China Starts 2017 With Chronic, Not Stable and Surely Not ‘Reflation’

By Jeffrey Snider of Alhambra

January-February economic statistics do not really indicate stable let alone, as “reflation” would have it, restoration

The first major economic data of 2017 from China was highly disappointing to expectations of either stability or hopes for actual acceleration. On all counts for the combined January-February period, the big three statistics missed: Industrial Production was 6.3%, Fixed Asset Investment 8.9%, and Retail Sales just 9.5%. For retail sales, the primary avenue for what is supposed to be a “rebalancing” Chinese economy, that was the lowest growth rate in more than a decade, the first time below 10% since the January-February period in 2006.

Analysts had been expecting Chinese retail sales to rise either 10.5% or 10.6%, depending on the source collating expectations, meaning that actual sales missed by a wide margin during the holiday period. What was perhaps most noteworthy was the growing dichotomy between online sales and retail sales overall. Virtual sales rose by more than 25% year-over-year, echoing a similar dynamic we have observed in US retail sales since early last year. Consumer prices according to government statistics have been stable (and actually decelerated sharply recently) and therefore different than in the US, so it might not suggest the same oil price effects as here but instead a similar underlying baseline weakness that hasn’t dissipated even though the worst of the “rising dollar” is now a year in the past.

The rest of China’s statistics propose the same assumptions. Industrial production at 6.3% is no different at all than the level of growth it has been for two years now. The noticeable lack of volatility in the changes month-to-month continues to suggest (louder) less reliability, perhaps, than might be hoped for (like China’s GDP estimates). If there were actually some appreciable acceleration in Chinese industry we would expect to see it here, meaning that it is very likely only the downside that might be obscured by an almost perfect and increasingly likely artificial sideways trend.

Continue reading China Starts 2017 With Chronic, Not Stable and Surely Not ‘Reflation’

China Credit and Global Inflationary Dynamics

By Doug Noland

Credit Bubble Bulletin: China Credit and Global Inflationary Dynamics

February 14 – Bloomberg: “China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545bn) in January… New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system.”

Like so many things in The World of Finance, we’re all numb to Chinese Credit data: Broad Credit growth expanded a record $545 billion in the month of January, about a quarter above estimates. Amazingly, last month’s Chinese Credit bonanza exceeded even January 2016’s epic Credit onslaught by 8%. Moreover, as Bloomberg noted, “The main categories of shadow finance all increased significantly. Bankers acceptances — a bank-backed guarantee for future payment — soared to 613.1 billion yuan from 158.9 billion yuan the prior month.”

February 14 – Bloomberg: “China’s shadow banking is back in full swing. Off-balance sheet lending surged by a record 1.2 trillion yuan ($175bn) last month… Efforts by the People’s Bank of China to curb fresh lending may have prompted banks to book some loan transactions as shadow credit, according to Sanford C. Bernstein.”

Yet this was no one-month wonder. China’s aggregate Credit (excluding the government sector) expanded a record $1.05 TN over the past three months, led by a resurgence in “shadow” lending. According to Bloomberg data, China’s shadow finance expanded $350 over the past three months (Nov. through Jan.), up three-fold from the comparable year ago period.

Friday from Bloomberg: “White House Chaos Doesn’t Bother the Stock Market.” Many are confounded by stock market resilience in the face of Washington discord. Perhaps it’s because global liquidity and price dynamics are currently dictated by China, the BOJ and the ECB – rather than Washington and New York. Eurozone and Japanese QE operations continue to add about $150bn of new liquidity each month. Meanwhile, Chinese Credit growth has accelerated from last year’s record $3.0 TN (plus) annual expansion.

February 14 – Bloomberg (Malcolm Scott and Christopher Anstey): “Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China’s rebounding factory prices. The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9% jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China’s economic stabilization and its efforts to shutter surplus capacity are also having an impact.”

China’s January PPI index posted a stronger-than-expected 6.9% y-o-y increase. A year ago – back in January 2016 – y-o-y producer price inflation was a negative 5.3%.  It’s worth noting that China’s y-o-y PPI bottomed in December 2015 at negative 5.9%, the greatest downward price pressure since 2009. In contrast, last month’s y-o-y PPI jump was the strongest since August 2011 (7.3%). China’s remarkable one-year inflationary turnaround was not isolated in producer prices. China’s 2.5% January (y-o-y) CPI increase was up from the year ago 1.8%, matching the peak in 2014.

There are two contrasting analyses of China’s record January Credit growth. The consensus view holds that Chinese officials basically control Credit growth, and a big January confirms that Beijing will ensure/tolerate the ongoing rapid Credit expansion required to meet its 6.5% 2017 growth target (and hold Bubble collapse at bay). This is viewed as constructive for the global reflation view, constructive for global growth and constructive for global risk markets. Chinese tightening measures remain the timid “lean against the wind” variety, measures that at this point pose minimal overall risk to Chinese financial and economic booms.

An opposing view, one I adhere to, questions whether Chinese officials are really on top of extraordinary happenings throughout Chinese finance, let alone in control of system Credit expansion. Years of explosive growth in Credit, institutions and myriad types of instruments and financial intermediation have created what I suspect is a regulatory nightmare. I seriously doubt that PBOC officials take comfort from $1.0 TN of non-government Credit growth over just the past three months.

Continue reading China Credit and Global Inflationary Dynamics

Chinese Yuan: “Manipulated” Does NOT Mean “Unpredictable”

By Elliott Wave International

Chinese Yuan: “Manipulated” Does NOT Mean “Unpredictable”
“…markets are bigger than governments.”

This year’s U.S. presidential election brought into focus one market you don’t hear about often: the Chinese yuan, or renminbi.

“Donald Trump has been telling us all for a long time now that China is a currency manipulator. It’s part of his plan for his first 100 days in office to get on with making sure that China is legally declared to be such a currency manipulator and thus start the process of doing something about it.

“The problem with this is that China really is a currency manipulator. But they’re manipulating the value of the yuan up, not down. Thus returning it to the correct free market value isn’t going to have the desired effect of closing America’s trade deficit with China.” (Forbes, Nov. 13.)

However things shake out with China under the new White House administration, let’s look closer at the basic premise of this argument — namely, that China’s government manipulates the currency.

By definition, market manipulation means stopping the free-market forces from doing what they do best: setting a fair value of an asset that suits both the buyer and the seller. It also implies that the manipulated market is no longer predictable using trend indicators you would apply to other, freely-traded assets.

So, does this mean that the yuan has been unpredictable?

You be the judge.

Below, you see a chart of the yuan vs. U.S. dollar exchange rate going back to 2014.

The arrows on this chart show you the timing of 15 yuan forecasts subscribers saw over the past two years in our Sunday-Tuesday-Thursday Asian-Pacific Short Term Update, edited by Chris Carolan.


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[Click chart to expand]

Continue reading Chinese Yuan: “Manipulated” Does NOT Mean “Unpredictable”

Trump, Bonds, Peripheries, China and Italy

By Doug Noland

Credit Bubble Bulletin: Trump, Bonds, Peripheries, China and Italy

The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.

Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.

Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.

There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.

It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.

Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.

Continue reading Trump, Bonds, Peripheries, China and Italy

The Latest on China’s Mortgage Finance Bubble

By Doug Noland

Credit Bubble Bulletin: The Latest on China’s Mortgage Finance Bubble

It’s been a full seven days since a CBB focused on China… Important – confirmation of the thesis – data again this week.

October 21 – Reuters (Yawen Chen and Nicholas Heath): “China’s new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China’s 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”

Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.

Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year’s housing fever, putting housing affordability close to Hong Kong’s and making it less affordable than London, UBS wrote…”

October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”

Continue reading The Latest on China’s Mortgage Finance Bubble

The (Ongoing) Myth of Stable China

By Jeffrey Snider of Alhambra

In other words, the Chinese economy, as the US and global economy, ratchets lower after each of these monetary episodes

There are those who believe that the Chinese economy has stabilized, as if that was a good thing. Many of these people, mostly economists, said and declared much the same after 2012. That China’s economy might be in 2016 merely as bad as it was in 2015 is a highly negative development, one which requires standards for economic judgment to be still further reduced, starting with “stimulus.”

The latest data from across the Pacific shows that nothing has changed, save one factor. Industrial Production grew by just 6.1% in September, down slightly but not really from the 6.3% in August. IP has been at or below 6.3% in all but two of the 19 months dating back to last March. Both of those were temporary jumps to 6.8% that after each found economists trumpeting the value of “stimulus”, especially the second this past March. It was not the expectation that these programs would “stabilize” Chinese growth but rather that stimulus would do what it is supposed to do, meaning restoring acceleration toward a Chinese economy more recognizable to its past miracle that would aid the ailing, flagging global system. To declare stability now is to admit defeat.

And it is not the first one. This has become a very regular pattern where if lost in the morass of traditional, orthodox perspective the changes in the Chinese economy are obscured along these very lines. In tandem with this supposedly “stabilizing” economy is the Chinese “rebalancing”; where industrial growth predicated on exports was once the driving force of the Chinese “miracle” it shall gently fade in favor of a more modern and benign economy driven as in the West by consumers. This claim first gained serious traction, as excuses always do, the first time the “unexpected” weakness hit.

In the years immediately following the Great “Recession”, the Chinese economy seemed to find the same footing it had held all during the later 1990’s and 2000’s. It looked like a recovery in the truest sense of the word, where the idea of rebalancing was ridiculous but from the other end (not needed). It was only when the global economy suddenly and unexpectedly (to economists) fell off after 2011 that Chinese consumers gained any notice.

Part of the reason for that was the fact that the government had undertaken truly massive “stimulus”, both fiscal as well as monetary. To economists, there was just no way it could have been so ineffective as it appeared to be by 2012, so this alternate explanation was developed as if that was instead the whole point; “stimulus” still works, it’s just that, apparently, economists didn’t realize the target for it.

abook-oct-2016-china3-ip-ratchet

Continue reading The (Ongoing) Myth of Stable China

The Perils of a Resurgent China Credit Boom

By Doug Noland

Credit Bubble Bulletin:  The Perils of a Resurgent China Credit Boom

There’s this uneasiness – an eeriness – in the markets; in the world (I’m not touching politics). Seemingly out of nowhere, the U.S. dollar index surged 1.7% this week. Notably, the Chinese currency fell 0.8% versus the dollar, the biggest weekly decline since January. Copper dropped 2.4%. Most EM currencies were under pressure. I suspect fears of heightened Chinese vulnerability have again become a major force behind unstable global markets.

We’re all numb to the big numbers. China’s debt has rapidly inflated to over 250% of GDP (Bloomberg at 247% to end ’15 from ‘07’s 150%), in what has evolved into history’s greatest Credit Bubble. Total Social Financing, China’s aggregate of total Credit (excluding government bonds) is on pace to expand almost $3.0 TN this year. A headline from Bloomberg TV: “China’s Total Debt Grew 465% Over Past Decade”

Global markets were troubled earlier in the year by fears of a faltering China Bubble – a stock market collapse, destabilizing outflows and a fledgling crisis of confidence. Market recovery owed much to the visibly heavy hand of Beijing frantically plugging holes and spurring a Credit resurgence. Those efforts ensured ongoing China economic expansion that, when coupled with $2.0 TN of QE, supported a short squeeze turned major rally throughout EM and commodities markets. Surging commodities and EM took pressure off troubled sectors, bolstering U.S. and developed market rallies generally. Highly leveraged speculators, commodity producers, companies, countries and continents were granted new leases on life.

The downside of ongoing massive QE and negative rates has of late become a market concern, and with concern comes heightened vulnerability. This ensures keen focus on the other major source of 2016 market support: The Resurgent China Boom. Here as well, the downside of egregious inflationism has become increasingly conspicuous. China’s Credit Bubble is completely out of control – and it’s become deeply systemic. We’re numb to how dangerous circumstances have become.

Continue reading The Perils of a Resurgent China Credit Boom

Risk Off, the BOJ and China

By Doug Noland

Credit Bubble Bulletin: Risk Off, the BOJ and China

Is a meaningful de-risking/de-leveraging episode possible with global central banks injecting liquidity at the current almost $2.0 TN annualized pace?

Thus far, central bankers have successfully quashed every incipient Risk Off. Market tumult has repeatedly been reversed by central bank assurances of even more aggressive monetary stimulus. The flood gates were opened with 2012’s global concerted “whatever it takes.” Massive QE did not, however, prevent 2013’s “taper tantrum.” Previously unimaginable ECB and BOJ QE coupled with ultra-loose monetary policy from the Fed were barely enough to keep global markets from seizing up earlier in the year.

It’s my long-held view that market interventions and liquidity backstops work primarily to promote speculative excess and resulting Bubbles. While celebrated as “enlightened” policymaking throughout the markets, an “activist” governmental role (fiscal, central bank, GSE, etc.) is inevitably destabilizing. The upshot of now two decades of activism is a global marketplace dominated by speculation and leveraging.

I’ll posit that a given size of “liquidity backstop” fosters a commensurate speculative response in the marketplace, ensuring that a larger future backstop/intervention will be required come the next serious de-risking/de-leveraging episode. The essence of the current (global government finance) Bubble is that central banks have committed to doing “whatever it takes” – and this moving target “whatever it will take” has kept inflating right along with speculative market and asset Bubbles across the globe. This scheme has gone on for years. A Day of Reckoning cannot be postponed indefinitely.

This is clearly a more pressing issue for me than for other analysts. Speculative Bubbles tend to climax with a terminal flurry of exuberance, excess and dislocation. A final destabilizing tsunami of financial flows and attendant price spikes ensure that grossly inflated market confidence and price levels turn untenable. Then comes the painful Reversal.

Global sovereign debt and bond markets this year were overwhelmed by “blow-off” excess. The biggest cash markets in the world along with the biggest derivative markets in the world dislocated in historic “melt-up.” Effects became systemic. Price impacts were extreme – historic. Virtually all asset classes were significantly disrupted by Bubble Dynamics. To be sure, there was newfound exuberance in the power and sustainability of “whatever it takes.”

From my analytical perspective, it appears we’re again nearing another “critical juncture,” yet another potential major inflection point. And the probability that such prognostication ends up looking foolhardy is not small. After all, central bankers have repeatedly had their way – imposed their will upon the markets. On the other hand, if we have indeed reached a critical point for acutely vulnerable markets, few are prepared. Of course, almost everyone is convinced they have the answer to the opening question: “No, and this was proved earlier in the year.”

Let’s take a different tack. Would $167bn ($2TN/12), a month of global QE, be sufficient to hold Risk Off at bay? How about $38 billion during a week of intense market tumult? The proverbial drop in the bucket. I actually believe that the global Bubble has inflated to such precarious extremes that even $2.0 TN of central bank purchases would in rather short order be overwhelmed in the event of a major bout of speculative de-leveraging. Let me suggest that the almighty central bank liquidity backstop arsenal would wither in the face of a synchronized global liquidation across various asset classes. What’s more, the possibility of just such an outcome has greatly increased after the recent global bout of synchronized central bank-induced speculative excess.

By the look of markets over the past week or two, the six-month central bank-induced respite appears to be winding down. The ghosts of January and February have reawakened: Europe, global banks, energy, EM and China (to name a few). Some Friday headlines: “Oil Falls to 1-Month Low…” “Mexican Peso Slides to Record Low…”; ‘Cost of Insuring Deutsche Bank’s debt Rises 8 percent…”; “U.S. Stock Funds Post Largest Weekly Outflows in a Year…” “Monte Paschi Bonds Slide to Two-Month Low…” “China H Shares Go From Best to Worst…”; “Low-Volatility Funds Face Rougher Ride”. “Volatility Puts Some Funds at Risk.”

Continue reading Risk Off, the BOJ and China

Giving Up on China’s Consumers

By Jeffrey Snider of Alhambra

As always, there is the attempt to put a brave face on what is shaping up to be the worst year yet. China’s “big 3” economic data were all disappointing in the context of what the last “brave face” was supposed to suggest – where weakness at the start of the year was only due to “global turmoil” and would quickly recede. Instead, industrial production stayed at 6% while retail sales expanded at only 10%, matching the worst growth rate (April 2015) of the last ten years.

The real problem, however, is as noted last month: fixed asset investment. FAI was the heart of both the Chinese “miracle” as well as the government efforts to deal with the fallout from its curious end coincident to the eurodollar system’s. The latest figures are suggesting a growing disaster. Total FAI, which includes fiscal activities (“stimulus”), grew by just 9.6% in the January to May period (the National Bureau of Statistics reports FAI in accumulated totals). That was the first rate below 10% since December 2000!

For just the private economy, the accumulated growth rate was 3.9% in the first five months of 2016, down sharply from 5.2% in the four months including April and 10.1% for 2015 as a whole. By my calculation, private FAI in May was up just 1.0% from May 2015 leaving the Chinese economy careening toward disaster.

The mainstream is finally acknowledging the precarious state of Chinese fortunes but once again being careful to “balance” it all out with hopes placed squarely upon consumers.

A slowdown in private investment is particularly worrisome because it indicates that companies are holding off spending, signaling limited confidence in the future and denying the economy what is often more effective and sustainable investment than government spending.

Sheng Laiyun, a spokesman with the country’s National Bureau of Statistics, cited overcapacity and a difficulty in obtaining financing as reasons private companies are reluctant to invest, though he said China’s economic fundamentals remain sound. “The slowdown in private investment shows that economic growth momentum needs to be strengthened,” he said.

“Though…China’s economic fundamentals remain sound”? These are just words stripped of all meaning as the first quoted paragraph devastates any idea of a “sound” economy. The spokesman basically claimed that the economy is sound except for all the primary and basic foundations which are not. The Wall Street Journal does its orthodox job of trying to put consumers at the leading edge of Chinese growth rather than at the end where the economy actually places them. The article starts off by claiming that “other, more upbeat economic data” were overshadowed by all this weakness, including the proper reference to “difficulty in obtaining financing.” That last part is the key which brings together the entire global transition.

Continue reading Giving Up on China’s Consumers

The Red Line

By Doug Noland

Credit Bubble Bulletin

April 25 – Financial Times (Jennifer Hughes): “Stand easy — or easier, at least. Ten basis points might not be the biggest one-day change for borrowing costs in China’s vast $7tn bond markets, but it was enough on Monday to push the country’s closely watched onshore repo rate back from an eight-month high. That offers a little breathing space for investors to ponder what next for the rising tensions in onshore bond markets. One point to look at is their own leverage as well as their fears for companies… Amid all the furore about the pain of rising rates, one so-far overlooked factor is that investors, as well as companies, appear precariously balanced. The market for pledge-style repos — short-term, bond-backed loans — is currently bigger than the stock of outstanding debt, according to Wind Info. A sharp worsening in market sentiment could force those borrowers into fire sales if their loans are called or cannot be rolled over.”

I recall an early-1998 Financial Times article highlighting the explosive growth in Russian ruble and bond derivatives. Not only had the “insurance” market for risk protection grown phenomenally, Russian banks had become become major operators in what had evolved into a huge speculative Bubble in Russian debt exposures. That was never going to end well.

Continue reading The Red Line