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Chinese Stocks Are On The Edge
With all eyes squarely focused on US equity markets daily impersonation of the Caracas Stock Index, BofAML is growing increasingly concerned about China. Since the start of December, Chinese equities have been under significant pressure with the Shanghai Composite on the edge of completing a 3-month Double Top. A break of 2079 would confirm this move, exposing considerable downside in the weeks ahead.
This could also prove to be the catalyst that ends the 17-month downtrend for USDCNY.
Since late October the pair has shown tentative signs of basing. A sustained break of 17m trendline resistance (6.0747) would confirm a medium term turn in trend, exposing the Aug/Sep highs at 6.1225 and potentially beyond.
BofAML concludes with one word... "Beware"
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What is the point of Wall Street recommendations again?
<---- To give us Hedgies something to point at and laugh
<---- To aid the middle class in directing their 401(k) investments prudently
Does that mean S&P will only be up 10 points instead of 20?
No. It means the Chinese market is about to implode and the dollar is about to explode higher because a war is about to start between China and Japan which will draw in the US and NATO very quickly.
Start filling sand bags you mooks!
Yah I get what you're saying, but then again this is one group's opinion within BofA, what do you want to bet another group thinks differently?
<-------BofAML concludes with one word... "Beware"
<------BofAML should worry about our own balance sheet
Thanks Ben! We'll watch the hen house, while ur gone,
The smog of war
Off like a herd of turtles. Markets on a half-shell.
China, either the next economic superpower or the most cataclysmic collapse the world has ever seen.(so far)
In the 50s and 60s the old Soviet Union was one of those (turned out it was both, ultimately). In the 80s it was Japan. Now it's China.
Forgive me if I don't believe ALL the hype about the China Miracle.
Tales from the Churnside.
BAML should beware we don't care what they think
What??? you don't like calls on non-floating pairs?? I, personally, am waiting for their call on their Drachma/Yuan pair.
You'll be on the edge of broke if you listen to the book talking mofos at bofaml.
You would be negavite money if you listened to the posts here on ZH. Gold has fallen out of bed and rolled down the stairs while stocks have shot past the moon on their way to mars.
"I'm a Donkey on the edge, I got a Dragon and I ain't afraid to use 'her" - Barry
Thanks for the comments. I almost got suckered in though that USDCHN chart looks tempting.
[edit-add] I think that trendline is set on the wrong slope. I may have to get Mrs Free to type for me this is way too hard.
So who the fuck is investing in China now, when the US has become the home of infinite risk free profits?
@Al Huxley: The unemployment goes up and market rises. Unemployment goes down and the market rises. QE is increased and the market rises. QE is decreased and the market rises. Detroit declares bankruptcy and the market rises. Government shuts down and the market rises. Record amount of people on foodstamps and the market rises. Congress with all time record disapproval and the market rises. Obamacare looks like a disaster and the market rises. Jack and Jill went up the hill to get a pale of water and the market rises. My lawnmower won't start and the market rises. The wind blew from the North yesterday and the market rises. Santa Claus was at the mall last week and the market rises.
Yep, I think you are correct sir!!
We tu low, sum ting wong !!!
"swimming in an Ocean of dollars and heading straight to default." (that would be everyone right now.) time to test that flexibility rubber band man http://www.youtube.com/watch?v=kKbADFJOCkU
So much rhythm, grace and debonair in one man? Oh No!
great band. "Did Gentle Ben just wipe out Chicago in addition to Detroit?" And yes...they were originally "The Detroit Spinners."
The books are cooked. How convenient that the cooked books demonstrate China's inadequacy to be an equitable partner in TPP at this time, when they have so far just fucked the shit out of and colonized all their trading partners since they joined the WTO.
Just like when the chinese population went from 2 biliion when they were receiving aid from the UN, to less than 1.3 billion when they were supposed to contribute to the UN.
Ted Turner: Try again.
The Chinese have made an art form out of falsifying data.
Potemkin would be proud.
I particularly liked the part where they melted a billion woks to boost steel production figures.
Top stuff China, Golf clap.
I trust your figures like I trust World Bank population stats.
On Friday, fears of another quarter-end credit crunch drove money-market rates in China sharply higher despite emergency central bank intervention announced Thursday. In the last five business days, interbank rates have doubled. The seven-day repurchase rate hit 9.9%, a level not seen since June, when it reached a record 10.77%. The one-year rate swap last week exceeded an all-time high.
The People’s Bank of China , the central bank, refrained from its regular open-market operations last week. Instead, it added liquidity through the larger commercial banking institutions, to the tune of 200 billion yuan according to Netease NTES +1.52% but maybe more. Banks in recent days have been scrambling to meet quarter-end regulatory requirements, such as loan-to-deposit and reserve requirement ratios.
Analysts say the central bank is trying to tighten credit to discourage dangerous lending practices and at the same time avoid a crisis like the one in June, when banks defaulted and the interbank market froze. Then, the People’s Bank, to avoid a failure of the Chinese economy, massively—and secretly—intervened beginning June 21. There would have been a short-term increase in rates at the end of the third quarter but for a flood of liquidity from the central bank.
The June and December quarter-end spikes are unmistakable symptoms of the exhaustion of China’s credit-fueled growth model.
The equity markets certainly do not like what they see, with liquidity concerns weighing heavily on sentiment. Stocks continued their losing streak on Friday, with the Shanghai Composite dropping 2.0%, the ninth-straight day in the red. Bank stocks were especially hard hit, even outside the Mainland. China Everbright Bank , for instance, fell 2.8% on its debut on the Hong Kong exchange on Friday, despite being priced below book. Analysts blamed general bad debt concerns for marring the first day of Everbright’s trading.
The Everbright offering, unfortunately for the bank, occurred in the wake of wide publicity of the November 29 bankruptcy filing of Liansheng Resources Group. The failure of this coal miner, the biggest private company in inland Shanxi province, is even thought to threaten the Chinese banking system.
Why? It is not because Liansheng went down with debt of almost 30 billion yuan or because its creditor list included some of the best Chinese banks. Liansheng, some think, could sink China’s shadow banking network, which could in turn expose the fragility of the state banks and trigger runs by depositors on those institutions.
Today, even minor problems can become big ones overnight, and Liansheng’s difficulties illustrate how this can happen. Jilin Trust issued a wealth management product with no assets other than loans to this coal miner. The loans, the only assets of this WMP, are backed solely by third-party guarantees, not collateral. The product was marketed by China Construction Bank , the country’s second-largest lender by assets, to its customers, and it was popular. There should be no surprise as to its wide acceptance: the investment offered a 9.8% return, far in excess of deposit rates at state banks.
The Liulin County People’s Court, managing Liansheng’s bankruptcy, has indicated that investors will be the last in line for payment. If they suffer losses from the failure of Liansheng, Quartz’s Gwynn Guilford believes they will flee WMPs. If, on the other hand, Construction Bank is forced to make investors whole, it will have to take the WMPs it marketed onto its balance sheet and will surely exit the business along with other banks. The purpose of these products was to permit these institutions to profit from unsound lending practices without having to make financial statement disclosures. If depositors, not protected by deposit insurance, understand how fragile the banks truly are, they would undoubtedly panic and begin withdrawing funds quickly.
Beijing’s statistics hide the extent of the problem. As Anne Stevenson-Yang of J Capital Research in Beijing points out, the prudential standards of Chinese banks are “deceptively low” because they have pushed “apparent risk into a cascading series of shadow institutions in order to realize rate arbitrage.” What looks like a 20% reserve requirement ratio is really 15%, she notes, and what looks like a 75% loan-to-deposit ratio is around 90%.
Even without adding in shadow banking exposure, China’s banks are undoubtedly balance-sheet insolvent if their assets were classified according to international standards. Yet these institutions have always remained liquid. Now, as we have seen at the end of this quarter and the second one, they are beginning to run out of cash.
Most analysts don’t worry. By and large, they believe the recent shortages of liquidity are the result of central bank efforts to tighten, so in their view the problems are short-term and “manufactured.” Take the Financial Times for instance. “Looking at interbank borrowing rates, while durations of one month and less have shot up, those from three months to one year have remained much flatter,” writes Simon Rabinovitch today. “This is an indication that the cash crunch is more an end-of-year scramble for money than a fundamental breakdown of the Chinese financial system.”
There are two main problems with optimistic views. First, the argument—it’s really no more than that—ignores why the central bank needs to rein in the money supply in the first place. Chinese technocrats need to tighten because of systemic flaws, especially runaway debt creation. Last year, China’s risk-laden shadow banking sector grew 42% according to one estimate, and credit overall may have soared by almost a third. If credit grew by only 20%—a conservative estimate one hears—then debt is increasing more than twice as fast as officially stated gross domestic product. My sense, based on guesses as to the extent of back-channel lending and more realistic GDP figures, is that credit is growing about seven times faster than the economy. In any event, Beijing has no choice but to rein in credit.
And reining in credit will inevitably create more Lianshengs. Once they can no longer borrow, broken businesses will default across the country. “If China is insolvent, why haven’t there been any big defaults yet?” asks Quartz’s Guilford. “Here’s why: China’s shadow lending system keeps credit pumping to insolvent companies, so no one can tell that they’re bankrupt.”
Second, given a runaway situation, the central bank is eventually bound to cause a disaster with its remedial measures. Not only pessimists think this. “We believe the PBOC is faced with some serious challenges with rapid unfolding of bottom-up interest rate liberalization and is confused on whether to target volume or rates of liquidity,” writes the normally optimistic Lu Ting from Bank of America Merrill Lynch. “With its limited predictability of flows and its insensitivity to market reactions, the PBOC finds it much more likely than before to make operation mistakes.”
The problem is even worse than the oft-quoted analyst thinks. Lu assumes that the central bank has a way forward. Yet it is much more likely that there is none. Chinese technocrats continually talk about “reform” and the need to accept lower growth rates, but they always flinch, falling back on state stimulus and rampant credit creation when growth rates falter. They do that, I suspect, because they know restructuring would cause the economy to fail.
If Beijing could implement reform, it would have done so by now. Instead, we have seen quarter-end interest rate spikes, one more sign the inevitable reckoning will occur in 2014.
these are collateral calls not "credit crunches." China is going through exactly what the USA went through in 2008 only "without the sophistication." In other words they've only experienced inflation in China...never an outright deflation. Obviously a major Chinese State bank going belly up would make Lehman look small. The yield curve has now been inverted over there for some time. (7 months.) This was the precursor to the US collapse. "guaranteed recession." (actually far worse as we all in the USA now know.) I think a catalyst will be a big sell off in Apple "on the good news." Zuck has already cashed out a major chunk of Facebook. So has Bezos of Amazon. The Oracle of Omaha is sitting on a huge cash hoard...some of which he put to work in XOM in a massive share purchase this year. (still only 1% of XOM though.) now we have a "fat finger trade" in the two year with rates plunging? I say bullshit. I could very easily see a scenario where bond yields collapse across the board here...rising in price 30% in the next 4-6 weeks.
Chinese paper
Unqualified valuations and unquantifiable orgin.
What's not to love? Keep pretending like you can buy the world.
Who the hell are these people who keep peeing on the emperors new clothes?
U.S. retail sales down three weeks in a row. China factories and American retail layoffs coming. Happy New Year!
Come on guys! I just read this morning how everything was all good now. Consumer confidence is up and the deficit is down. Its got to be all good now, right?
China is fucked, so are the 'others'. Counter party risks or every buyer needs a seller or every seller needs a buyer. How does that go? Maybe in syncopated rhythm.
I don't know where this guy learned his techinical analysis skills but that ain't no double top formation I've ever been taught!
Which means, that like the U.S. for the past five years, it's time for the PBOC's version of the plunge protection team to engineer a stick-save, therebye ripping the face off any trader who dares to bet that the market can, indeed, break-down.
N korea tapering
http://www.project-syndicate.org/commentary/yuriko-koike-suggests-that-the-north-korean-regime-s-last-chapter-may-have-begun
The USD/CNY is fixed by the Chinese government. And trust me, they have tons of USD to back it up. This article was written by a GD moron with no understanding of FX markets. There is no USD/CNY FOREX market. It is a state exchange rate. But thanks for playing. The problem in China is their main savings and colateral asset, gold, was artificially devalued by 40%. Bankers see a problem in economics when their garbage paper derivatives get devalued by actual market forces. They can't understand 3/4 of the real world and real economy uses gold. Mispricing it has an actual real effect, even on their banks. The real world will just wait their asses out as the bankers insist on a gold price that is only 9% of its historical value. We will see how many banks are still left standing when they finally figure it out.
China sent USD back to the USA in trade for UST bonds. They fix the USA/CNY by printing 6 CNY for every 1 Ben prints.