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China Currency Plunges Most In Over 5 Years, Biggest Weekly Loss Ever: Yuan Carry Traders Crushed
And just like that the Chinese yuan devaluation has shifted away from the merely "orderly."
In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market (for the reasons why, read this), has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408. Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever!
The dramatic monthly plunge from the CNY perspetive is shown on the chart below.
There isn't much commentary on this most recent dramatic move aside from this commenbt by Zhou Hao, a Shanghai-based economist at ANZ, who said "CNY movements indicate that the authorities are determined to deter capital inflows and there were likely stop-losses triggered when the CNY broke key psychological levels."
What is more notable is that the move, while certainly intending to shake out the carry traders bent on riding the USDCNY ever lower, is starting to appear borderline erratic. As a reminder, and as we posted yesterday before the FT picked up the story earlier today, there is a lot of pain in store for those betting on a stronger Yuan, because while the move may not seem dramatic (by USDTRY standards), the reality is that the carry trade positions have massive leverage associated with them, with the pain level on $500 billion in existing carry trades beginning to manifest once the Yuan enters the 6.15-6.20 gap and becomes acute once the European Knock-In zone of 6.20 is crossed (see first chart below) and rising exponentially from there. In fact as we explained, should the renminbi break past 6.20 per dollar, which it is very close to right now, banks would be forced to call in collateral, accelerating the Yuan plunge, at which point the drop would become self-sustaining. The pain from that point on is around US$4.8 billion in total losses for every 0.1 above the average EKI (see third chart).
This is what we warned yesterday:
The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications.
Morgan Stanley believes that one such carry-trade structured product that will be the "pressure point" for this - should the Yuan continue to depreciate - is the Target Redemption Forward (TRF) which has a payoff that looks as follows...
While this is just an example of a product payoff matrix to the holder, the broader point is that the USD/CNH market has a particular level (or range of potential levels) at which three factors can create non-linear price action. These are:
1. Losses on TRF products will (on average) crystallize if USD/CNH goes above a certain level. This has implications for holders of TRF products, who are mostly corporates;
2. The hedging needs of writers of TRF products (banks) mean that there is a point of maximum vega for banks in USD/CNH. Below this level banks need to sell USD/CNH vol; above this level banks need to buy USD/CNH vol;
3. The delta-hedging needs of banks are complex. As we approach the average strike (the 6.15 in the theoretical point of Exhibit 1), banks need to buy spot USD/CNH. Above this point but below the European Knock-in (EKI) (i.e., between 6.15 and 6.20 in Exhibit 1), banks need to sell spot. Then above the EKI, banks don’t need to do anything in spot.
From internal Morgan Stanley data, we estimate that the point of maximum vega is somewhere in the range of 6.15-6.20, and that the 6.15-6.20 in Exhibit 1 is reasonably indicative of the average strikes and EKIs in the market.
In other words, so long as the TRF products remain in place (i.e., are not closed out) and we remain below the maximum vega point (somewhere between 6.15 and 6.20), there is natural selling pressure by banks in USD/CNH vol. When we get above that level, there is natural vol buying pressure.
Of course, in the scenario that USD/CNH keeps trading higher and goes above the average EKI level, the removal of spot selling flow by banks and the need to buy vol means the topside move may accelerate.
Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...
How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.
Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.
Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.
In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.
Deutsche Bank concludes...
Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch...
As Morgan Stanley warns however, this has much broader implications for China...
The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.
However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.
In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.
Remember, as we noted previously, these potential losses are pure levered derivative losses... not some "well we are losing so let's greatly rotate this bet to US equities" which means it has a real tightening impact on both collateral and liquidity around the world... yet again, as we noted previously, it appears the PBOC is trying to break the world's most profitable and easy carry trade - which has created a massive real estate bubble in their nation (and that will have consequences).
+++++++++++++++
The bottom line is the question of whether the PBOC's engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC's willingness to break their momentum spirit).
It appears, as Bloomberg notes, the PBOC is winning: "Yuan has gone from being most attractive carry trade bet in EM to worst in 2 mos as central bank efforts to weaken currency cause volatility to surge. Yuan’s Sharpe ratio turned negative this yr as 3-mo. implied volatility in currency rose in Feb. by most since May, when Fed signaled plans to cut stimulus."
So far the PBOC's "shock and awe" has impressed currency traders. Hopefully, the PBOC knows what it is doing because if indeed it causes the carry trade to unwind, the unwind could send the currency plunging well beyond the central bank's intended limits. What happens then nobody knows.
Curious for more? Read our first post in this series: Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)
Finally, if indeed this is the start of the real carry unwind, things go from bad to worse: read "The Pig In The Python Is About To Be Expelled": A Walk Thru Of China's Hard Landing, And The Upcoming Global Harder Reset
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Juan carry trades. Is that code for a drug mule?
"Carlos. How is my Juan carry trades doin'?"
"He's collapsed again."
"Fuck. Can we get some fuckin' water an' guns over there?"
"No fuckin' way. Holder is sick"
I really liked the bonus chart from the last article on this subject.
Is China's currency still ''crushed'', when they are trying to devalue it??
No different than a gold chart.
Same kinda waterfall.
Stack On
And why not? Everyone else is playing the same game. Their 15 Tonnes of Gold purchased at giveaway prices from the Western Central Banks gives them a huge buffer. This is purely tactical. The longer-term strategy remains the same: a Yuan reserve currency backed explicitly or implicitly by Gold.
Wonder if Jim Rogers is buying CYN on this.
Last I heard....Jim was furiously buying gold.
So wills this mean stronger dollar, hence, gold pounding this morning?
I didn't know that you could carry trade the Yuan in the first place?
Yaun backed by gold as a world reserve currency or an SDR reset backed by gold with new Yuan clout, or?
I've read arguments for/against various cases..... just trying to fathom this is like being back in grade school
fortunately I have a bunch of ZH'rs commenting, ranting and espousing their world views. all educating and some mis-educating me ...... so what's this yuan sh*t today leading to???
Wobbly banks making losses (bail-ins not finalised), currency war (China not ready / willing to take helm), more global jousting for the NWO or whatever its called (but it seems IMF & cohorts aren't quite getting their way 100%).... so more games likely to be played and more time needed for a 'popular' currency shift even though some seem to have hot money on March being the great reset month..... and March starts tomorrow!
Another CB controlled crash.....Good Morning Vietnam!
It all leads to war in the end, no matter how the details play out..
Shorting the CNY is the easiest money one will ever be able to make.
No matter what is said, threatened or warned, by whomever and how frequently, the Chinese will continue to steadily devalue their currency, and U.S. Multinational Corporations will order their puppets in the congress & the White House to DO ABSOLUTELY NOTHING IN RESPONSE TO THIS other than talk.
There is trillions of factories & plants, along with R&D centers, built out by western firms on Chinese soil, essentially captive hostages of the Chinese Government, should trade wars break out, that benefit from being able to tap a cheaper CNY in their ongoing efforts to sell their products in both China & export markets, and this fits nicely with the 50 year business models they've
adopted.
It is only a matter of a very short time frame before developed market equity indexes plunge now, and emerging equity markets outperform (if only in nominal terms due to said currency devaluation).
This is the appropriate time to reflect upon the fact that most wars are driven primarily by economic factors, so the alternative to this scenario would possibly (probably?) be some form of major regional hot war, since China truly is between a rock & a hard place at present.
What if those trillions of factories & plants were to roll out zillions of drones and missiles?
I'd be careful of chanting USA too loudly.
USA helped win WWII because of her manufacturing capability.
History rhymes.
As in the past, so in the future.
Stack On
I'm doing no chanting of USA.
I'm pointing out that multinationals that have built trillions in factories/plants and R&D in China have NO national allegiance, and will lobby aggressively to ensure that there is no threat to utilizing those resources of production accordance with their long term business models.
lobbying implies a degree of governmental independance needed to be won over.... not sure we have more than an appearance of this in any nation, so we back to your argument its about business models of TPTB with a little PR sprinkled on us all
Total agreement.
I should have said the Corporate Bosses will restrain their puppets.
@TIS
Yes, that is what the fundamentals suggest. This is truly "The American Crisis". However, when, shortly, TSHTF, you should expect the usual reaction, which is a flight to "Quality". That means a massive flight into USD and Treasuries, even though that is actually the source of the problem. So be careful with EM and PM investments short-term. Longer-term, yes, of coursee, you are correct.
So what happens when the last hope of globalization goes all in on a race to the bottom?
.9%?! Well run for the hills Ma Barker, before i call the feds!
OVERDOSE BITCHES!
OT
http://voiceofrussia.com/news/2014_02_23/Anonymous-Ukraine-releases-Klitschko-e-mails-showing-treason-3581/
...and you are who exactly valkir??
I think it's safe to assume everyone is KGB at this point.
Yea, and the bigger the better too.
Anonymous Ukraine releases Klitschko e-mails showing treason
here is the link to the released e-mails
Well, all those smart Chinese who bought gold are laughing now.
I think the problem is fonestar dumped his bitcoin and bought yaun.
Stack On
Release the Kraken!!! Bitchz..
http://www.youtube.com/watch?v=sQz8XAdzR_A
The end of the forex world is near. Time to escape to my panic room. Wait, I don't have a panic room.
Panic!!
It's on like Donkey Kong.
Well use your hands, dig a hole in the ground, stick your head in it, and call that a panic room.
Well, this makes Chinese exports cheaper, eh?
Steps in establishing a reserve currency:
Don't forget stealth massive accumulation of the element with atomic number 79
Holy foock!
Sum ting wong.
It's going to be a bloodbath until they peg their yuan to gold and dump their remaining ust's on the same day
Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620
The word you want is reciprocal.
Something smells here, but then again, the "leader of the free world" has cock breath.
Does he dig boning old white guys or being boned?I get it mixed up
Yes
China wants to widen the current usd/cny trading band from .7% to 1% this summer, so that their bond market is more attractive. Good luck with that one!
When bankers fuck the Chinese, do the Chinese cup the balls of their overlords like the Americans and British? Anyone know the Chinese symbol for "yes?"
The currency manipulators have been identified ...
Sum Ting Wong
We Tu Lo
Bang Ding Ow
Ho Lee Fuk
(Never gets old IMHO...!)
Also named:
Ho Li Fuk
Will the PBOC sell dollars to buy yuan?
The global economy desperately needs a circuit-breaker to bring a halt to the out-of-control asset bubbles that are being inflated everywhere.
The fact that it's the PBOC making the first sensible and responsible moves to this end, rather than the reckless baffoons at the FED, doesn't even suprise me anymore.
The Chinese invented the printing press in more ways than one. Yellen blushes when she sees their toilet paper rolls. P.S. chicks blush when they orgasm. And I just puked thinking about that in the Yellen context. Then I shaved my head and bought a wig and I'm cool now.
+1 man.....he he heeee.....just because.......
Oh no, it went from a whopping 6.05 to 6.15, which is obviously a disaster. When it dropped from 6.15 to 6.05 in no time at all no one says a damn thing. Maybe, just maybe some people in charge know exactly what they are doing. Oh no, the currency plunges and all the factories become highly profitable again instead of very slim margins. Foreign goods become higher in price, while domestic goods remain more stable, increasing internal consumption. Failing to see the problem here unless you're a dumbass muppet or john kerry who'll be making another trip to beg china to buy more airplanes.
wages dropping/stagnating in an inflationary enviroment means nobody can afford shit other than food/gas- gee that sounds familiar. and round and round the wheel goes- jobs shift from US to Mexico then to China then to Vietnam then to ????. these factories can be moved halfway around the world to chase cheaper labor in a matter of days.
Wages have been going up very nicely here in China for a long long time. Stagnant wages... I believe you're referring to the US since the 70s.
Look for a sharp, steady & long term reversal of the rising wages in China trend.
Confucius say "Better to have the people work jobs for less pay, than not work at all, or else Jade Revolution become likely."
This is particularly true in China where a) leadership fears social uprising above all else, b) demographics demand Chinese factories remain open & hiring, and dO there's no social safety net to catch unemployed citizens as there is in the west, whatsoever.
It never gets old watching the stunned look on their faces when students ask me, Does the govt in America really pay people who do not work? When I say yes they say that they heard about this but couldn't believe that it is true.
And present day USA: stagnant wages for 95%.
But then, how globalization works is a bit like water finding its own level: some levels rise, others drop.
Bonapartist eh? I'm an Orléanist man myself. Vive le Roi!
The dollar will rip like a Stihl chainsaw and Mr Yellen will have to double QE to counter. The Chinese will continue to suck up US, Canadian and Australian RE making that bubble bigger than the last US housing bubble.
Canada and Australia got resources. Think Deep Storage.
Ain't no RE bubble in Winnipeg or Brisbane.
Toronto and Sydney aren't the Country.
Stack On
Whats a few hundred billion between friends?
What's a few trillion between 'friendenemies' ??
FIFY
*edit* watch the bond markets to define the term 'friendenemy'
Rook out berow!
Yes, but can the Chinese bankers top this!
What a sad state of affairs. At least my government is gonna make the depositors pay rather than the tax payers.
At least that is what my government says, it is part of their plan...
Stack On
RBS - Robbing Blind Suckers
That's the spirit!
And...US futures are green if you look at Fair Value. What a market. I will most definitely be watching CNBC when they pull the rug on this rigged game
Their headline is seriously "Stocks Higher; As Yellen talks Taper" LOL what analysis
*whispers* buyy thee dipp
Hahahahha...! JUMP, you f--kers!!!
Gene Burnett concurs.....
http://www.youtube.com/watch?v=9TYezSrzUUs
OT. Forget China.
UKRAINE: MILITARY AIRPORT AT SEVASTOPOL IN UKRAINE'S CRIMEA SEIZED BY RUSSIAN SERVICEMEN -INTERFAXFri Feb 28, 2014 6:07am GMT
Let me know when the SHOOSTING begins.
Gold, trolls
Gold trolls? where?
Relax.....I don't see anything.
"Good As Gold #1 Equity Trust"
Fucking Fakes
LOL
chinese people with physical gold are not worried at all except for the declining wages
Take it this way they appreciated the yuan and bought dollars/bonds, now they are depreciating the yuan and selling dollars/bonds. They will be making a killing in yuan terms and will put immense pressure on the US bond market. The US can't complain too much because when they needed suckers to buy bonds the Chinese bought. I don't think the Chinese will dump US bonds but rather use them to buy more mines, food and energy companies - hard assets. What they may do is to decrease future US bond buying and buy more currencies/bonds of countries that have currency swap agreements with them. One thing thats certain is they have a plan while the US is like a dung beetle floating on a ping pong ball in the middle of the Pacific (spending a lot of energy to stay on top while going no where).
would you be referring to china's moves into Africa? china has decided to build bridges in developing countrries and not bombing them.
however, don't blink you eye too slowly. they will end up changing the name of that continent to, Bejing IIi
Ukraine: Russian Soldiers at Crimea Airports
Newsticker Ukraine
latest Videos:
Videos Kiew
gee what will Obozo and John Kohn do now? more red lines and empty threats?
Pretty close.
http://www.washingtontimes.com/news/2012/oct/25/us-economy-on-schedule-t...
March 4th huh.........well........OK then.
I'll probably start worrying about it on March 3rd....I'm like the world's biggest procrastinator.
#Ukraine's acting president calls emergency session of security chiefs on events in #Crimea - Reuters
Russian Navy beefing up strength in Barents, Baltic Seas as part of operability test
UKRAINE INTERIOR MINISTER CALLS RUSSIAN MILITARY MOVES "INVASION AND OCCUPATION"
Russian soldiers are occupying key airports in Crimea, says Ukraine's interior minister
Kolchuga Passive Sensor AAA Radars being deployed in and around Kiev in response to Russian Air Force buildup along border regions
Interfax: Crimean Berkut police on Perekopsky isthmus to prevent armed invasion
So the pro-Russians folks control the only way to invade the Crimea by land...
NATO's answer (for now)
http://www.eurasianet.org/node/68092
U.S. Endorses NATO MAP For Georgia
Ukraine's response :
*UKRAINIAN LAWMAKERS APPROVE RESOLUTION TO SEEK INTL MONITORING
The Ukraine is WEAK!!!!!!!!
Wires reporting Ukraine appealing to US, UK to guarantee its sovereignty after seizure of Crimea parliament, airports by pro-Russian gunmen.
And if they say yes... uh oh.
We are all Crimeans now - J. McShame
#Ukraine's parliament asks #UN #SecurityCouncil to call session to consider Ukraine's present problems
With Russia with a veto at the security council?? Is Ukraine freaking retarded?
UKRAINE PARLIAMENT PASSES REOLUTION ON FOREIGN INVASION INTO TERRITORY VIOLATING BUDAPEST MEMORANDUM
Experts: Ukraine oil and gas reserves in Black Sea near Crimea peninsula more than in Russia
NATO commander plays down tension with Russia over Ukraine
NATO won't do shit! Ukraine is on it's own!
Fuckin BULLISH! The EUR/USD is at 1.38!
..what a FUCKED UP rigged casino market this is.
The Age of Outright DENIAL
The EURO is real money, ... don't fuggat-aboutit
If & when the germans abandon the euro then run like hell
CNY is not real money,
What is real money ? 'AAA'
CHF, NOK, SGD ...
USD is toilet paper, nope USD is bitocoin, nope USD is shekels
What happens if we already abandoned the Germans?
Refusing Germany their gold was technically an act of war....but thankfully no one is calling it that just yet.
There is only room for one at the top fellow.
In a federation of anarchosyndicalist republics there are as many tops as waves in the ocean.
Interesting to note that much of this action in the CNY/CNH really started to kick off AFTER last weekend's G20 pow wow in Sydney, where EM's whinged about the US Fed Taper.
Considering that China went opposite to what their authorities were saying, and ended up bailout their Trust/Shadow Banking products, perhaps there is need for more Yuan in their domestic economy. Either way, this is just another thorn in the side of the US led (Lew) wishes for further & more rapid Yuan strengthening.
Is this a big middle finger to you, Mr. Lew from Mr. Liu???
So if CNY starts to get disorderly to the downside, does China reverse the trend and start to sell treasuries and USD in order to support the Renminbi? This has been one of those 'blackswans' that I've thought possibly could start the world's future debt-ponzi meltdown.
As everybody knows, China has a hell of a lot of local toxic debt floating around in their banks that will continue to need to be monetized. Amazing how, following 2009, all of these emerging markets just sacrificed themselves at the alter of the U.S. consumer by devaluing in line the the U.S.. For all of the tough talk and bravado that came out of the BRICs right after the financial crisis, they all basically allowed themselves to import all of our fraud and shenanigans because they didn't have the cojones to see what would happen if they let their currencies strengthen.
Thank God we have central banks to save us from the horror of being able to buy more stuff with our money.
I get the feeling China is trying to head off a dollar dumping frenzy. That exchange rate is set by the state in China. They have a lot of our paper to protect until they can unload it. And the USD just got pounded under 80, while treasury have gapped down huge, so it did not help much.
http://finviz.com/futures_charts.ashx?t=DX&p=m5
http://finviz.com/futures_charts.ashx?t=BONDS&p=h1
Dystopian world; deflation in developed economies, inflation in emerging world via currency wars declared by reserve currency KING.
No hope for any real economic growth, as the peak interest rate of Reserve and peak conventional oil price of Jerusalem's black gold, those TWIN TOWER symbols of the global economy, loom ahead of the Oligarchy manned boat like Charybdis and Scylla.
Attach yourselves to the mast !
And don't listen to the sirens of MSM! --Lady Lagarde sees the pot of gold at the end of the rainbow!
Never in the history of man has such a CB experiment been made. We live to reinvent poisonous, hot water in Fukushima as elsewhere and being scalded like the cat on a hot tin roof of man made gas guzzling ad nauseum. No wonder the sky is now falling on our heads.
And the Wise man cries out in his desperation : Have you no eyes to see what's up ahead?
(But the King does not hear him, as in his own paranoid ire he had blinded his own people and advisors in a fit of rage).
When the Gods condemn a civilization they first drive its kings mad.
PS : While the world ponders about the inevitable in Ukraine as in Syria, here is what's happening in the Land of the Free, home of the Brave (Land of King with blinded minions) :
Law Professor Says US At A 'Constitutional Tipping Point' - Business Insider
I have the rest of those storys that go with the thousands and one nights.
Either Turdley just woke up, he's a useful idiot or his masters have called him to earn the 30 pieces of my silver they gave him.
USD is tanking too. Euro and GBP continues pushing up.
It will be important to follow the Yen/Dollar correlation through this Yuan devaluation. If it breaks down, we might be looking at a black swan
jb
This was published in American Thinker and Breitbart
China’s Economic Bubble Is Bursting
The highly credible HSBC/Markit Purchasing Managers' Index (PMI) of economic demand in China reported that demand in China’s factories fell for a second month in a row and hit a seven month low. Markit Research also reported that production volume turned negative for the first time in seven months and hiring expectations fell to a five year low. Although the Chinese government continues to produce an array of rosy economic statistics each month, China’s industrial competitiveness is fading fast. Coupling production contraction with banking problems and a fall in employment to a five year low, it appears that China’s economic miracle may just be a speculative bubble that is about to burst.
Markit Research compiles “flash” indicators each month for demand and operating conditions in China’s manufacturing sector. The report is based on surveys responses from executives inside approximately 85%–90% of China’s most important factories. A Markit flash score above 50 means that activity is expanding, whereas a score below 50 means that activity is contracting. Although the final reports are not published for another two weeks, the Markit flash reports seldom differ from the final reports.
The Chinese Lunar New Year festival began this year on January 31 and most workers went on vacation back to their family home to celebrate for two weeks. Consequently, the level of economic activity during the lunar holidays is an excellent indicator of the strength of domestic consumer demand. The purchasing managers’ index falling from a weak 49.5 in January to a seven-month low of 48.3 in February is a strong warning that the accelerating contraction in demand is being driven by weak domestic consumption.
Former Chinese President Hu Jintao and Premier Wen Jiabao in 2010 published “Report on the Work of the Government” and report of the National Development and Reform Council (NDRC) that formed the basis of China’s Five Year Plan for 2011-2015. The Plan discarded the centrally planned economic model of emphasizing export manufacturing for the past three decades. The new Plan focused the nation’s economic and development on centrally planned efforts to build a modern consumer economy.
The main features of the new policy were converting China from being the “world’s manufacturer” to becoming the “world’s consumer”; upgrading its scientific and technological capabilities with an emphasis on innovation; expanding educational coverage; and increasing wages and living conditions in the rural areas.
Over the next five years, China’s implemented “new measures” that included widespread property tax changes that converted agricultural land into housing developments. State-owned-banks were commanded by central planners to increase lending $15 trillion in just five years, twice the entire Chinese annual gross domestic product (GDP). As a result, housing prices soared in major cities like Beijing from an average of $1,150 per square meter in 2005 to $11,400 per square meter by 2013. Condos that sold for $3,500 in 1994 are now listed for sale at $833,000.
But over the last six months, real estate demand and prices have been contracting faster in cities beyond the nation's relatively wealthy "first-tier" metropolises of Beijing and Shanghai. According to the Securities Times newspaper, housing developers in the industrial city of Hangzhou outside of Shanghai cut prices this week by an average 19% in a scramble to sell about 120,000 newly built apartments. The current inventory of new, unsold units in the city now exceeds the total number of housing units offered for sale in Beijing and Shanghai combined. A study by Shanghai's Tongji University said real estate has been especially shaky in the northeastern city of Wenzhou, where new-home prices have fallen every month for the last two years.
The borrowing binge in China was not just restricted to state-owned-banks; approximately $3.5 trillion in private loans were also made by individuals to small companies at up to three times the interest rates banks charged. Many of these loans went to shady business operators who bought coal mines to speculate on the growth of China’s electricity demand. But most of those loans are now insolvent as the economic slowdown has caused the price of coal to be cut in half last year.
Facing liquidity shortfalls as interest payments on long term loans have shriveled; Chinese banks over the last six months have been forced to borrow huge amounts of short-term money from foreign banks. The Sunday edition of London's Daily Telegraph published a story that, “Currency crisis at Chinese banks could trigger global meltdown”. The article warned that short-term foreign currency borrowing by Chinese companies has almost quadrupled in just four years to more than $1 trillion. “Any substantial appreciation of the US dollar – and many analysts are indeed expecting gains this year – could open up a dangerous cross-currency mismatch, forcing Chinese borrowers to default and inflicting shattering losses on international lenders.”
According to Beijing's State Administration of Foreign Exchange, at the end of 2013 China had foreign liabilities of a stunning $3.85 trillion; roughly 40% of total GDP. The bulk of those liabilities consist of $2.32 trillion of highly illiquid foreign investments in factories and equipment. Another $374 billion is foreign investments in China’s stock and bond markets. Most foreigners assume they can sell and take money out of China; but the “Qualified Foreign Institutional Investor Program” strictly limits on the size and frequency of withdrawing money from China.
The contraction of HSBC/Markit Purchasing Managers' Index to 48.3 during China’s biggest annual holiday seems dire when coupled with the PMI's Employment Index fall for a fourth month in a row to 46.9, its lowest point since the depth of the financial crisis in February 2009. Over the last five years, Chinese central planners drove GDP per capita from $2,204 to $3,348, the fastest expansion of any large economy in the world.
The Chinese Communist Party leadership would obviously like to continue to inflate China’s economic bubble with more lending. But with banks facing massive loan losses and scrambling for short-term funding just to survive, central-planners now seem powerless to prevent China’s economic bubble from bursting.
The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!
kneega kneega kneega kneega
tinga tinga tinga tinga
Dollar Crashes Below 80.00, Euro Breaks $1.38 - Somebody Read James Rickards' Book "The Death Of Money" Already
We have quite a morning today. In the early trading hours US Dollar was crashed below the all-important 80.00 level to 79.84 and Euro has broken $1.38 level. With all the ongoing Currency Wars and China pushing Yuan down Gold Demand is going strongly up. Now recent increase in demand for Gold to the record numbers in China can be put in another perspective. Somebody has read James Rickards' new book "The Death Of Money" and playing along with it. As we have noted before, Ukraine is another battle to be lost by the US dollar as The Reserve Currency of Choice. Who is selling US Treasuries today? Is it only angry Russia or is it China raising cash to Buy Barrick Gold's vault in the ground at Pascua Lama? Now with Yuan pushed down and US Dollar going down after the highest number on record of Chinese selling US Treasuries, Gold has no other way but to go much higher. Short squeeze will help, as some banks were encouraging to sell gold again after this very initial advance, after bottoming in 2013. We have seen nothing here yet. The Mother of Short Squeeze in Gold and, particular, in Silver is still to come. http://sufiy.blogspot.co.uk/2014/02/dollar-crashes-below-8000-euro-break... Ukraine, Syria And Global De-Dollarization: USD To Go Down And Gold Up TNR.v MUX RGLD GDX GLD ABX
Fast growth tends to mask flaws and weakness within a system, and China has been growing like a weed for years. To make things worse many of the investment decisions were driven by politics. This has created massive overcapacity. Money has been poorly allocated and often shoveled into deep holes like ghost cities and bridges to nowhere.
Currently a 6.6 trillion dollar spending spree used as stimulus to combat global economic slowdown is coming back to haunt China. This has greatly expanded credit and created huge overcapacity during the past five years. A massive debt crisis now looms in the offing. Companies are struggling to repay loan taken to build factories that sit idle because of weak demand. More in the article below,
http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-de...
Bit yuan ...
Don't shoot until you smell the garlic breath.
USD has been pushed down for some time - ahead of the rising Euro and the promise-land of the Chinese Yuan.
http://bullandbearmash.com/chart/spot-dollar-daily-tanks-support-7950/
We expected the USD to move back up - China's reality is becoming more mainstream.