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Thread: Charting China's Imminent Implosion

  1. #301
    In what appears to dismiss President Trump's claims that a deal is a lot closer than you think, Bloomberg reports that the White House is said to support a review of investment limits for China.
    Among the options the Trump administration is considering:

    • delisting Chinese companies from U.S. stock exchanges and
    • limiting Americans’ exposure to the Chinese market through government pension funds.

    Exact mechanisms for how to do so have not yet been worked out and any plan is subject to approval by President Donald Trump, who has given the green light to the discussion, according to one person close to the deliberations.
    Bloomberg adds that there is reportedly no timeline for a Chinese capital restriction action.
    The market did not like that...

    Yuan is also tumbling...

    Alibaba shares plunged...

    But there are others...

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  3. #302
    As the violence in Hong Kong escalates with every passing week, culminating on Friday with what was effectively the passage of martial law when the local government banned the wearing of masks at public assemblies, a colonial-era law that is meant to give the authorities a green light to finally crack down on protesters at will, one aspect of Hong Kong life seemed to be surprisingly stable: no, not the local economy, as HK retail sales just suffered their biggest drop on record as the continuing violent protests halt most if not all commerce:

    We are talking about the local banks, which have been remarkably resilient in the face of the continued mass protests and the ever rising threat of violent Chinese retaliation which could destroy Hong Kong's status as the financial capital of the Pacific Rim in a heart beat, and crush the local banking system. In short: despite the perfect conditions for a bank run, the locals continued to behave as if they had not a care in the world.
    Only that is now changing, because one day after a junior JPMorgan banker was beaten in broad daylight by the protest mob, a SCMP report confirms that the social upheaval has finally spilled over into the financial world: according to the HK publication, the local central bank, the Hong Kong Monetary Authority, was forced to issue a statement warning against a "malicious attempt to cause panic among the public" after rumors were spread online about the possibility of the government using emergency powers to impose foreign-exchange controls.

    And while the de facto central bank stressed that the banking system remained robust and well positioned to withstand any market volatility, some of the statistics it provided gave a rather troubling impression: the monetary authority said that not only were more than 10% of 3,300 ATMs damaged and could not function, but that banks were negotiating with logistics firms to refill cash machines as 5% of them had run out of money, adding that banknote delivery was affected by the closure of shopping malls and MTR stations.

    Will this be enough to prevent a bank run on the remaining ATMs? The answer will largely depend on what happens in the next 24-48 hours in Hong Kong, although the signs are grim.

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  4. #303

  5. #304
    China's exports in September fell 3.2% from a year earlier, customs data showed on Monday, hurt by the intensifying Sino-U.S. trade war and weakening global demand.Analysts polled by Reuters had expected exports would decline 3%, after a 1% drop in August.
    Imports in September fell 8.5% from a year earlier, more than a predicted drop of 5.2% and compared with a 5.6% contraction in August.

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  7. #305
    China's producer prices deflated for the 3rd straight month, slumping 1.2% YoY - the biggest deflationary impulse since July 2016 - but, thanks to the explosion in pork prices (as 'pig ebola' spreads), Chinese consumers are facing the worst inflation since 2013.

    • China Sept CPI +3.0% YoY (2.9% exp and 2.9% prior)
    • China Sept PPI -1.2% YoY (-1.2% exp and -0.8% prior)

    “The return to PPI deflation since July is not only acting as a drag on manufacturing investment, already under stress from U.S.-China trade tensions and supply-chain relocation, but also poses a major risk for onshore corporate debt refinancing,” Bo Zhuang, chief China economist at research firm TS Lombard, said before the data.
    “Sustained PPI deflation, where the monthly rate remained below -2% for more than three to six months, would be a likely catalyst for the reversion to old-style credit stimulus.”
    The biggest driver of China's consumer price inflation was food prices, which rose 11.2% (highest since Oct 2011), thanks to pork prices surging 69.3% YoY - the biggest spike since 2007.

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  8. #306
    For months, pundits have been looking at China's official data - be it the PBOC's reserve data or SAFE's monthly flow report - for indication that capital flight is picking up again as it did in 2015 in the aftermath of the first yuan devaluation, and so far the data has refused to validate predictions that Chinese depositors are quietly pulling their money from China's financial system.

    Does this mean that Beijing has been successful in implementing draconian controls on outbound foreign investment and other capital movements to lock the front door through which money used to leave China.
    That's one possibility. However, as the WSJ notes, instead of using the front door, Chinese capital is increasingly "walking through the back door" following the recent sharp devaluation in the yuan, which has slumped 6% against the dollar since late April, and 10% since mid-2018; of course should the back door open any wider Beijing will find itself again forced to sell down big parts of its currency reserves to avoid a panic. Worries about cracks in currency fortress China are another reason Beijing is likely to remain wary of aggressive monetary stimulus.
    It's also why China - the country where economic data is anything but what is represented by the government - has no qualms about fabricating data to refute a worst case scenario that would unleash a self-fulfilling prophecy leading to more devaluation and more capital flight.
    And yet, despite Beijing's best efforts at misdirection - and outright data fabrication - there is a relatively simple way to keep track of what is really happening with China's fund flows behind the scenes. As the WSJ notes, the relevant figure to track is China’s "errors and omissions" line in its balance of payments.

    This number represents the residual of the main BOP accounts registering trade and investment flows—in other words, capital that has moved across China’s borders without being documented. An equation "plug."

    Whereas in most countries this line item is relatively small, in China, since 2014 when Beijing decided to stop appreciating the yuan against the dollar, it has become persistently and mysteriously large and negative" with analysts at Rhodium Group and others long suspecting this item represents undocumented capital flight.
    And while this shadow capital flight moderated in 2018, the trend recently became even more striking, as "errors and omissions" hit a record first-half high of $131 billion in 2019, the WSJ notes citing Gene Ma of the Institute of International Finance, much larger than the first-half average of $80 billion during the last period of big capital outflows in 2015 and 2016.
    On the surface, this suggests that true capital flight is now twice as large as what was observed after the 2015 devaluation, and indicated that while measures instituted a few years ago to limit capital flight have appeared effective, China remains vulnerable to rising outflows through unofficial channels. Furthermore, the country has yet to report its third-quarter figures, following the big yuan depreciation in early August, when it dipped below 7.00 against the dollar for the first time in a decade.

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  9. #307
    Auto sales in China have fallen for the 15th month out of 16 months in September. It's the "worst slump in a generation", according to Bloomberg, as the key Asian market continues to be the poster child for the global automotive recession.

    The market fell 6.6% to 1.81 million total units, according to the China Passenger Car Association. The auto industry continues to be weighed down by a slowing global economy, the trade war and stricter emissions rules. The China Association of Automobile Manufacturers is forecasting a drop in vehicle deliveries to dealers in 2019, despite China trying several types of stimulus to drum up demand.

    Both local manufacturers and global manufacturers have experienced these headwinds in China.
    General Motors said late last week that third quarter deliveries in China were down 18% and local Chinese manufacturer BYD said sales were lower in September by 15%.
    Additional data from Marklines shows that names like Mitsubishi, Mazda and Nissan continued mid-single digit declines, while Toyota and Honda were able to (barely) buck the trend.

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  10. #308
    Golden Week, a seven-day Chinese holiday, is traditionally a peak period for home sales.
    This year, sales plummeted.

    The South China Post reports ‘Golden Week’ Property Sales Plunge in Major Chinese Cities.
    Property sales in China’s major cities saw one of their worst “golden week” holidays in years, as buyers held back amid a slowing economy and tight restrictions on mortgage loans.
    Sales of new homes in Beijing dropped to their lowest level since 2014 during the week following the National Day holiday, according to data from the property information portal
    By area, sales of new homes in Shanghai plummeted 86 per cent to 5,000 square metres, while the capital saw a 92 per cent plunge to 2,000 sq metre, according to data from Centaline Property.
    Clement Luk, a director for east China at Centaline Property, said the home-buying mood has been dampened by the tightening of mortgage lending and the prolonged US-China trade war that discouraged spending.
    “People do not want to commit in big investment now, like purchasing any homes, as market sentiment has cooled quickly since March,” he said. “Most owners prefer travelling during golden week holiday instead.”
    “Deals are increasingly difficult to conclude unless owners are willing to cut selling prices at big discounts,” said Guo Yi, chief analyst at Beijing-based property consultancy Heshuo Institute.
    Beijing Dilemma

    Beijing faces the dilemma of all speculative markets: because most real estate buying is now driven by expected price increases, when prices credibly stop rising, buyers disappear and prices begin to fall. Price stability isn't a real option. via @scmpnews
    — Michael Pettis (@michaelxpettis) October 8, 2019
    When property speculation ends, property bloodbaths begin.

  11. #309
    Retail rents in Hong Kong, among the most expensive in the world, fell sharply in the third quarter, property consultancy CBRE said on Tuesday, following anti-government protests that have pushed shop sales to a record low.High street retail rents fell by 10.5% in the July-Sept quarter compared to the previous quarter, CBRE said, the sharpest quarterly decline since the first quarter of 1998 at the time of the Asian financial crisis.
    Overall high street rents are likely to decline by another 5-10% over the remainder of 2019, the consultancy said.

    The landlord of an 11,600 square foot (1,078 sq m), three-storey shop space in Causeway Bay, a prime shopping district, has slashed rent by more than 30 percent, according to realtor Midland IC&I.
    The space will be leased for a monthly HK$480,000 ($61,196) to a claw crane arcade this month, down sharply from the HK$700,000 charged from the home appliance chain Fortress before that lease expired last October.
    The protests have taken a heavy toll on tourism and consumer spending.
    "There's very few rental transactions; people are not making offers, they're pessimistic about the outlook and want to observe more," said Daniel Wong, CEO of Midland IC&I.

    A Midland survey published last month showed vacancy rates in Hong Kong's four core shopping districts rose only slightly to 6.5% in the third quarter, up from 5.6% a year ago.
    The realtor expected rents for core district street shops to decline 10%-15% in the second half, and the vacancy rate to rise to up to 8%-9% next year.
    The government said last week at least 100 restaurants have closed in the past few months, and has repeatedly urged landlords and property developers to offer rent subsidies to retailers and food and beverage businesses.

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  12. #310
    It's that time of the month again... when China drops all its heavy-hitting macro-economic data (goal-seeked or not - allegedly) with expectations for slowing industrial production and overall economic growth (but a bounce in retail sales).
    Recent aggregate macro data has been disappointing as China's credit impulse (despite every effort) has failed to inspire...

    The Chinese goalseek-o-tron appears out-of-order tonight, when moments ago Beijing reported that China's Q3 GDP rose just 6.0% YoY, below the 6.1% consensus had expected - and the lowest since 'modern' records began 27 years ago in 1992, dipping below even the financial crisis low of 6.4%.

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  13. #311
    A darkening outlook for China's economy continues to materialize week by week.
    New data from commercial property group CBRE warns the country's office vacancy rate has just surged to the highest since the financial crisis of 2007–2008, first reported by Bloomberg.
    CBRE said the vacancy rate for commercial office space in 17 major cities rose to 21.5% in 3Q19, a level not seen since the global economy was melting down in 2008.
    Sam Xie, CBRE's head of research in China, said the recent "spike" in vacancies is one of the worst since the last financial crisis.

    Catherine Chen, Cushman & Wakefield's head of research for Greater China, told Financial Times that soaring commercial office vacancies in China was mainly due to dwindling demand, but not oversupplied conditions.
    "Contributing factors included slower expansion of co-working operators and financial services companies, and a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown," she added.
    Henry Chin, head of research for Asia Pacific at CBRE, told Financial Times that macroeconomic headwinds relating to the trade war between the US and China were also a significant factor in rising office vacancies.
    As shown in the Bloomberg chart below, using CBRE data, Shanghai and Shenzhen had the highest office vacancies than any other city, and both had around 20% of office spaces dormant.

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  14. #312
    A new report from Centaline Property, a research firm providing private data on the property market in Hong Kong, has shown property prices are experiencing their worst downturns since late last year during the global growth scare, which sent global equity markets crashing.
    Centaline's report said property prices in the city have plunged for eight straight weeks, mostly tied to an extreme economic deceleration in the region as macroeconomic headwinds continue to increase.
    The Central Plains City Index (CCL) is a monthly leading index that tracks property prices in Hong Kong. Regional investors use CCL to track the changing trend of the Hong Kong property market.

    As a whole, the CCL Leading Index has tumbled to 180.32, -.36% w/w, -1.62% m/m, and has recorded the lowest level in 27-weeks.

    The CCL Leading Index for Large-Scale housing in Hong Kong printed at 181.44, -.32% w/w, -1.70% m/m, and now at a 28-week low.

    The CCL Leading Index for Small and Medium-Sized Units printed 180.26, -.37% w/w, -1.71% m/m, and now at the lowest levels in 27-weeks.

    The three major leading indexes for Hong Kong property prices (above) slid for eight consecutive weeks, falling -4.29 %, -4.70%, and -4.54%, respectively.

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  16. #313
    The latest growth (and trade) figures suggest China's economy is slowing even more as we enter 4Q. In fact, according to Lipper Alpha Insight's China Momentum Indicator (CMI) 2.0, the latest China GDP was likely at 4.2%, a third below the official print.

    Lipper Alpha Insight told their clients that the slowdown in China's economy isn't a "consequence of rebalancing; China abandoned its half-hearted attempt to reform the economy in a bid to cushion the slowdown last year. Recent measures of consumer appetite have reinforced this message. Retail sales, bank lending to households and aviation passenger numbers have all slowed since the end of 2017 (when our CMI last peaked), despite being key indicators of a more consumer-led economy."

    Lipper Alpha Insight adds that while the "pursuit of growth at the expense of reform is the wrong medicine; it will work for a time, but allocative inefficiencies and diminishing returns mean that unless something changes China is destined for perennially lower economic growth. This idea is reflected in our forecast, with the path into the future expected to be one that winds to and fro, with key events likely to intensify China's prioritization of growth, regardless of the long-term cost."

    With growth estimates in China missing the mark in 3Q, it's likely slippage below 6% could be seen in 4Q, as there is no indication that China, nor the global economy is turning up at the moment. There are some positive factors when it comes to the recent trade truce, or at least that's what the market believes. Still, as we have repeatedly discussed, the global slowdown didn't start because of the trade war but due to residual problems within China's massively overlevered economy, so any resolution will likely only boost global growth for a brief period.
    Bloomberg data shows China's full-year expansion for 2019 to come in around 6.2% and will slow to 5.9% in 2020.
    China can cut interest rates and unleash higher doses of monetary policy. But the problem China is running into today, as explained in our report Sunday night, is that monetary stimulus is becoming less effective than ever before.
    As the world awaits the upcoming Politburo meeting for economic clarity and a medium-term outlook from Chinese leaders, China's economy is rapidly deteriorating and will likely fall underneath 6% in the quarters ahead, and could even register full-year growth rates for 2020 under 6%.

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  17. #314
    China’s $13 trillion economy is slowing and indicators showing that range from freight shipments to factory power generation and from employment to expenditures on entertainment.

    China releases gross domestic product data on Friday, a key indicator for global growth since even small changes in China’s economic performance can have ripple effects for other major economies.
    Economists expect China’s growth has slowed to near its lowest since 1990 because of the escalating trade conflict with the United States and weakening domestic demand. That slowdown appears to be deepening despite a weakening currency and steps by Beijing to provide stimulus, including cuts in taxes and fees equivalent to about $282 billion.

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  18. #315
    Bloomberg outlines a significant problem. Since the Chinese overpaid for many foreign companies in the last several years, volatile markets across the world have made it impossible at the moment to sell for the right price.
    Since the ability to offload some of these companies through public markets has shut in 2019, one needs to look at the IPO implosion in the US, as these companies are now trying to reduce their debt piles, which is an acknowledgment that bad times are ahead.
    Ferretti SpA, an Italian superyacht maker, owned by China's SHIG–Weichai Group, shelved its IPO last week. Ferretti blamed macroeconomic headwinds for the dealy, as the IPO was seen as a way for SHIG–Weichai Group's to cash out of its position in the company.

    Since the trade war began a little over 15 months ago between the US and China, the Chinese have been selling assets across the world to build liquidity as domestic capital controls become tighter.
    The global IPO and M&A markets are slowing, something we recently highlighted, has made it much more difficult for Chinese firms to sell foreign companies and assets in 2H19.
    "It's a big process of adjustment," Mark Webster, managing director at BDA Partners in Shanghai, told Bloomberg in a phone interview. "Some Chinese companies made overseas acquisitions at the top of the cycle and ended up overpaying for assets that did not make a lot of strategic sense. They are now finding it challenging to offload those businesses at fair values."
    Another example of Chinese firms attempting to liquidate companies is PizzaExpress Ltd., a UK casual dining chain acquired by Chinese private equity firm Hony Capital in 2014.

    Sources told Bloomberg that PizzaExpress had hired a financial adviser to prepare debt talks with creditors. There's also a possibility that advisors are preparing the company for a sale.
    China's HNA Group Co. recently attempted to dump its stake in Avolon Holdings Ltd. for $8.5 billion, a deal that has yet to close.
    Data compiled by Bloomberg shows the volume of Chinese outbound deals dropped to $59 billion so far this year, down 13% over last year, and well off 2016 high.
    It's only a matter of time before Chinese firms become forced sellers of Western companies, only to realize that there will be no buyers at the valuations they paid several years ago, as forced selling will then crush valuations.

  19. #316
    The South China Morning Post reports China Doubles Value of Infrastructure Project Approvals to Stave Off Slowdown.
    The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to South China Morning Post calculations based on the state planner’s approval statements released between January and October this year.
    The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads and airports.
    Local governments have been under increasing pressure from Beijing to support the economy, but they have less budget room due to lower tax revenues after the central government over the past year ordered individual and business tax cuts.
    To fill the gap, Beijing has allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects. At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year. And when local governments came close to exhausting their annual quota set this autumn, the central government brought forward a portion of their 2020 quota so they could continue to raise funding for new projects.
    Infrastructure Urgency

    Michael Pettis, Finance Professor, Peking University, and author of the China Financial Markets website has an interesting take infrastructure projects.

    Allocation of Money

    To fund the projects China Cuts Banks' Reserve Ratios, Frees up $126 Billion for Loans.
    Analysts had expected China to announce more policy easing measures soon as the world’s second-largest economy comes under growing pressure from escalating U.S. tariffs and sluggish domestic demand.
    The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 50 basis points (bps) for all banks, with an additional 100 bps cut for qualified city commercial banks. The RRR for large banks will be lowered to 13.0%. The PBOC has now slashed the ratio seven times since early 2018. The size of the latest move was at the upper end of market expectations, and the amount of funds released will be the largest so far in the current easing cycle.
    The broad-based cut, which will release 800 billion yuan in liquidity, is effective Sept. 16. The additional targeted cut will release 100 billion yuan, in two phases effective Oct. 15 and Nov. 15.
    Real Growth

    With real growth at probably half reported levels – which measure growth in activity, whether or not it is wealth enhancing – lower-than-expected growth rates are not a bad thing: they mean credit growth, while still too high, is slowing. via @scmpnews
    — Michael Pettis (@michaelxpettis) October 20, 2019
    World Bank has just cut its GDP forecast for China to 6.1% in 2019, 5.9% in 2020, 5.8% in 2021. For this to happen, debt-to-GDP ratios would have to rise by at least 12-15 percentage points, which I think is very unlikely. I'll bet 2021 growth is below 5% (still way too high).
    — Michael Pettis (@michaelxpettis) October 10, 2019

    Chinese Local Government Funds Run Out of Projects to Back

    On October 16, the Fiancial Times reported Chinese Local Government Funds Run Out of Projects to Back.
    There are not many economically viable projects for us to take on,” an official at Sichuan Development told the FT.
    “We have plenty of bridges and roads already.

    More at:

  20. #317
    Hong Kong has fallen into recession, hit by five months of anti-government protests that erupted in flames at the weekend, and is unlikely to achieve any growth this year, the city's Financial Secretary said.Black-clad and masked demonstrators set fire to shops and hurled petrol bombs at police on Sunday following a now-familiar pattern, with police responding with tear gas, water cannon and rubber bullets.
    TV footage showed protesters, who streamed into the Kowloon hotel and shopping artery of Nathan Road on Sunday, setting fire to street barricades and squirting petrol from plastic bottles on to fires at subway entrances amid running battles with police.
    At one station, activists rolled a flaming metal barrel down a long staircase towards police below.
    "The blow (from the protests) to our economy is comprehensive," Paul Chan said in a blog post, adding that a preliminary estimate for third-quarter GDP on Thursday would show two successive quarters of contraction - the technical definition of a recession.
    He also said it would be "extremely difficult" to achieve the government's pre-protest forecast of 0-1 % annual economic growth.

    Tourists numbers have plummeted, with visitor numbers down nearly 50 percent in October, a decline Chan called an "emergency".
    Retail operators, from prime shopping malls to family-run businesses, have been forced to close for multiple days over the past few months.
    While authorities have announced measures to support local small and medium seized enterprises, Chan said the measures could only "slightly reduce the pressure".

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  21. #318
    Chinese oil and gas giant PetroChina reported on Wednesday a 58-percent plunge in its third-quarter profit as lower oil prices, fierce domestic fuel competition, and slowing gas demand growth weighed on earnings.
    PetroChina booked a net profit of US$1.25 billion (8.83 billion Chinese yuan) in Q3, down by 58.4 percent from the same period last year, missing analyst estimates. Revenues in the third quarter were slightly up—1.8 percent— from a year ago, but they were still below expectations, pushing the company's stock price down by 4.33 percent.

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  22. #319
    According to Bloomberg, more than 2 trillion yuan ($283 billion) of local-government notes will mature in 2020, a record and 58% more than this year’s level. This means fresh debt to refinance upcoming maturities will start hitting the market soon, with a the southern province of Guangdong expected to sell notes as early as November.

    This is happening as China's 10-year yield rose 3 basis points to 3.31%. the highest since late May, while the cost on 12-month interest rate swaps jumped 5 basis points to 2.92%. The yield on China Development Bank’s 3-year bonds due January 2022 rose 10 basis points to 3.25%.
    Despite trading in a narrow range, China’s government bonds have been sliding for nearly two months, starting around the time a "growth shock" hit US rates and sparked the infamous quantastrophe, with the 10-year yield hitting the highest since May as selling momentum accelerated. Naturally, a flood of new supply will only exacerbate the weakness, especially as real, inflation-adjusted yields are barely above zero, a rarity for emerging markets.

    “The large amount of supply that will be rolled over will weigh on China’s sovereign bonds,” Ken Cheung, chief Asia FX strategist at Mizuho Bank, told Bloomberg. The risk only grows when one considers the recent surge in food inflation as a result of "pig Ebola", coupled with lower expectations of central bank stimulus.
    To avoid a panic issuance scramble, Deputy Finance Minister Xu Hongcai said in September that China will grant part of a special bonds quota in advance to ensure that the funds raised can be used early in the year, Bloomberg reported, noting that so-called "special bonds have mostly been used for infrastructure spending, and the national limit could be raised from 2.15 trillion yuan."
    Earlier, in June, the State Council expanded the sectors that funds raised via the special bonds can be put toward. For 2020, they will include transport, energy, agriculture and forestry, vocational education and medical care. Overall fixed-asset investment has slowed this year amid pressure from the U.S. trade war.
    Of course, there is only so much selling that the PBOC can take before it has to intervene, which is why so many China watchers have been stumped by the central bank's lack of willingness to intervene so far.
    Beijing’s decision to avoid conducting aggressive stimulus measures - even as China's growth engine sputters, and the economy grows at the slowest pace since the early 1990s - has spooked bond investors. The central bank has held off from adding liquidity this week, instead allowing large short-term cash injections to mature. That’s effectively drained 500 billion yuan from the financial system. Meanwhile, China's credit impulse which previously pulled the entire world out of a recessionary ditch, has barely pushed off the cycle lows.

    Some analysts said the central bank could instead use a targeted tool to inject one-year cash, which it refrained from doing Wednesday. That said, there is also a limit how aggressive the PBOC can get: soaring consumer prices, fueled by the surging cost of pork, are seen capping how much liquidity Beijing can provide without further stoking inflation.
    Which means that very soon, the PBOC will be forced to choose: risk runaway bond yields, tumbling risk prices and an even faster slowdown in the economy, or stimulate the economy, and watch as the yuan tumbles as inflation surges even more.

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  23. #320
    Early on Thursday, China's National Bureau of Statistics reported that in October, China's manufacturing PMI slumped deeper into contraction, dropping from 49.8 to 49.3, not only below the 49.8 consensus estimate, but also below the lowest sellside estimate (the range was 49.5-50.5). Worse, the Non-manufacturing PMI, which many had ignored for months because it was so deeply into expansionary territory, tumbled sharply, and after its biggest drop in almost a year, dipped to 52.8 from 53.6, and is now just shy of the lowest print since the financial crisis.

    It gets even worse: whereas the contraction for large cap companies was modest, at just 49.9, down from 50.8, mid cap companies were worse, at 49.0, while small caps were dismal, at a paltry 47.9, down from 48.8.
    Broken down by components, almost every index posted a decline, with the exception of the worst one, employment, which posted a modest increase:

    • Production 50.8, down from 52.3
    • New Orders 49.6, down from 50.5
    • Employment 47.3, up from 47.0

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  25. #321
    The unraveling and coming debt crisis in China will take a series of corporate debt defaults to spook investors, and perhaps, the first series of defaults has already started.
    The latest causality is Shandong-based steelmaker Xiwang Group Co., who defaulted on a $142 million bond last week, has sparked contagion fear with other companies in the same region, reported Bloomberg.

    Then on Wednesday, Shandong Sanxing Group Co.'s 2021 dollar bond and China Hongqiao Group Ltd.'s dollar bond due 2023 plummeted to their lowest levels ever as contagion from Xiwang's default continued to frighten investors.
    "Xiwang's default onshore has raised concerns that other privately owned enterprises in Shandong, particularly those from the same locality, may have been associated with the firm," said Wu Qiong, executive director at BOC International Holdings Ltd. in Hong Kong, who spoke with Bloomberg.
    China's onshore credit markets continue to erupt with stress after 2019 defaulted bonds have already hit 2018 highs.

    Fitch Ratings said the default rate of all Chinese issuers in the first three quarters of this year was 1.03%. By historical standards, the default rate is much higher than last year. Most of the firms skipping out on bond payments were private entities.
    The cash crunch comes at a time when overleveraged companies in China are reeling from a global synchronized slowdown and a controlled deleveraging period by the government to create a soft bottom in the economy.
    "Defaults are likely to continue rising, as many medium- and small-sized private firms are facing significant refinancing pressures," Zhang Shuncheng, associate director of corporate research at Fitch, said in an interview. "Private companies suffer from many problems in their own operations, not to mention the impact from the slowing economy and tight credit environment."
    China's corporate sector downfall is overleverage, taken on during the global synchronized recovery. Now, a synchronized decline, these firms are starting to deleverage, adding to the downward pressure in the economy.

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  26. #322
    First it was Baoshang Bank , then it was Bank of Jinzhou, then, two months ago, China's Heng Feng Bank with 1.4 trillion yuan in assets, quietly failed and was just as quietly nationalized. Today, a fourth prominent Chinese bank was on the verge of collapse under the weight of its bad loans, only this time the failure was far less quiet, as depositors of the rural lender swarmed the bank's retail outlets, demanding their money in an angry demonstration of what Beijing is terrified of the most: a bank run.
    Local business leaders, political cadres and banking executives rallied Thursday at the main branch of Henan Yichuan Rural Commercial Bank, just outside the central Chinese city of Luoyang, where they stood one by one before a microphone to pledge their backing for the bank, as smiling employees brandished wads of cash before television cameras to demonstrate just how much cash, literally, the bank had.
    It was China's latest, and most desperate attempt yet to project stability and reassure the public that all is well after rumors spread that the bank’s chairman was in trouble and the bank was on the brink of insolvency. However, as the WSJ reports, it wasn’t enough for 31-year-old Li Xue, who showed up for the third day Thursday to withdraw thousands of yuan of her mother’s life savings after hearing from fellow villagers that Yichuan Bank - which is the largest lender in Yichuan county by the number of branches and capital, and it is also a member of PBOC’s deposit insurance system, according to the local government - was going under.

    Just like any self-respecting Ponzi scheme, the bank's branch managers tried to persuade her to keep her money with them until March, when her mother’s three-year deposits would mature, yielding more than 10,000 yuan in interest. And then, just like any Ponzi scheme, to sweeten the offer, the bank managers also offered her even higher-yielding products, plus supermarket gift cards, just to keep her money there..
    "Our bank is state-backed, and your money is insured by deposit insurance," one female manager told her, but Ms. Li refused, her confidence in the state's lies crushed.
    “We really can’t afford to lose the money,” she said.
    The bank run at Yichuan Bank, located in China's landlocked province of Henan, makes it at least the fourth bank that authorities have rushed to rescue this year. It won't be the last.

    More at:

  27. #323
    Despite China's surprise surge in Caixin Manufacturing PMI (to its highest since Dec 2016), Services were expected to show a modest decline which it did (down from 51.3 to 51.1).
    Note that the only one of the four PMIs to rise was the government-sponsored manufacturing index - massively bucking the trend of the rest...

    Commenting on the China General Services PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:
    “The Caixin China General Services Business Activity Index dipped to 51.1 in October from 51.3 in the previous month, marking the slowest expansion in eight months amid subdued market conditions.
    1) Demand across the services sector grew at a reduced pace, with the gauge for new business falling to the lowest level since February. The measure for new export business picked up slightly.
    2) While the job market expanded at a weaker clip, with the employment gauge falling from the previous month’s recent high, the measure for outstanding business rose further into expansionary territory. This implied a mismatch between labor supply and demand.
    3) Both gauges for input costs and prices charged by service providers edged down, but they remained in positive territory, reflecting relatively high pressure on costs, including those of workers, raw materials and fuel.
    4) The measure for business expectations dropped to the lowest point in 15 months, indicating depressed business confidence.
    Additionally, the Caixin China Composite Output Index inched up to 52 in October from 51.9 in the month before, amid an improvement in manufacturing, but a softer service sector performance.

    "The employment gauge dipped into contractionary territory, indicating renewed pressure on the labor market, which was likely due mainly to structural unemployment. The measure for backlogs of work climbed to the highest level since early 2011, highlighting bottlenecks in production capacity and inventories due to weak business confidence.
    “China’s economy continued to recover in general in October, thanks chiefly to the performance of the manufacturing sector. Domestic and foreign demand both improved. However, business confidence remained weak, constraining the release of production capacity. Structural unemployment and rising raw material costs remained issues. The foundation for economic growth to stabilize still needs to be consolidated.
    But then again, it could be worse - it could be Hong Kong, which saw its PMI crash to 39.3 in October - the lowest since November 2008 with business activity crashing at the fastest pace in the survey's 21-year history. So much for the bounce in August that everyone declared as the bottom...

    Commenting on the latest survey results, Bernard Aw, Principal Economist at IHS Markit, said:
    "Hong Kong's private sector remained mired in one of its worst downturns for the past two decades during October, with the latest PMI survey signalling a deepening economic malaise.
    "The ongoing political unrest and impact of trade tensions saw business activity fall at the sharpest pace since the survey started over 21 years ago. Anecdotal evidence revealed that the retail and tourism sectors remained particularly affected.
    "As new orders continued to fall sharply, led by a record decline in demand from mainland China, firms were becoming increasingly pessimistic about the outlook."
    Which doesn't sound like a picture of 'recovery' or bottoming for the Chinese economy as a whole.

    More at:

  28. #324
    The social-economic turmoil in Hong Kong is certainly unprecedented.
    Retail sales have crashed, housing prices are rolling over, monetary policy via the Hong Kong Monetary Authority is failing to stabilize the economy, and now, new evidence suggests the financial industry is starting to crack.
    Hong Kong Exchanges & Clearing Ltd., the world's third-largest stock exchange (in terms of average daily trading volume), recorded its worst profit in three years as investors fled regional stocks.
    Net income of the exchange plunged 10% to $282 million in Q3 YoY, Bloomberg reported Wednesday. This was one of the most significant drops since the global slowdown in 2016.

    Last week, Hong Kong crashed into a technical recession, the first time since the 2008/09 financial crisis. Hong Kong's economy plunged 3.2% in Q3, government data showed last week, exceeding economists' lowest estimates and confirming a technical recession has begun.

    Hong Kong Financial Secretary Paul Chan warned after more than half a year of violent anti-government demonstrations, the end of October marked the start of the recession.
    "After seeing negative growth in the second quarter, the situation continued in the third quarter, meaning our economy has entered technical recession," Chan wrote in a blog post.
    "It seems it will be extremely difficult for us to reach full-year economic growth of 0 to 1%. I would not rule out the possibility that the full-year economic growth will be negative."
    With two consecutive quarters of negative growth and no end to the protests in sight, Bloomberg has noted in a series of graphs that a full-year economic contraction is likely for 2020.

    Since the protests became violent in early summer, Hong Kong Exchanges & Clearing shares have slipped 12%.

    As the crisis deepens in Hong Kong, it's likely the Hang Seng is setting up for another leg lower.

  29. #325
    China has been spearheading the global recession in the automotive industry and, as one more month has come to pass, there are still no signs of the bleeding letting up.
    As the U.S. and China continue to grapple with solving "Phase 1" of the allegedly upcoming trade deal, pressure remains on the automobile industry globally. For October, China retail passenger vehicle sales were lower by 6% year over year to 1.87 million units, according to the Passenger Car Association. October SUV retail sales also fell 0.7% y/y to 853,130 units.

    More at:

  30. #326
    China's producer prices fell the most in more than three years in October, as the manufacturing sector weakened on declining demand and a knock from the Sino-U.S. tariff war, reinforcing the case for Beijing to keep the stimulus coming.The producer price index (PPI), seen as a key indicator of corporate profitability, fell 1.6% in October from a year earlier, marking the steepest decline since July 2016, National Bureau of Statistics (NBS) data showed on Saturday. Analysts had tipped a contraction of 1.5% for the PPI.
    In contrast, China's consumer prices rose at their fastest pace in almost eight years, driven mostly by a surge in pork prices as African swine fever ravaged the country's hog herds. Some analysts say the CPI rise could become a concern for policymakers looking to introduce measures to prop up demand.

    The factory deflation was punctuated by falling raw material prices, including in the oil and gas extraction and ferrous metal smelting industries. It aligns with other indicators showing shrinking manufacturing activity in October, with the official Purchasing Managers' Index (PMI) indicating contraction for a sixth straight month.
    Zhao Wei, a macro analyst with Wuhan-based Changjiang Securities, said the drag from the real estate sector, which is suffering from a government crackdown on sales speculation and policy tightening on financing for developers, will also become more pronounced.
    "Looking ahead, while a low base from last year will provide some support in the next few months, PPI deflation is likely to continue as overall demand is still under pressure," said Zhao.
    "The PPI may continue to be within a negative growth range."

    To drive down funding costs and boost the economy, China for the first time since 2016 cut the interest rate in its one-year medium lending facility (MLF) loans. The Chinese authorities, though, have been relatively restrained in providing stimulus measures and the cut was by only 5 basis points.
    But surging consumer inflation is adding to the headaches of policymakers who are racing the calendar to meet Beijing's annual growth target as the world's second largest economy slows to the lower end of a 6%-6.5% range for 2019.
    October's consumer price index (CPI) rose 3.8% year-on-year, the most since January 2012 and beating analysts' expectations for 3.3% rate.
    The rise was driven largely by a steep climb in pork prices and other meats after African swine fever killed a large portion of China's pigs. Pork prices more than doubled year-on-year in October, according to the stats bureau, accounting for over 60% of the CPI increase.
    Core CPI for October remained benign at 1.5%. For the full year of 2019, China is aiming for a CPI target of around 3%. It rose 2.6% in the January-October period.
    "Although we expect the People's Bank of China (PBOC) to maintain its easing policy stance, we believe there is elevated risk of a wage-price spiral amid surging pork prices and the spillover effects to other food prices," analysts at Nomura wrote in a note on Nov. 1.
    "Thus the PBOC could potentially become more reluctant to deliver high-profile policy stimulus in coming quarters to avoid fuelling inflation expectations," the analysts said.

    More at:

  31. #327
    China’s credit growth slowed far more than expected in October to the weakest pace since at least 2017 as a continued collapse in shadow banking, weak corporate demand for credit and seasonal effects all signaled that efforts to prop up the economy through bank lending still aren’t working. The central bank reported that Aggregate Financing, China's revised version of the old Total Social Financing, was a paltry 618.9 billion yuan ($88 billion), missing the median conservative estimate of 950 billion yuan, and down a whopping 72% from the 2.27 trillion yuan in September and 737.4 billion yuan in the same month of 2018. Today's print was the lowest in the revised series history which goes back to the start of 2017, and only a slightly lower print in the old series prevents today's total credit injection from being the lowest since 2016!

    New CNY loans of 661.3 billion yuan also missed the consensus print of 800 billion yuan, resulting in outstanding CNY loan growth of 11.9% annualized in October, well below the September 13.3% annualized print. As has been the case recently, two thirds of yuan-denominated bank loans were borrowed by households in the month, while the borrowing by non-financial companies was the least in amount since August 2016.
    But it was China's shadow banking that was the main culprit for today's steep total credit drop, which tumbled by 234 billion in October, the second biggest one month drop of the year, and the 7th drop in a row as well 18th of the past 20! Specifically, entrusted loans fell by 66.7 billion yuan, trust loans declined 62.4 billion yuan and undiscounted bankers acceptances fell 105.3 billion yuan.

    While bank lending traditionally falls in October compared to the previous month as the week-long National Day holiday affects business activity, the continued collapse in shadow banking as well as the completion of local government special-purpose debt sales has magnified the downward trend, resulting in a far lower credit impulse to the economy than China so desperately needs.
    Separately, China's all important M2 rose 8.4% yoy in October, in line with expectations, and just shy of the all time low print.
    "The data itself is kind of expected in terms of the trend,” Commerzbank analyst Zhou Hao said, nothing however that the market is concerned about two things - that it hit another record low (for the current series) and that this means that banks seem to have no place to funnel money after lending to smaller and private firms earlier waned. The deflationary omen also pushed China’s 10 year government bond yield lower by 5 basis points to 3.22%.

    Adding insult to injury, and limiting the central bank's ability to ease more, the latest high frequency data indicate November CPI data may reach an even higher level on a year-on-year basis. But the weak TSF and expected weaker activity growth data will likely put policy makers under more pressures to keep policy stance loose.

    More at:

  32. #328
    The Bussiness Confidence Survey 2019/20 published by the German Chamber of Commerce in China, in cooperation with KPMG in Germany, finds that almost a quarter of German companies operating in China are preparing to relocate production facilities.
    The survey was conducted from late July through mid-September and had 526 member companies out of 2300 respond. Out of the 526 member companies, 23% of the respondents said their factories will be transferred out of China or are contemplating the move.
    Among the German companies leaving or actively planning to leave China, about 71% blame increasing labor costs; 33% cited unfavorable policy environment; 25% said the US-China trade war, and 22% said market access barriers.

    More at:

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  34. #329
    Yesterday, shortly before China's data deluge, we reported that a Beijing-based think tank became the first Chinese economic research institute linked to the government to predict that China’s economic growth rate will slow below 6.0% next year. Specifically, The National Institution for Finance and Development (NIFD) on Wednesday said that China’s economic growth rate will slow to 5.8% in 2020 from an estimated 6.1% this year, a number which is already quite ambitious, not to say artificially goalseeked.
    “The economic slowdown is already a trend,” said former central bank adviser Li Yang, who heads the institute that is affiliated to the Chinese Academy of Social Sciences (CASS). “We must resort to deepened supply-side structural reform to change it or smooth the slowdown, rather than solely rely on monetary or fiscal stimulus.”
    The problem is that even a sub-6% number is wildly optimistic and misrepresents the true state of China's economy considering that back in August, Fathom Consulting calculated that growth in the second largest economy had already shrunk to 4.6% and was declining.

    Of course, shortly thereafter China released its latest retail sales, fixed investment and industrial production data, all of which missed badly and worse, the data showed the weakest retail sales growth since 2003 and weakest Fixed-Asset Investment growth since 1998.

    However, while the slowdown in China's economy has been widely telegraphed for years, a more ominous development is taking place in China's financial system, which at roughly $40 trillion is not only nearly double the size of that of the US, but is the world's biggest. It is here, that one find not only an escalating loss of faith by the market, but confirmation that China's all important credit channel is increasingly clogged up, if not outright broken.
    Following the Q3 earnings releases from Chinese banks, Saxo Bank's Peter Garnry has updated his market cap to total assets ratio for the four largest commercial banks in China. What he found is that the ratio hit a new all-time low of 5.8% in Q3 as total assets grew an annualized 8% in Q3 while market cap of the four banks declined.

    More at:

  35. #330
    Speculative loans in China are souring rapidly. Ruzhou, a city of one million people provides examples.

    Struggling to keep its economy growing, the city of Ruzhou spent big, but is now asking its health care workers for cash to stay afloat.

    Great piece. The problem isn't incompetent officials: the problem is unrealistically high GDP growth targets that clearly cannot be met except by borrowing and overbuilding (and, of course, capitalizing investment losses that should be expensed).
    — Michael Pettis (@michaelxpettis) November 11, 2019
    Begging Nurses for Money

    The New York Times asks How Bad Is China’s Debt?
    Ruzhou, a city of one million people in central China, urgently needed a new hospital, their bosses said. To pay for it, the administrators were asking health care workers for loans. If employees didn’t have the money, they were pointed to banks where they could borrow it and then turn it over to the hospital.
    Ruzhou is a city with a borrowing problem — and an emblem of the trillions of dollars in debt threatening the Chinese economy.
    Local governments borrowed for years to create jobs and keep factories humming. Now China’s economy is slowing to its weakest pace in nearly three decades, but Beijing has kept the lending spigots tight to quell its debt problems. Increasingly these deals are going sour, as they did in Ruzhou, and the loans are going unpaid. Lenders have accused three of Ruzhou’s hospitals and three investment funds tied to the city of not paying back their debts.
    Local officials have long used big spending to keep the economy growing. Ruzhou is home to a number of white-elephant projects, including a stadium and sports complex turned e-commerce center, now largely unused. A shantytown redevelopment project, begun four years ago to give rural residents new homes, has been slowed for lack of money, locals said.
    Doctors and nurses at the traditional Chinese medicine hospital complained to one local state-owned newspaper that they were being ordered to give between $14,000 and $28,000. At Ruzhou Maternal and Child Health Hospital, nurses and doctors were told they had to invest between $8,500 and $14,000, according to government online forums and state media.
    Ruzhou officials did not respond to repeated requests for comment. Two employees of The New York Times who traveled to the city were briefly held by the police and forced to leave.
    Tip of the Iceberg

    Ruzhou has several hospitals in trouble, an unused sports stadium, a cultural complex in shambles, and a failed shantytown project.
    Play this same scene throughout China.
    It's everywhere.
    Nobody is quite sure how big the problem might be. Beijing says the total is about $2.5 trillion. Vincent Zhu, an analyst at Rhodium Group, a research firm, puts the figure at more than $8 trillion.
    Factor in the world's worst air pollution and water supplies you would have to be crazy to drink from.
    Yet, US hyperinflationists think the dollar will collapse to nothing, Chinese debt somehow doesn't matter, China will soon rule the world, and the yuan will displace the dollar as the world's reserve currency.
    I suggest Forget the Yuan: King Dollar is Here to Stay for quite some time.
    The yuan is not even close to competing with the dollar for at least six reasons.
    Meanwhile, Chinese growth is hugely overstated and its massive debt problem little understood.

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