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"I Fear For The Chinese Citizen"

Tyler Durden's picture




 

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.

A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.

China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.

That is a bursting bubble. Not terribly unique or mind-blowing, bubbles always burst. However, in this instance, the entire world will be swept out to sea with it. More money-printing, even if Beijing would attempt it, no longer does any good, because the Politburo and central bank aura’s of infallibility and omnipotence have been pierced and debunked. Yesterday’s cuts in interest rates and reserve requirement ratios (RRR) are equally useless, if not worse, if only because while they may provide a short term additional illusion, they also spell loud and clear that the leadership admits its previous measures have been failures. Emperor perhaps, but no clothes.

Every additional measure after this, and there will be many, will take off more of the power veneer Xi and Li have been ‘decorated’ with. Zero Hedge last night quoted SocGen on the precisely this topic: how Beijing painted itself into a corner on the RRR issue, while simultaneously spending fortunes in foreign reserves.

The Most Surprising Thing About China’s RRR Cut

[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.

Ambrose Evans-Pritchard, too, touches on the subject of China’s free-falling foreign reserves.

China Cuts Rates To Stem Crisis, But Doubts Grow On Foreign Reserve Buffer

The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run.

 

If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.

 

“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.

It is a dangerous game they play, that much should be clear. And you know what China bought those foreign reserves with in the first place? With freshly printed monopoly money. Which is the same source from which the Vinny the Kneecapper shadow loans originated that every second grandma signed up to in order to purchase ghost apartments and shares of unproductive companies.

And that leads to another issue I’ve touched upon countless times: I can’t see how China can NOT descend into severe civil unrest. The government at present attempts to hide its impotence and failures behind the arrest of all sorts of scapegoats, but Xi and Li themselves should, and probably will, be accused at some point. They’ve gambled away a lot of what made their country function, albeit not at American or European wealth levels.

If the Communist Party had opted for what is sometimes labeled ‘organic’ growth (I’m not a big afficionado of the term), instead of ‘miracle’ Ponzi ‘growth’, if they had not to such a huge extent relied on Vinny the Kneecapper to provide the credit that made everything ‘grow’ so miraculously, their country would not be in such a bind. It would not have to deleverage at the same blinding speed it ostensibly grew at since 2008 (at the latest).

There are still voices talking about the ‘logical’ aim of Beijing to switch its economy from one that is export driven to one in which the Chinese consumer herself is the engine of growth. Well, that dream, too, has now been found out to be made of shards of shattered glass. The idea of a change towards a domestic consumption-driven economy is being revealed as a woeful disaster.

And that has always been predictable; you can’t magically turn into a consumer-based economy by blowing bubbles first in property and then in stocks, and hope people’s profits in both will make them spend. Because the whole endeavor was based from the get-go on huge increases in debt, the just as predictable outcome is, and will be even much more, that people count their losses and spend much less in the local economy. While those with remaining spending power purchase property in the US, Britain, Australia. And go live there too, where they feel safe(r).

I fear for the Chinese citizen. Not so much for Xi and Li. They will get what they deserve.

 

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Wed, 08/26/2015 - 17:23 | 6474966 post turtle saver
post turtle saver's picture

me Chinese, me play joke, me put QE in your Coke

Wed, 08/26/2015 - 17:26 | 6474974 J Jason Djfmam
J Jason Djfmam's picture

Are Xi and Li Panda Bears?

Wed, 08/26/2015 - 17:34 | 6475006 Stuck on Zero
Stuck on Zero's picture

The delicious irony is that the $100B in Treasuries just sold by the Chinese government were probably purchased by Chinese investors wishing to keep their money safe,

Wed, 08/26/2015 - 17:52 | 6475091 fauxhammer
fauxhammer's picture

Tide is going out...who will be wearing the golden Speedo?

Wed, 08/26/2015 - 18:18 | 6475160 Ham-bone
Ham-bone's picture

tide is sooooooo going out...

China's demographics are horrific with a declining 0-64yr old population through at least 2050!!! (according to OECD) and all net population growth for the next 15yrs is in the 65+yr/old segment living far longer than previous generations (but with no income or sources to pay for this but their adult children...how most Asian cultures do it since there's no social safety net). China is predicted to officially become Japan 2.0 in 2030 when their population is set to peak and start declining!!!

Couple that with the perhaps the greatest credit bubble in history (+1400% in 14 years) primarily plowed into a (now crashing) housing bubble. Chinese credit is set to contract significantly as the housing market is in free fall...obviously, the impact on consumption of all this is really huge. Please remember Chinese hold most of their "retirement" assets in real estate...so you can imagine the economic pain as the housing market collapses.

Welcome to check all the details at the links below.

World population and demographics...

http://bit.ly/1Uboboy

China demographics and credit...

http://bit.ly/1h9mmMS

Wed, 08/26/2015 - 19:04 | 6475262 Save_America1st
Save_America1st's picture

But let's not forget, bitchez....

 

China did not and has not operated within a bubble.  It was enabled by the treasonous Fed, our treasonous Gov-scum, many treasonous corporations, and the rest of the world CB's and Gov-scum.  Who sold China Trillions in bullshit bogus U.S. Treasuries, huh???  And how were those created?  And what the fuck are they backed by???

"Thin air" is the answer to those last 2 questions.

China took advantage of what this treasonous NON Federal Reserve has created over decades.  But they didn't take advantage in some sneaky, underhanded way that the Fed Res and Gov-scum didn't know about.

They did it with their advisement, their conspiracy, and quite frankly their fucking blessings. 

This is all a big, long, drawn out, decades long game, folks.  Don't lose site of that.

Do you really think China devalued the yuan w/out the Fed-scum knowing about it????  They fucking advised them to do it!  It was the only way to shake shit up so that the "Fed" could avoid any further pressure to raise rates by even just a small fraction of a point!

To wit...just look at what happened today with the announcement that there will be no rate hike and then the parabolic market reaction before the close.

What did that mean????  It meant RISK OFF FOR NOW BITCHEZ!!!

That's all...just more games.  This ain't over by a long shot.  And by being "over" I don't mean "recovery" or "growth" or anything substantial for the future.  By "over" I just mean the fucking end ain't here just quite yet.

There's still a good amount of time...1 month to 12 months maybe before the whole universe implodes on us like a fucking black hole.

It's all by design even if there are no definite dates.  But the end of the current monetary system and the "hopeful" (in their sick and twisted minds) birth of a NWO by the Globalist, elitist scumbags is definitely what the plan is in the end by way of destroying everything we thought we knew.

WWIII coming up too if they can't get it done in other ways. 

We don't have 7 more years to get ready like we've had in the last 7 years since the warning shot across the bow 7 years ago.  Anyone who doesn't realize that or who thinks this can go on and on is a dilusional maniac...or a Kardashitard.  Same fucking thing.

We won't have 7 years "to prepare" ever again after this.  This is it.  Plain and fucking simple. 

Wed, 08/26/2015 - 23:47 | 6476221 Implied Violins
Implied Violins's picture

Preaching to the choir, SA1. Unfortunately, it seems to be the future choir invisible. People just have a hard time grasping how those at the top of this fiat pyramid control ALL the strings, and when they get all tangled up, that is part of the plan, too.

Fri, 08/28/2015 - 12:38 | 6482046 roddy6667
roddy6667's picture

The Chinese have a 36% savings rate. This, combined with the practice of not relying on the government for retirement needs, will carry them through.

The real estate market is not "crashing" in China. Get off your ass, get a passport, and come here and see what is really going on. Don't sit at home watching Fox News and swooning over stories of "ghost cities" and "crashing markets". It's just doom and tragedy porn for the ignorant Americans.

Wed, 08/26/2015 - 20:19 | 6475594 kiwigal
kiwigal's picture

The Australian prime minister Tony Abbot is famed for speedos or budgie smugglers. 

Wed, 08/26/2015 - 18:34 | 6475224 MalteseFalcon
MalteseFalcon's picture

No mention of China's gold.  Irrelevant?

Wed, 08/26/2015 - 17:25 | 6474971 Ignorance is bliss
Ignorance is bliss's picture

I'll let the Chinese worry about themselves. I'm worried about my own Ass

Wed, 08/26/2015 - 17:39 | 6475028 Joe Sichs Pach
Joe Sichs Pach's picture

Really kinda curious to hear some commentary from Jim Rogers on these recent events...

Wed, 08/26/2015 - 21:04 | 6475763 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

Well said!  Trouble is that China is such a large economy and if China tanks it will have a global impact.  I also do not rule out the collapse  of the CCP and a breakup into 5 nations. Of course this will be accompanied by refugees streaming out of China BY THE MILLIONS.  For China, losing 100 million is nothing, but for the rest of the world, it is nothing short of an invasion.  

 

As it is the Chinatowns in such places as Canada and USA have become more-or-less self-contained cities, fortreses if you will, that do NOT welcome outsiders. Imagine the current scanario multiplied by a thousand!  

 

So YES, it will affect all of us one way or another. 

Wed, 08/26/2015 - 17:27 | 6474979 CHC
CHC's picture

I fear for the American citizen. 

Wed, 08/26/2015 - 18:00 | 6475115 CheapBastard
CheapBastard's picture

I fear for Deez Nutts. He's gaining on Hitlery.

Wed, 08/26/2015 - 17:30 | 6474993 semperfi
semperfi's picture

not one mention in here of china being able to stablize the yuan with gold which they have a shit-ton of - Raul is an idiot

Wed, 08/26/2015 - 17:44 | 6475055 I AM SULLY
I AM SULLY's picture

China is heading towards civil war.

Wed, 08/26/2015 - 17:58 | 6475109 semperfi
semperfi's picture

not gonna happen

Wed, 08/26/2015 - 22:10 | 6476019 847328_3527
847328_3527's picture

Despite what you hear on USA MSM, the middle class in China is still doing a heck of alot better then in the USA where it's been annihilated by Barry, Pelosi, Reed, Schmucker, etc.

Wed, 08/26/2015 - 21:07 | 6475776 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

Right you are.  Many say that China can split up  into 5 countries.  As it is the real money-making engines of China - Guangzhou (incl. HK and Macao) and Shanghai - are fed up with kow-towing to Beijing.  They are also fed up with Mandarin taking first  place.  Once independent, they can be incredibly rich and prosperous. 

Wed, 08/26/2015 - 21:12 | 6475790 Pliskin
Pliskin's picture

In yours and all the neo-con, warhawk, pieces of shit in Washingtons dreams.

How about a nice civil war in the U.S....just to clear out all the shit I mentioned above?

 

Wed, 08/26/2015 - 17:31 | 6474997 Squid Viscous
Squid Viscous's picture

Remember Cramer's gong?

 

https://www.youtube.com/watch?v=_1DQJQYmH-Y

Wed, 08/26/2015 - 17:35 | 6475013 kchrisc
kchrisc's picture

I fear for the American citizen.

Zion is a scheme, not an ethnicity.

Wed, 08/26/2015 - 18:38 | 6475236 NorthernPike
NorthernPike's picture

kchrisc said "I fear for the American citizen" Backing you 100% on that statement.

Wed, 08/26/2015 - 17:43 | 6475051 Omega_Man
Omega_Man's picture

silly article

Wed, 08/26/2015 - 17:49 | 6475065 Grandad Grumps
Grandad Grumps's picture

Maybe they will start a war to distract away from their corruption and incompetence. Isn't that what "real" western leaders do? Rally the folks in the name of an external (faux) threat.

When the going gets tough, blame it on someone else and kill off a few million folks?

Wed, 08/26/2015 - 17:48 | 6475072 Amish Hacker
Amish Hacker's picture

Gold represents only 2% of China's reserves (at least officially), vs. 68% for Germany, 66% for Italy, 65% for France, etc. In other words, 98% of China's reserves are fiat currencies, which can fail as a store of value if confidence is lost.

Nice chart here:  https://en.wikipedia.org/wiki/Gold_reserve

Wed, 08/26/2015 - 18:16 | 6475162 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

I met a guy yesterday who has a Chinese client with an off-balance sheet stash of 60 tons in a cave. True. So "Golden Mountain" may not be the US. I bet there are plenty more former Red Army generals with similar stashes, I remember meeting one in 1989 in HK who was a billionaire...and that was during "Red" China. 

Wed, 08/26/2015 - 17:49 | 6475075 johny2
johny2's picture

my prediction: once the chinese have sold most of their treasuries, they will anounce a new peg. around 300000 yuan per 1 ounce of Au.

Wed, 08/26/2015 - 17:51 | 6475083 Grandad Grumps
Grandad Grumps's picture

Wow, that is some devaluation ... from about 7000 RMB/tr. oz. now.

Wed, 08/26/2015 - 17:54 | 6475101 Jacksons Ghost
Jacksons Ghost's picture

The dinks survived Mao and his "Cultural Revolution",  50 Million plus killed.

They will survive a few economic bubbles.

 

USA...not so much.

Wed, 08/26/2015 - 18:03 | 6475121 jack stephan
jack stephan's picture

Kazakhstan greatest country in the world all other countrys are run by little girls. Kazakhstan number one exporter of potassium! Other countries have inferior potassium!!!

What the hell, wacky reporters seem to be the order of the days antics, another one is an foxy ex of mine with her hubby, he wore a salmon pink fuckin shirt again.

Note to Chinese, American, and European men, Never under any circumstance wear a salmon pink shirt, your wife may have those nice family pics but after you go, ill fuck her brains out til eventually they regress to infantilism and start calling me daddy, sorry fellas.

Wed, 08/26/2015 - 18:52 | 6475144 gallistic
gallistic's picture

This dumbfuck author from the terribly horrible "Automatic Earth" blog does not give a flying fuck-ass about the "Chinese Citizen".

That alone questions his credibility and disqualifies the entire article.

Wed, 08/26/2015 - 18:13 | 6475155 New_Meat
New_Meat's picture

make this transition, they'd need to embrace Mill and Locke.  Then again, American politics might wish to make the transition as well.

OTOH, I think I'm off to self-medicate.

- Ned

Wed, 08/26/2015 - 18:32 | 6475216 bid the soldier...
bid the soldiers shoot's picture

Wow.

I never thought that the expression "Born Yesterday" would never apply to the author of an article here at ZH.

Just as one rarely sees an story by RT or TASS in the NYT or Wapo, it is also true about stories by Xinhua and people.cn

.

Spare us your Walmart compassion.  

 October 112007, the Dow Jones Industrial Average (DJIA) reached a high of 14,279. In December 2008, the DJIA would reach a low of 8,515.

And then 

The DJIA hit a market low of 6,443.27 on March 6, 2009

I hope you hadn't spent all your pity then for the dwellers in their several million dollar condos and co-ops on Central Park West and West End Ave.

The Dow has since tripled to over 18,000 since March 6, 2009.


Why?  Because the Fed turned its press on to auto.  Did SocGen how many scores of trillions they printed.

Or are you going to take the Fed at its word about how much they printed? 

:o)

Wed, 08/26/2015 - 18:45 | 6475256 q99x2
q99x2's picture

I have a solution but I'm tired of repeating it. I want paid for it now.

Wed, 08/26/2015 - 18:48 | 6475270 wholy1
wholy1's picture

Truly ironic!  The Chinese wealthy are bugging in while the American elite are bugging out!

Wed, 08/26/2015 - 19:23 | 6475410 Dr. Bonzo
Dr. Bonzo's picture

LMAO... when the Secret Service finally comes to arrest me in my Motel 6 room with my digital gear and stacks and stacks of counterfeit credit cards and they announce I'm under arrest for counterfeiting I'll hold my head up high and object:

"Excuse me sirs, this is a credit expansion operation."

LMFAO.

Wed, 08/26/2015 - 19:37 | 6475442 who cares
who cares's picture

The Chinese will find the solution to their own problems. Why dont'you fuck off and mind the problems of your own country?

Wed, 08/26/2015 - 20:56 | 6475739 gimme-gimme-gimme
gimme-gimme-gimme's picture

Yeah, the Chinese ain't no dummies. The West bought trillions worth of shit knick knacks and gave China paper treasuries and currency in return.

The Chinese know it won't be worth shit 30years from now and built 30years worth of infrastructure in 8 years as a hedge.

IMO China was pretty stupid to even get themselves into this situation to begin with, but I guess it was the easiest way to have "growth" and "job creation".

Thu, 08/27/2015 - 00:50 | 6476336 pachanguero
pachanguero's picture

Ok, one more time....Thailand is where I live.  The biggest fucking property bubble ever known is popping here NOW!

Long gold short THB....

Thu, 08/27/2015 - 01:35 | 6476378 onmail
onmail's picture

Chinese citizens have gold 

They are safe.

Thu, 08/27/2015 - 02:21 | 6476417 TheEndIsNear
TheEndIsNear's picture

"And you know what China bought those foreign reserves with in the first place? With freshly printed monopoly money."

It seems so bizarre to value one fiat currency in terms of another fiat currency.

 

Thu, 08/27/2015 - 22:30 | 6476488 roddy6667
roddy6667's picture

At 3000, the Shanghai Composite Index is right where it should be , looking at a 25 year chart. Where is the disaster? In 2007-2008, it dropped much more, and China went on to kick everybody's ass.

Alarmist article written by Chicken Little.

 

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