery investors erased almost $400 billion from Chinese stocks, with the Shanghai Composite index shedding up to 8% to hit a one-year low, according to Reuters calculations.

As you can see the Reuters journalists were unable to resist the temptation of writing a large number ( $400 billion ) in spite of the fact they are using a marginal price for some to value the total. Actually but for the price limits there would have been further falls.

Stocks tumbled across the board, with nearly 3000 stock closing at limit-down price. ( YuanTalks)

Although not every share fell and I guess you will not be suprised to see who did not.

Mask producers and some medical related companies outperformed.

The traditional response to this is for the bond market to rally and it did not disappoint.

#China’s 10-year #treasury futures closed 1.37% up at the highest level in more than 3 years as investors dump risky assets. ( YuanTalks )

This meant that the benchmark ten-year yield pushed below the 3% barrier to 2.86% at the close. So heading towards the levels seen by us Western Imperialist Capitalists.

The exchange rate has a more mixed picture. Whilst the Yuan fell by more than 1% versus the US Dollar this morning and pushed through the 7 Yuan threshold it is also true that we are where we were three months ago. In the circumstances we had seen a surprising stability as whilst there had been plenty of media rhetoric a move from 6.85 to 6.92 was not a lot. So it is over playing it to say it is the dog that did nor bark it has been quiet.

People’s Bank of China

This stepped up to the plate today according to the South China Morning Post.

In the face of the “epidemic situation”, the People’s Bank of China (PBOC) said on Sunday it would “inject 1.2 trillion yuan via reverse repo operations on February 3 to ensure sufficient liquidity supply.”
“The liquidity of the overall banking system will be 900 billion yuan more than the same period of last year,” the central bank added.It is the first time that the central bank has made such an announcement and also marks the largest single-day reverse repo operation it has ever conducted.

The issue was partly caused by the fact that there were previous operations which were maturing so we need to see the net effect.

According to Reuters calculations, 1.05 trillion yuan (US$151 billion) worth of reverse repos are set to mature on Monday, meaning that 150 billion yuan in net cash will be injected.

This also came with a small interest-rate cut.

SHANGHAI (Reuters) – China’s cut to its reverse repo rate should alleviate the shock to the real economy from a virus outbreak and is a good move to stabilize expectations and restore financial market confidence, a central bank adviser said on Monday.

Ma Jun’s comments followed an unexpected decision by the central bank for a cut of 10 basis points in the interest rate on reverse repurchase agreements.

Thus we have seen the traditional central banking response to an expected equity market decline as well as a reason for today’s fall in the Yuan.

Manufacturing

This is a rather hot topic in the circumstances as we note this morning’s release.

“The Caixin China General Manufacturing PMI stood at
51.1 in January, down from 51.5 in the previous month. The
manufacturing sector expanded at the slowest pace since August, despite growing for six consecutive months, indicating a mild economic recovery.”

It is hard what to know to make of that and even more so this.

That said, business confidence continued to improve, with the gauge for future output expectations on the rise and tending to recover after two years of depression, due chiefly to the phase one trade deal between China and the U.S

Looking at the dates this gives us a snapshot just before the virus hit and perhaps we should be expecting something more like this bit going forwards.

Production growth slowed, with the output subindex posting its lowest reading since last August. The employment subindex returned to negative territory.

Whilst it also covers other sectors of the economy the official industrial data for December was somewhat downbeat.

BEIJING (Reuters) – China’s industrial firms posted their first annual decline in profits in four years in 2019, as the slowest economic growth in almost 30 years and a bruising trade war with the United States hit the country’s factories.

Official data released on Monday showed industrial profits declining 3.3% on an annual basis to 6.1996 trillion yuan ($897.96 billion) in 2019, compared with the 2.1% dip in the January-November period, the National Bureau of Statistics (NBS) said on its website. It was first full-year decline since 2015 when profits fell 2.3%.

Hong Kong

This has a role as a type of offshore hybrid for the Chinese economy. Even before the Corona Virus it had been seeing economic problems due to the protests there.

According to the advance estimates, GDP decreased by 2.9% in real terms in the fourth quarter of 2019 from a year earlier, compared with the decrease of 2.8% in the third quarter of 2019. The decline of was mainly attributable to the weak performance in both domestic and external demand. For 2019 as a whole, GDP decreased by 1.2% in real terms from 2018. ( Hong Kong Statistics )

The situation is presently in flux with @fastFT announcinng this earlier.

Hong Kong closes border crossings with China

Comment

The issue here twists on the fact that the Corona Virus is new. After all a flu epidemic would be considered not that major on this scale, but it is the fear of the unknown driving this. But the quarantining response has hit the Chinese economy and is being felt around the world. For example the reduction in oil demand has led to this.

OPEC+ IS CONSIDERING FURTHER OIL OUTPUT CUT OF 500,000 BPD DUE TO VIRUS IMPACT ON DEMAND – TWO OPEC SOURCES MOST OPEC MEMBERS AGREE ON NEED TO CUT OIL OUTPUT FURTHER || OPEC+ NOW CONSIDERING MEETING ON FEB. 14-15 – OPEC SOURCE ( @FirstSquawk )

This is in reply to a price for a barrel of Brent Crude Oil which has fallen below US 57 Dollars today. Those who just follow the headlines will be a bit surprised as we have in recent times twice had headlines of it exceeding 70 US Dollars but the truth is that without something special to boost it the oil price has been slip-sliding away.

Switching to Dr. Copper then a futures price of US $2.53 suggests trouble ahead. As to Iron Ore the price falls are already impacting on the South China Territories. From Commodity News.

THE deadly coronavirus outbreak threatens to put a significant dent in Western Australia’s finances amid a plunge in the iron ore market.

Premier Mark McGowan says a 13 per cent decline in the iron ore price over the past fortnight to $US81 ($A121) per tonne is one of several concerns for a state economy heavily dependent on a lucrative trade partnership with China.

Construction has ground to a halt across China amid travel restrictions and port closures, prompting investors to dump iron ore shares.

Meanwhile if you want some positive news here is an example from planet ECB.

ECB’s De Guindos: Starting To See Signs Of Stabilisation On A Global Level. ( @LiveSquawk )

Podcast

The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,
Satisfied.

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.

Comment

It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.

 

 

The banks continue to be trouble,trouble,trouble

The weekend just past has been full of banking news which has not been good. That is quite an anti achievement when we note that a decade or so ago when the banking crisis hit we were assured by politicians and central bankers that it would never be allowed to happen again and they would fix the problems. Whereas the reality has been represented by this from the Guardian this morning.

Under the new Lloyds Bank “Lend A Hand” deal, a first-time buyer will be able to borrow up to £500,000 for a new home, without putting down a penny of deposit.

Why is this necessary? It is because the establishment have played the same old song of higher house prices and telling people they are better off via wealth effects. Meanwhile the claims of no inflation are contradicted by the increasing inability of first-time buyers to afford housing even with ultra-low mortgage rates to help.

In this instance the mortgage is 100% of the loan for the people taking it out but payments are backed for 3 years by a family member or members.

The Lloyds deal requires that a member of the family – such as parent, grandparent or close relative – helps out. The bank will only grant the 100% mortgage if the family member puts a sum equal to 10% of the value of the property into a Lloyds savings account.

I have looked it up and their liability is limited to the first 3 years.

At the end of the 3 years, you will be able to take out your savings plus interest. That’s as long as the buyer hasn’t missed any payments or their home hasn’t been repossessed.

Frankly if payments are in danger of being missed it may suit the family member to fund them. But unless things go dreadfully wrong after 3 years we have what it a mortgage with only a little equity as not much is repaid in the first 3 years.

But as ever we see something of a round-tripping cycle between the central bank which pushes cheap liquidity to the banks who then pump up the housing market.

Vim Maru, group director of Lloyds Banking Group, which also controls Halifax, said: “We are committed to lending £30bn to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and ‘Lend a Hand’ is one of the ways we will do this.

Mark Carney’s morning espresso will be tasting especially good today.

China

Let me hand you over to the People’s Bank of China which has issued a Q&A about its new (easing) policy and it starts with something very familiar.

Banks need to have adequate capital to guarantee sustainable financial support for the real economy.

When central banks state that what they in fact mean is the housing sector. For example the Bank of England claimed its Funding for Lending Scheme was for smaller businesses when in fact lending to them fell but mortgage lending picked up as mortgage rates plunged. So let us dig deeper.

The Central Bank Bills Swap (CBS) allows financial institutions holding banks’ perpetual bonds to have more collateral of high quality, improves market liquidity of such bonds, and increases market desire to buy them, thereby encouraging banks to replenish capital via perpetual bond issuance and creating favourable conditions for stepping up financial support for the real economy.

As we do so we see that what are finite organisations (banks) have debt forever which is troubling for starters. We also note that this is a type of debt for equity operation as we mull that there are some quite good reasons for not being keen on bank equity. So debt in this form ( perpetual) qualifies as capital and I believe Tier 1 capital in this case. The next move is that the perpetual bonds can be swapped for central bank bills meaning that the central bank now has the risk and the investor has none in return for a haircut depending on how much collateral is required. Thus we get.

increases market desire to buy them

because if you have worries you just accept the haircut and pass the rest of the risk to the PBOC.  As to improving market liquidity then the Bank of China was quick to back up that point.

Bank of China issued 40 billion yuan perpetual on Friday at a coupon rate of 4.5%, the first bank issuer of perpetualbond in . ( Yuan Talks)

The catch is that these sort of moves create liquidity for a time but later can drain it. That is because if things go wrong you end up with two very different markets which is the real one and the central bank supported one.

So the banks will get more capital and they will use it to raise lending and if history is any guide the “real economy” will be the housing market. This will then be presented as a surprise and we will learn what the Chinese word for counterfactual is.

Deutsche Bank

It is always there isn’t it? Let us start with what looked like some better news which was a 4% rally in the share price to 8.13 Euros on Friday. This looks like an early wire on this from @DeltaOne yesterday.

DEUTSCHE BANK GETS ADDITIONAL INVESTMENT FROM QATAR…….DISCUSSIONS ON QATAR INVESTMENT ARE ADVANCED BUT NO FINAL AGREEMENT TIMING AND SIZE OF INVESTMENT UNCLEAR

As they are already shareholders then this would be a case of doubling up or rather if we look at the price history doubling down. Of course this is not the only plan doing the rounds about DB.

Shareholders in Deutsche Bank have voiced deep concerns about the German lender’s mooted tie-up with domestic rival Commerzbank, saying the move would “paralyse” the country’s largest lender and destroy value for investors. ( Financial News)

Mind you it has been doing a pretty good job of destroying shareholder value all on its own.

Greece

Here we have seen massive sums used to pump up the banks at the cost of the national debt of Greece itself. But according to the IMF at the end of last week more is needed.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets. Coordinated steps by key stakeholders are needed to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).

So all the bailouts have been to the tune of “Tantalize Me” by Jimmy the Hoover from back in the day.

Comment

The sad part of all of this is that we are observing yet another lost decade. As so often the hype and indeed hyperbole has not been matched by action. Central banks like to trumpet the improvement in bank capital ratios but if you look at bank share prices then there has been a shortage of investors willing to put their money where the central banks open mouth operations are.

In the case of Deutsche Bank as well as the Chinese and Greek banking systems we see that we are entering yet another phase of the crisis. With the problems recently at Metro Bank in the UK that had its risk model wrong in another “mistake” then the central banks will be on the case this time or maybe not.

This means we have not been processing most model change requests from internal model banks. ( Reserve Bank of New Zealand)

 

China adds to the list of slowing economies

This morning has seen a barrage of economic data released by the National Bureau of Statistics in China. This gives us an opportunity to see if they are catching the economic cold that we have been observing developing amongst us evil western capitalist imperialists. According to the rhetoric things are going really rather well.

In November, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the requirement of high-quality development, stuck to the general working guideline of making progress while maintaining stability, adopted the new development philosophy, deepened the supply-side structural reform, and intensified efforts in policy implementation to maintain stability in areas like employment, financial sector, foreign trade, foreign investment, domestic investment, and market expectation. The economy performed within the reasonable range and maintained the generally stable and growing momentum.

That is quite an opening sentence to say the least! Let us add to that with some perspective as we look back.

Next week marks 40 years since China opened up its economy to the world. It’s economy has grown to 80x the size of its 1978 version. For comparison, the U.S. has grown 8x. ( @DavidInglesTV)

So the rhetoric fits that but as we shall see fits what is currently taking place much less well.

Today’s Data

Industrial Production

Whilst the growth rate would be loved by many this is China and things are not what they used to be.

In November, the real growth of the total value added of the industrial enterprises above designated size was 5.4 percent year-on-year, 0.5 percentage point slower than last month.

This wrong-footed expectations based on the ongoing stimulus programme and was the lowest reading since early 2016. In terms of this year the annual growth rate has fallen from the 7.2% of January to a period of apparent stabilisation around 6% and now another leg lower. In terms of a breakdown we were told this.

In terms of sectors, the value added of the mining increased by 2.3 percent on a year-on-year base, the manufacturing grew by 5.6 percent and the production and supply of electricity, thermal power, gas and water grew by 9.8 percent.

Retail Sales

So with production falling was there a potential boost from consumer demand?

In November, the total retail sales of consumer goods reached 3,526.0 billion yuan, a year-on-year rise of 8.1 percent, 0.5 percentage point slower than last month.

If we switch to Reuters we see that it has been quite some time since growth has been at this level.

Retail sales rose 8.1 percent in November from a year earlier, data from the National Bureau of Statistics showed on Friday, below expectations for an 8.8 percent rise and the slowest since May 2003. In October, sales increased 8.6 percent.

If we look at the pattern we see the recent peak was 10.1% in March and the early part of the year saw several readings comfortably above 9%.

From January to November, the total retail sales of consumer goods grew by 9.1 percent year on year.

The official data set also gives us an idea of the scale of urbanisation in China now.

Analyzed by different areas, the retail sales in urban areas reached 2,999.0 billion yuan, up by 7.9 percent year-on-year, and the retail sales in rural areas stood at 527.0 billion yuan, up by 9.3 percent.

I doubt you will be surprised to learn what was particularly pulling the numbers down.

Auto sales fell a sharp 10.0 percent from a year earlier, in line with industry data showing sales dived 14 percent in November – the steepest drop in nearly seven years. ( Reuters).

Slowing auto sales on China are part of a pattern that has rumbled around the world this year. Only yesterday there was news about Ford closing a plant in Blanquefort in France and planning job cuts in Saarlouis Germany.

Service Sector

This was not as weak as the others but has also fallen in 2018.

In November, the Index of Services Production increased by 7.2 percent year on year, the same speed as last month………From January to November, the Index of Services Production increased by 7.7 percent year on year.

Taxes

Another way of looking at economic performance is to analyse what a country can collect in taxes and at first this looks good.

China’s fiscal revenue rose 6.5 percent year-on-year to 17.23 trillion yuan (about 2.5 trillion U.S. dollars) in the first 11 months of 2018, official data showed.

But it too has slowed quite a bit in the last couple of months.

The country’s fiscal revenue stood at 1.08 trillion yuan last month, with a 5.4-percent decline year-on-year, according to the Ministry of Finance.

The decline widened from a drop of 3.1 percent in October, the first fall this year.

In November, China’s tax revenue reached 805.1 billion yuan, down 8.3 percent year on year, compared with a 5.1-percent decline in October, the ministry said.

Some of this has been driven by the tax cuts applied to try to stimulate the economy so we will have to wait and see how this fully plays out.

Money Supply

Reuters updated us earlier this week.

Broad M2 money supply grew 8.0 percent in November from a year earlier, matching forecasts and October’s pace.

Adding to signs of stress on balance sheets and faltering business confidence, M1 money supply rose just 1.5 percent on-year, the weakest pace since January 2014. M1 reflects both the strength of corporate cash positions and whether they may be building up funds for possible future investments.

That is a fascinating perception of narrow money. What we would expect from such data ( the growth rate exceeded 10% in late 2015 and much of 2016) is for it to apply a brake to the Chinese economy and that is exactly what it appears to be doing. Furthermore the brake appears to be tightening.

Switching to broad money trends and subtracting inflation we get a suggestion that future economic growth will head towards and maybe below 6%.

Comment

Whilst the rhetoric may be different China has itself a dose of what the western capitalist imperialists are suffering from in 2018 and that is slower narrow money supply growth. We can argue about definitions and circumstances but as we look around Europe, the US and now China it seems the rhythm section are hammering out the same beat. There are different responses because countries start from different growth levels. For example the impact on France seems to have sent production into negative territory if this morning’s Markit business survey is any guide whereas Chinese production is still recording a growth rate above 5%.

But the direction of travel is the same and China has got used to high growth rates so there will be indigestion from the changes. So we can expect more stimuli and if the recent speeches from the PBOC are any guide some interest-rate reductions I think. They will be a bit late for the next few months though.

And so it begins?

China To Lift Retaliatory Tariff On US Cars For Three Months -Had Imposed 25% Retaliatory Tariff On Cars -To Lift Tariffs From On Jan 1 ( @LiveSquawk )

 

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 China financial crisis of 2016 is partly a reflection of the mighty US Dollar

We are not even out of the first week of 2016 and there is already a litany of financial and economic news out of China. We discussed several times in 2015 the issue of whether the Chinese central planners could make a better job of this sort of thing than the evil capitalist imperialists of the West and this week’s news suggests maybe not! Let us remind ourselves of one of the signs of trouble which I discussed on August 11th by looking at what the People’s Bank of China (PBOC) had done.

The bank then weakened the midpoint to 6.2298 per dollar on Tuesday morning, compared with Monday’s 6.1162 fix – the biggest-ever one-day adjustment to the midpoint.

So we saw that the Yuan ( which seems to have replaced the Renimbi again…) was seeing two things at once. Firstly it was continuing a journey from a fixed exchange-rate in the direction of a flexible or free once. Secondly it was being devalued/depreciated as the flexibility was downwards. At the time I pointed out that this was a new front in the currency wars of the time as we were already seeing the Bank of Japan and the European Central Bank push the Yen and Euro later. We know now that ( as I discussed yesterday) the Euro was about to take a dive.

This week

If we look back to August we see that the Yuan declined to around 6.4 versus the US Dollar quite quickly and then we saw a period of relatively stability as for example a month ago it was at 6.4. Actually it had rallied and dipped back. But since then we have seen a slow decline which has been replaced by faster falls this week. Central banks always have difficulties with a managed float of this sort and China has seen the same and now it finds the Yuan at 6.59 versus the US Dollar. Actually another sign of trouble is that the offshore Yuan is at 6.68 right now showing quite a gap and it was at 6.74 earlier until a fall back which looks rather like PBOC intervention to me. Thus we see that the managed float has proved problematic in 2016 so far with today the most difficult as an attempt to push the Yuan higher ended with it being fixed lower. We are back to levels seen in February 2011.

Currency reserves

This morning has seen news of trouble on this front too. I will let Reuters take up the story.

China’s foreign exchange reserves, the world’s largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday.

This backs up the picture for 2015 as a whole.

China’s foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record.

So it looks as though China has certainly been splashing the cash in 2015 to support its currency. As we have discussed monetary flows into China have become outflows and I note that RBS think that in the year to November 2015 outflows were of the order of one trillion US Dollars.

If we look at this in the style of the film “Airplane” then it looks as though the International Monetary Fund may have chosen a bad time to put the Yuan in its SDR (Special Drawing Rights) basket.

The strong dollar

A factor underreported in this is that China is at least partly suffering from its decision to at least partly fix its currency against the US Dollar. The trade-weighted Dollar Index is at 98.7 as opposed to the 80 or so of the summer of 2014 and this move has put the squeeze on quite a lot of currencies. If we look at 2016 so far ( h/t @BTabrum) then of 22 emerging market currencies the Yuan is in 11th place below the Singapore Dollar but above the Russian Rouble and its fall is small compared to the 6% of the Argentine Peso.

Trade-weighted Yuan

On December 11th the PBOC with interesting timing guided us towards a new trade-weighted index for the Yuan or Renminbi and here is the latest report.

According to the latest figures, on December 31, 2015, the CFETS RMB exchange rate index closed at 100.94, gaining 0.98 percent from the end of 2014;

In case you do not get the message then it is rammed home.

The mixed movements of the three RMB exchange rate indices are a reflection of overall stability of the RMB exchange rate against a basket of currencies in 2015…….The current conditions are supportive of relatively stable RMB exchange rate against a basket of currencies.

Actually in a way they have been proven correct today alone.

In 2016, the RMB exchange rate regime will continue to be based on market supply and demand and with reference to a basket of currencies. We expect that the exchange rate will move in both directions with flexibility.

So we move on having noted that at least some of the trouble right now has been caused by a sort of managed fixing versus the US Dollar. This has been exacerbated by the strength of the US Dollar which has put pressure on currency management. If we look at the other extreme of a free float even the previously firm UK Pound £ has been feeling the strain as it has been pushed below US $1.46. So the PBOC may be singing along to Brandon Flowers of The Killers.

And we’re caught up in the crossfire of Heaven and Hell
And we’re searching for shelter

Equity market pain

You can argue that there was only a very brief equity market in China this morning. There was only 29 minutes of trading as the market fell by just over 7% with the CSI 300 index falling 255 points. So much for a free market? Oh and where was the plunge protection team when it was most needed?

If we look for perspective we see that back on the 11th of August the Shanghai Composite equity index had a high of 3970 and today it closed at 3116. In the meantime we have had a barrage of moves to support the markets but technical and economic such as the interest-rate cuts. But like the evil capitalist imperialists discovered such moves struggle to reflate a deflating bubble. The falls have been particularly sharp this week so far as the Shanghai Composite closed 2015 at 3539 meaning there has been a 12% loss so far in 2016.

There has been an international impact too as we see that the UK FTSE 100 has fallen below 6000 today and as I type this is down 160 points at 5913. So central bankers around the world will be watching this – and in the case of the US Federal Reserve with sweaty palms and maybe a racing heartbeat – as they have targeted asset prices which includes equities. Spare a thought for Swiss taxpayers should this go on as of course the Swiss National Bank has become something of an equity investor in recent times.

Comment

A deeper analysis of the Chinese situation shows us that its own financial instabilities have been exacerbated by the strong US Dollar. This has been made worse by its decision to set its exchange-rate against it. Thus rather than drifting lower like virtually everyone else instead the pressure builds up, which it has tried to resist, but even with its sizeable currency reserves it has to give way every now and then. This then adds to the pressure as everybody concentrates on the decline in the reserves rather than the large amount left. Also I suspect that those in the “know” have been trying to get out of the Yuan before it falls further which only makes things worse.

The generated instability is also being seen in the stock market where it would appear that at least temporarily the plunge protection team has taken a holiday or perhaps a bath. As this crunches around the financial system we see consequences in many markets and not just other equity ones. For example Dr. Copper has nearly touched US $2 and Brent Crude Oil fell earlier to below US $33.

If we now move to the real economy we know that it had slowed down in China as highlighted by this week’s services and manufacturing surveys which indicated stagnation at best. The PBOC and Chinese authorities will be hoping for a disconnect between financial markets and the real economy but sadly for them this is usually an example of an asymmetric relationship. Falls hurt and rallies help little, or at least that has mostly been the picture in the West. Of course markets themselves are likely to be volatile as for the last day of trading this week it would hardly be a surprise if the plunge protection team was already doing some calisthenics and limbering up. For them there is only one song today courtesy of David Bowie and Queen.

It’s the terror of knowing
What this world is about
Watching some good friends
Screaming, “Let me out!”
Tomorrow gets me higher
Pressure on people – people on streets