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Presenting Five Channels Of Contagion From China's Hard Landing
Before China’s bursting equity bubble grabbed international headlines, and before the PBoC’s subsequent devaluation of the yuan served notice to the world that things had officially gotten serious in the global currency wars, all anyone wanted to talk about when it came to China was a “hard landing.” Indeed for what seems like forever, the bogeyman hiding in every economist’s closet was a sharper-than-expected deceleration in China’s economy which, as everyone is now acutely aware, is the engine for global growth and trade.
Of course no one knows where China’s official output numbers actually come from. They could be some amalgamation of real data and NBS tinkering (much like what you get from the BEA in the US) or they could come straight from the imagination of Xi Jinping. There’s also a strong possibility that a lack of robust statistical controls mean China routinely understates its deflator, leading to perpetually overstated GDP growth during times of plunging commodity prices - times like now.
But whatever the case, China’s “shock” devaluation effectively telegraphed the “real situation” (to quote the NBS). That is, policy rate cuts had failed to boost growth and the situation was in fact becoming so precarious that the PBoC was willing to loosen up on the dollar peg that had caused the yuan to appreciate by some 15% on a REER basis over the course of just 12 months, putting untold pressure on the export-driven economy.
The message was clear: China is landing and it’s landing hard.

Now, the task is to determine what the channels are for contagion and on that note, we go to RBS’ Alberto Gallo who has more.
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Via RBS
The contagion from China’s economic slowdown is deep and widespread, with profound implications for both emerging and developed markets.
There are five main channels of contagion for credit:
1. Exports and revenue exposure. Economies for which China is the largest trading partner will suffer from lower demand: Brazil, Chile, Australia, Peru, Thailand and Malaysia. Specific sectors in developed markets will also be affected, especially Germany and Italy. A number of sectors in DM credit with high dependence on Chinese revenue could be vulnerable, including German carmakers (VW, Daimler, BMW), luxury goods manufacturers (LVMH), and telecoms companies.
2. Banking system exposure. Among countries which report to the BIS, South Korea, Australia and the UK have the largest proportion of foreign claims in China. For the UK and Australia, exposure is concentrated among a few banks, specifically HSBC, Standard Chartered and ANZ. UK banks are more exposed than Australian banks, as their loans to China represent up to 30% of their total lending, whereas loans to Asia are generally less than 5% of Australian bank lending (except for ANZ at 14%).
3. Commodity dependence. With China consuming nearly half of the world’s industrial metal supply, slower growth may weigh on supply-demand dynamics and directly lower commodity prices. Countries that rely on commodity exports, and specifically China’s consumption of them, are especially vulnerable.
4. Petrodollar demand for $-denominated fixed income asset investment. Lower commodity prices also mean oil exporters will have lower revenues and less savings to invest in $-denominated fixed income assets. The yearly flow of Petrodollars may shrink to around $280bn/year this year from $700bn in 2014, according to our estimates based on average annual oil prices and lifting costs. If we assume that 30% of oil proceeds is invested in $ fixed income, then the decline is roughly equivalent to $100bn/year in lower demand for dollar assets. This is equivalent to the increase in net supply of Treasuries or $ IG corporates YoY.
5. Currency depreciation and a high proportion of hard currency debt increase solvency risks for EM corporates. While EM sovereigns generally do not rely on hard-currency debt much more than in the past, EM firms have boosted their share of hard-currency debt over the past decade. The portion of $-denominated bonds from foreign firms is now a quarter of the total US IG market. Many EM firms have a large proportion of their debt in hard currency. We have previously highlighted the vulnerability of some EM firms in particular, such as Chinese real estate developers.
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Bonus: The updated China contagion flowchart
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When things start going poorly for the Chinese...
I DID see on an earlier ZH thread today that PERU is likely going to get hit hard. Brazil already has been (but they have a huge corruption problem AND a huge hubris problem as well).
So far our business in Peru is doing OK. But, I have been warned...
EDIT: It is possible that bad economies in our supplier countries S. Korea and China may mitigate, to some degree, bad effects in Peru with (perhaps) lower prices for their pieces...
There is a global debt bubble that is in collapse.
The proximal cause doesn't matter - it is collapsing in real time and monetary reform and debt market write-down is essential to limit chaos.
So far our business in Peru is doing OK.
Do Chen... is that you?
+10 buddy
I was having a rough time during my early sobriety, even here (too crazy, disturbed my tranquility), so I scrambled my password and left. But, it's good to be back.
+ 10 back!
Good on ya' - I always read yr comments closely for DM & PRC insight.
If anyone makes me a double, you take it! Or pass it on...
Funny how no one is talking about the triumph of state capitalism these days...
I like this one better.
Come on! Can't some former Enron accounants "fix" this?
Propaganda still works, right?
Ok, you all clear on the *reason" the markets have to crash now?
Narrative in place: Check
The shiny has worn off and now they have to try and save THEIR economy, but of course don't really care about knock-on effects to the rest of the world. Unfortunately we are using heavily manipulated Keynesian theory and this pesky reality shit will make for "interesting times".......
Yes. And it looks like it will be another "interesting" week. Interesting month too. And interesting YEARS too, probably.
i'm figuring "interested" starts tonight right when the china markets sets to begin...thinking...24 hr Wal-Mart run while the sheep sleep and dream of tomorrows bbq outings...Spam is yummy,btw.
Let's hope RBS can see this crisis better than they could the last one that nearly bankrupted them.
As long as the crash isn't Yellen's fault she can raise rates.
'it's our currency... and, `your problem`'
PERIOD!!!
the MSM's are trumpeting the markets are going to fall, my taxi driver said get out...
sounds of '?contrarian!' similar to the '2000' crash/ slaughter, when everybody and his/her cousin were giving advise on the dot/com train to riches?
whether the fed hikes or goes Qe doesn't matter.
It all about 'our currency'...
@earleflorida
Maybe your taxi driver lost his arse in the markets and is driving a taxi as a result?
USA is actually doing China a favor...hear me out
while china is trying to stop/saved their broken econ enough to over take usa dollars(their original plan),the crooked usa dollar thieves have mucked it so bad,so soon that china only has to slow their roll enough that when the usa dollar dies all they have to do is walk right in(all dependent on them saving their dollar long enough to do it)....it really is a race to the bottom.
Hmmm, I'm not seeing America on the Chinese contagion flowchart. I'd think selling treasuries hand over fist would cause it to make the list.
4 reasons china's hard landing will get harder:
1) continuing lack of demand from eu & em
2) hideously overpriced domestic assets
3) the TRUMPster dumpster
4) nobody likes them
For as along as I have been here (including my older account), I have been impressed with buzzsaw99's comments.
You made some I disagreed with, yet you turned out be right. H/T
It never ceases to amaze me how people always "buy high" and "sell low".
I was going for a walk to the beach earlier, and spent some time with a neighbor friend of mine. I really like this guy.
He's made a spot in life with his skills and being a decent hardworking individual.
On several occasions he's asked to invest money with me, and I've respectfully declined.
I just feed him a few ideas/suggestions, when I'm walking by.
This guy and his wonderfull wife bought a beautiful home with a panoramic view of the ocean, and have tons of equity.
I can't believe how intoxicating ZIRP and some equity is to the novice. I explained the long end of the bond curve, and how China ~Japan will dictate rates as they search for liquidity.
His wife is very conservative, and I think, I might have gotten through to him.
Funny how China's crashing market allowed the Chinese to dump a HUGE amount of US junk off their balance sheet.
Dumb luck I guess.
I'm sure Charlie Gas-bagarino, or Maria Barferino will explain it away on Faux Paux news.
I don't waste my time bagging on CNBS, MSNBS, CNn, because they're like the local casino lounge lizards.
BTW> Google Search sucks donkey diks.
Yahoo, actually gives better search results.
YC, Bing came up with Al Shanken's parody song "Gangster Paradise" (hilarious) when Google could not.
Glad to be back here at ZH dialoging, even under my new name.
You raise a point that has been nagging at me.
So China sells its Treasuries and gets dollars in return.
But dollars offer even less return than Treasuries, yet also depend on the continued viability of the US.
So they sell their dollars for Chink buks in order to support their currency on the alternate days when they aren't busy trying to devalue it.
And what they end up with is non-interest-paying Chink buks rather than low-interest-paying Sam Treasuries.
Which they then use to buy overvalued Chinese shell companies and stock ponzis that not only provide no return but are crashing in value.
Which in turn means that, instead of gradually privatizing SOEs so they can become more efficient, they are effectively nationalizing the worst performing companies in China (because they need the most support for their stock price) and thus guaranteeing an even less efficient and less profitable enterprise going into the future.
So they are selling their hoard of hard currencies that took decades to accumulate in order to buy up every worthless fake company in the country.
This economic policy seems to offer fabulous benefits for the current owners of putative Chinese penny stocks but spells disaster for everyone else.
interesting point, but it rests on the assumption that they are spending 100% of the dollars they got in return for the tresuries on buying RMB then using those to support (effectively nationalize) the shittiest businesses in china.
we would have to know what they are doing with those FRNs they are getting from treasury sales. i would guess that a portion is spent to support the currecncy, but i would guess that they are also spending a great deal on buying hard assets.
for me it comes down to this. are they keynesian idiots or are they using sunzi's art of war as their playbook? ie appear weak when you are strong, bide your time until the right time to strike etc etc.
if they are keynesian idiots then youre right, this policy is suicidal.
if they are smart (and maybe i give them too much credit), they took advantage of a popping stock market bubble, which they themselves might have intentionally created, to liquidate some of their massive treasury holdings while denying the US a good reason to villianize them. they can then use all those dollars to buy up even more hard assets, which simaltaneously makes the fed monetize the treasuries they are offloading thereby fucking directly with the fed.
they have prodigious real estate and stock market bubbles as well as their huge shadow banking system. they are taking steps to systematically dismantle the dollar while at the same time building an alternative financial system. if they were to, as jim willie has suggested, bide their time and then suddenly announce their (potentially massive) gold reserves while inserting the RMB into something resembling a world or even asian reserve currency, they could offset some of the pain in the real estate and stock markets by immediately and substanially increasing demand for their currency and thus everything demoniated in that currency. essentially an overnight upwards currency revaluation.
this would allow domestic chinese consumers the ability to consume the huge production capacity in china and make them wealthier when measured in foreign goods, which again would offest a lot of the problems with the real estate and other bubbles. it would also solve the problem of their economy being dependant on the dying and criminally corrupt and insane west.
Bhat Yuan Rial Pound Som Dong Florin Euro Dinar?
When I snap my fingers you will wake up and forget all the western propaganda that China is some how hurting.
As I said the other day, in November 2014 the Shanhai Stock Market changed its rules and permitted foreign brokers to buy 'A' shares for their overseas customers. This was ground zero for the bubble in the Shanghai Composite and the explosion of margin debt there.
You don't have to be Sherlock Holmes to know that the Wall Street firms who are members of the Shanghai Exchange were buying stock for their own accounts under fictitious names. Alfred Neumann's account was $23 billion. Tyler Durden moved up to $40 billion into the Shanghai exchange. And newsoutlet topped the list at over $90 billion.
Goldman Sachs took monikers from ZH commenters to open its phony accounts. Wall Street had a lot of practice opening pretend accounts, because of all the syndicates it had opened to avoid the rule stipulating that if an individual owned more than 7% (?) of a company it had to be reported to the SEC.
They all bought on margin and then they all sold short the same companies they originally bought. Charlie Chan, however, was waiting for them.
Half the companies on the Shanghai Exchange abrubtly suspended trading in their own stock, according to the rules of that exchange. They are still suspended some 3 months later. Neither Blankfein nor Goldman's lawyers picked up on self-suspension.
Finally, when all these fictitious characters with ZH names exchanged dollars for yuan to buy Chinese stocks, one dollar bought about six yuan.
With the devaluation of the yuan in last couple of weeks, plus the threat of further devaluations -- maybe down to eight (8) yuan to the dollar -- with all their assets in yuan and on margin, GS finds that a couple of clocks are ticking against them:
1) the margin clock (paying interest on Margin)
2) the devaluation clock (if China devalues more, GS gets back less in fx)
3) the non productive assets clock (the suspended capital could be used to rip off people in the US or Europe.
Reading how China is suffering from their market collapse or the devaluation of the yuan in the MSM, is like reading about the honor and merit of Poroshenko and the Ukrainian Government.
(snaps fingers)
It's ALWAYS the same. Big money gets in at the bottom and the market subsequently starts to rise. When the trend is "obvious" retail gets in and big money unloads on them. Then the bubble bursts as there is nobody else to hold the bag. Average Joe on the street always gets screwed one way or another. That's his fate. Sad, sad, sad.
here in Australia, the commidity price fall has impacted the rural scene. Heavy mechinery up for sale all over as thminng industry windsback. THis is yet to impact the cities though, house prices are at record highs and the property market ithe ONLY game in TOWN. IT didnt crash as it it did in 2008 as in the US, its run has been uninterupted.
House prices falling is in no way part of any ones thought process.. I wait for the day for a good solid 80% price fall in house prices. Its all a debt binge. People buying shacks for $1.4 million. the dont have $400 K let alone 1.4 mill.. most probably they dont have even 40K cash imo.
In AUstralia , it doesnt mater if GDP does down, debt goes up, stock market goes down, AUD dollar goes down nor unemployment down and inflation up..... its ALL ABOUT THE PROPERTY MARKET...... THE ECONOMY IS the PROPERTY market.
Im hoping for a good CREDIT CRUNCH to bring rates up thanks to chinas hard landing. then the 80% house price fall. Maybe its wishful thinking.