People Are Suddenly Worried About China (Again)

Tyler Durden's picture

Considering that in the past 3 months the only daily topic of relevance for the media has been "Donald Trump" both in the US and abroad, one would assume that when it comes to global policy uncertainty the primary source would be, record S&P 500 paradoxically notwithstanding, the United States. One would also be wrong, because while Trump seemingly remains the only topic worthy of discussion blanketing the airwaves, as the following chart from Goldman demonstrates, it has been China where policy uncertainty has stealthily exploded in the past three months according to, while making virtually no new headlines.

But how is it possible that China, which is seemingly far more "concerning" at this moment than it was a year ago when fears about Chinese financial conditions and devaluation led to global market selloff and pushed the S&P into correction, has had virtually no impact on risk assets so far in 2017: clearly either the chart above, or the market, is wrong.

Conveneintly it is the same Goldman which has published an exhaustive report laying out the key risks to China's growth, many of which have been discounted by the market which erroneously assumes that just because the world went though a China "scare" period one year ago, that the world's second biggest economy remains contained. Far from it.

For those pressed for time, below is the summary of Goldman's "Risks To China's growth In The Year of the rooster" report, from the team of MK Tan:

  • After meeting the 2016 growth target, Chinese policymakers are focused on stability ahead of the upcoming leadership reshuffling. This relative calm–we expect only a modest deceleration in growth in the Year of the Rooster—is coming at the cost of further increases in credit and other imbalances. Meanwhile, markets have tempered their acute bearishness on the Chinese economy and are focused on policy and politics in the US and Europe. Still, with growth arguably above potential and Chinese policy tightening, we think a review of China-related risks is timely. We separate risks into those emanating from the Chinese economy itself, and adverse shocks from abroad.
  • Domestically, our concerns center on the ongoing credit boom and the calibration of policy tightening. A fading "credit impulse" to growth seems likely, with cyclical sectors like housing apt to slow this year—even if low reliance on foreign funding and strong government influence on bank lending and bond purchases reduce the risk of an acute credit crunch. As for policy tightening, policymakers have tried to balance growth targets with financial stability, but inflation could become a new constraint as potential growth declines.
  • The biggest risks for China from abroad are an accelerated pace of Fed tightening and/or US protectionism. As for the former, with two Fed hikes already priced in for 2017, it would probably take a shift into more hawkish territory than our own forecast (three hikes) to cause a major shock. As for the latter, the most disruptive measures would be a large across-the-board tariff on China or the “border-adjusted cash flow tax” under consideration by the House of Representatives. Either could impose a meaningful hit to Chinese exports and growth, as well as exacerbating capital outflow and financial stability risks.
  • If one or more of these risks materializes, a Chinese slowdown would be transmitted to other countries through three main channels: slowing goods imports from the rest of the world, falling commodity prices, and tighter financial conditions (most likely via a stronger USD and weaker equity prices). Open Asian economies, particularly those with commodity exposure and/or dollar indebtedness, remain the most vulnerable to a “hard landing” in China.

* * *

Those interested in the details behind the report are encouraged to read on for the key select excerpts:


A year ago, markets were abuzz over the possibility of a financial calamity in China and/or a “big deval” in the currency. Market pricing implied the likelihood of substantial equity price moves and CNY depreciation (Exhibit 1). Fears of a China crisis reverberated through global markets, tightening financial conditions around the world and pushing the US Federal Reserve to postpone its plans for further rate hikes.

Exhbit 1: China’s equity and currency markets were both under stress a year ago

Chinese policymakers wrestled with challenges throughout 2016, but large and sustained policy stimulus eventually fostered recovery. Fiscal and regulatory easing, alongside continued rapid credit growth, underpinned strong growth in infrastructure spending and a rebound in cyclical sectors like property and motor vehicles. Real GDP growth came in on target (6.7% versus a 6.5%-7.0% target range), and alternative measures of activity also improved (Exhibit 2). Our China Current Activity Indicator bottomed out at 4.3% (see dark line in Exhibit 2; this is measured on a three-month, three-month annualized basis) in early 2015, recovered to the mid-5% range last year, and is now running at 6.9%. Heavy industry, as proxied by our physical output measure (gray line in Exhibit 2), has seen an even more pronounced reacceleration.

Exhibit 2: After a tough 2015, our measures of Chinese growth accelerated in 2016

Now, while forecasters still expect a little slowing in growth and some further depreciation in the renminbi, the focus is much more on policy in the US and Europe. In the US, President Trump’s tweets have spawned a cottage industry of interpreters vying to understand where policy may head in the coming year. Across the Atlantic, the road map for “Brexit” as well as continued uncertainty about politics in the rest of the Eurozone occupies many market participants. While we subscribe to the view that Chinese policymakers will manage through the year with reasonably high growth, it is still prudent to review the risks ahead.

After the roller coaster of the past year, most observers expect Chinese policymakers to make significant efforts to keep growth stable this year and try to reduce volatility in financial markets. Indeed, commentary following December’s Central Economic Work Conference suggested that “controlling financial risks” may even take precedence over the growth target—a sensible ordering of priorities, in our view. Still, even if the Communist Party of China (CPC)'s long-term commitment to double income in this decade—as promulgated by the previous administration and reiterated last year by many senior officials—is pushed out by a year or two, it continues to carry some weight. We therefore expect the growth target to be near 6.5% for 2017, and policymakers to accept only limited flexibility around this target (sub-6% GDP growth is unlikely to be acceptable). A special motivation for minimizing market and economic "noise" in 2017 is the upcoming 19th Party Congress and associated leadership reshuffling, which will involve the majority of members in the Politburo and Standing Committee of the CPC. 

Global financial markets seem to have bought into the notion that China-related risks will be managed, shrugging off China’s significant bond and FX market volatility in recent months. Substantial capital outflows and CNY depreciation against the USD continued in late 2016 but have not (yet) resulted in substantial tightening in global financial conditions, unlike last year (Exhibit 3).

Exhibit 3: Less spillover from China to US financial conditions recently

The aforementioned improvement in growth, alongside clearer messages from policymakers (publicly rejecting a large devaluation and holding the trade-weighted renminbi stable since mid-2016) and friendlier global conditions (a more dovish Fed in particular) have all helped.

What could bring China fears to the fore again, and cause the markets to change their assessment?

We explore some possible paths to a “hard landing” in China. (For the purposes of this discussion we define a “hard landing” as a drop of at least 4pp in our China Current Activity Indicator within one year—on this basis we’ve had a few near misses in the last few years, most recently in early 2015, but no hard landing. From the current growth pace, this would imply a drop in CAI to the mid-2% range or below.) We divide our review into external shocks and then domestic vulnerabilities, although clearly the two interact with each other. We emphasize these risks are not part of our baseline scenario for China in 2017, though they are more than mere "tail risks".

Domestic vulnerabilities—credit and policy miscalibration

We see two principal risks domestically. The first is an abrupt end to China’s credit boom.

A widespread perception of a "policy put", implicit guarantees to state enterprises and governments at all levels, and generally strong growth have underpinned the stability of the financial system. They have also encouraged rapid growth in leverage, including a reacceleration in 2015-16 (Exhibit 4).[5] China’s post-GFC credit boom has taken debt levels well beyond those of EM peers (Exhibit 5).

Exhibit 4: Credit growth has reaccelerated since 2015 and is well in excess of nominal GDP growth

Exhibit 5: China’s debt level well above EM peers 

Sustained debt booms typically lead to slower growth, greater financial volatility, and heightened risk of a financial crisis. Looking at more than a century of historical data, we found that a “large domestic debt boom” lasting at least 7 years where the debt-to-GDP ratio increases by over 52pp—China’s easily qualifies—is typically followed by a 2pp slowdown in growth and a heightened risk of financial crisis (Exhibits 6 and 7).

Exhibit 6: Real GDP growth decelerates after debt booms: Real GDP growth relative to average during debt boom period

Exhibit 7: Financial crises common but not inevitable in large-country domestic debt booms

Another way to look at the potential growth consequences is to estimate the negative “credit impulse” if credit growth were to slow to half its current pace. Using our past analysis of the relationship between credit and growth, and assuming a deceleration over one year, this would slow growth by 2-3pp or more (a more gradual deceleration would spread this growth hit over a longer period). 

We have seen credit booms end because of intentional tightening (Japan, where policymakers raised interest rates and imposed credit controls), external shocks (capital outflows in the Asia Financial Crisis), or to some extent collapsing under their own weight (the United States, where rising defaults led to a vicious cycle of tighter credit, falling asset prices, and weaker growth). Similarly, a structural break in China’s credit expansion—a sharp tightening in credit availability—could occur because of a deliberate policy shift or because imbalances have simply grown too large to be sustained (more on both below). Regardless of the trigger, a supply-driven tightening in credit would have highly negative consequences for growth.

Chinese policymakers are trying to avoid this sort of sharp pullback. Perhaps with the US experience in mind, they have been particularly attentive to “shadow banking” risks, recently taking steps to regulate off-balance sheet activities such as wealth management products, and to increase the cost of repo financing that is often used to fund shadow banking activity, even at the cost of prompting a significant bond market selloff in late 2016. In this context, our forecast remains for a "bumpy deceleration" in growth rather than a hard landing, though the longer the credit boom continues, the more difficult it will be to guide the economy to a soft landing.

The second domestic risk is a major policy tightening. This could be intentional or unintentional, although we view the latter as much more plausible. 

Chinese policymakers’ growth goals appear increasingly likely to conflict with supply-side constraints. Historically, the growth target was a “policy put” that was out of the money—a reassurance that growth would not be allowed to drop too far. However, in recent years the target appears to have become a binding constraint on policy. Actual growth is near the target instead of well above it (Exhibit 8), and our estimates suggest potential growth is slightly lower (near or below 6%).

To meet the GDP growth targets, credit growth has boomed, as noted in the previous section, and a key driver of demand for that credit has been a large increase in the broadly-defined fiscal deficit (Exhibit 9). Indeed, a portion of the fiscal expansion has been underwritten by the central bank itself in the form of rising credit to the banking sector (e.g., "pledged supplementary lending" to policy banks such as CDB; see Exhibit 10). 

Attempting to boost growth above its potential rate for a sustained period is likely to lead to rising inflation and/or unsustainable asset price appreciation. We have already seen a large run-up in housing prices, substantial capital outflow pressures, and a sharp turnaround in producer prices (although we would attribute the latter primarily to CNY depreciation and upstream supply-side constraints rather than demand stimulus). As yet, CPI inflation is modest (Exhibit 11), but inflation could eventually force more difficult tradeoffs—and possibly a harsh policy tightening--if growth targets are not tempered further.

With growth in the target range for now, policymakers have begun tightening on a number of fronts to address these risks:

  • Housing restrictions in tier 1 and 2 cities, mostly on the demand side, to address surging home prices.
  • Regulation of "shadow banking" activities such as wealth management products to limit liquidity risks and overall credit growth.
  • Higher and more volatile repo rates to limit shadow credit growth (and perhaps also to discourage outflows and support the currency).
  • Stricter enforcement of controls on capital outflows.

The steps thus far look like “targeted tightening” designed to limit risks without too much damage to economic growth. For policymakers to cut their growth aspirations significantly and tighten very aggressively, other economic challenges such as inflation or capital outflows would have to get much worse, in our view.

Exhibit 8: Policymakers have kept real GDP growth on target...

Exhibit 9: ...but fiscal support has reached unprecedented levels

Exhibit 10: PBOC and banking sector have helped finance stimulus

Exhibit 11: PPI rebounded sharply, but CPI inflation still modest

Even if policymakers do not intend to slow growth sharply, there is always a risk that they do so accidentally. The past few years have featured numerous occasions where policy tightening generated bigger effects (either in financial conditions or the real economy) than expected. Examples include the mid-2013 spike in repo rates (Exhibit 12), volatility in the equity markets around policy interventions (such as the introduction of the “circuit breaker” in early 2016), and of course the ructions in global currency and equity markets around the small renminbi devaluations in August 2015 and early 2016. Late last year, modest tightening by PBOC contributed to a significant backup in the bond market (Exhibit 13). In the real economy, efforts to reform local government finances slowed investment and heavy industry activity in late 2014 and early 2015, prompting a reversal in the spring of 2015 and substantial easing thereafter.

Exhibit 12: Sharp repo spikes in earlier years; moderate increase in volatility recently

Exhibit 13: Recent bond market backup ended a three-year rally

The biggest vulnerabilities to unintended tightening are probably in the less formal areas of off-balance sheet spending (on the fiscal side) and non-bank credit extension (on the monetary side). On-budget fiscal policy is relatively transparent and controllable, but how local governments will respond to changing incentives—including anticorruption efforts, shifts in performance criteria, and changing availability of credit—is harder to predict. Likewise, policymakers have considerable influence on direct lending by large state banks, but less so on other bond market participants or "shadow banking" entities. This is especially true when multiple regulators/policymakers may be acting in a manner that is not completely coordinated. A particularly big challenge is how to unwind the perception of implicit guarantees on the debt of many SOEs and local governments’ financing vehicles without precipitating a credit crunch.

In summary, we see a policy tightening "accident" as a key domestic risk. Credit expansions can buckle under their own weight as leveraged asset prices rise to unsustainable levels and rising defaults prompt a reversal in credit availability. But with policymakers attempting to manage both housing prices and defaults directly, we think the central issue in the year ahead is policy calibration. Policymakers clearly do not want the economy to slow sharply, particularly ahead of the leadership transition later this year. At the same time, they need to address some of the imbalances in the economy to limit future volatility. Getting the balance right is particularly challenging given the leverage already in the system. Warning signs of overtightening could come from a large pullback in fiscal activity (Exhibit 9), a sharper spike in short-term interest rates (Exhibit 12), a widening in credit spreads (Exhibit 13; this might occur for example because of a reassessment of the value of implicit guarantees), or any sign that polices were causing an abrupt seizure in broad credit availability (Exhibit 4).

* * *

Potential shocks from abroad—export slump or hawkish Fed

We see two main potential shocks from abroad that could conceivably cause a “hard landing” in China:

First is a sharp decline in export demand... Despite the rapid growth of domestic demand and services, exports remain an important pillar of China’s economy. In recent years, 15-20% of Chinese value-added was dependent on demand outside the country. Although this proportion has been declining, China remains sensitive both to global growth shocks and to any lurch towards protectionism in developed markets, particularly the US. 

...either because of global growth… The single most important driver of Chinese exports is the pace of domestic demand growth in its trading partners. Our analysis suggests that Chinese real export growth moves slightly more than one-for-one with foreign demand growth,after accounting for exchange rate moves and commodity prices.[18] With an export-to-GDP ratio of slightly over 20%, it would clearly take a very large shock to directly cause a "hard landing" in China. It took the global financial crisis for an external shock to slow growth by 4pp on its own (Exhibit 14). Of course, weaker external demand could have indirect effects on domestic challenges also (e.g., by increasing non-performing loans and credit stresses, or by leading to greater FX outflows). However, weaker external demand isn't our base-case scenario; on the contrary, global activity has been accelerating and we expect at least a modest improvement in domestic demand growth in developed markets in 2017.

…or increased trade barriers. In the wake of the US election, the more likely risk to export demand comes from protectionist measures on the part of China's trading partners. China benefited enormously from the reduction in trade barriers following its entry to the World Trade Organization in 2001 (Exhibit 15), and clearly would be adversely impacted from any backsliding in this area.

Exhibit 14: Export shock would need to be GFC-sized to cause hard landing on its own

Exhibit 15: Chinese export shares have leveled off since the GFC

More substantial US actions would include across-the-board tariffs on Chinese imports (Trump advisor Peter Navarro has proposed 45%) or a “border-adjusted tax,” which would effectively be a tariff on imports from all countries. These could potentially have meaningful growth impacts, particularly when second-round effects of retaliatory tariffs are taken into consideration. Still, while our analysis suggests that tariffs in the single or low double-digits will certainly slow growth, our models do not suggest a magnitude approaching our 4pp "hard landing" threshold in most scenarios that we find plausible. This is particularly true in 2017, since we think the new US administration would be unlikely to apply large tariffs to China or implement a border-adjusted tax before lengthy negotiation and debate.

2. Fed tightening. The pace of Fed hikes in 2017 will be an important determinant of external pressures. More rapid Fed hikes would raise interest differentials and likely result in a stronger USD.[23] Chinese policymakers would then face the choice of seeing their own currency appreciate on a trade-weighted basis (and thereby losing competitiveness), or depreciating against the USD (potentially exacerbating capital outflow pressures). A stronger dollar would also be unhelpful for regional growth.[24] We think Fed and dollar pressures are an important risk in 2017 and beyond, though the gap between market pricing of rate hikes (close to two hikes for the year) and our US team's view of three rate hikes for the year has closed as markets have priced in better growth and inflation outlook post-election.

However, it is important to note there is an automatic stabilizer of sorts. To the extent outflows or the CNY move are viewed by markets as disorderly, or having the potential to become so, we could revisit the experience of August 2015 and January 2016 where US financial conditions tightened (USD strength/equity weakness), causing the Fed to back off and reducing the pressure that created the concern in the first place. US policymakers certainly have no interest in seeing a "hard landing" in China's economy, and have been responsive to financial conditions.[25] Clearly, however, this process would be damaging to risk assets initially, as it was in August 2015 and early 2016.

Taken together, while external conditions could prove more difficult in some respects in 2017, we do not think that they will be the fundamental triggers of a "hard landing" in China in 2017. Global growth appears healthy at the moment, with our Global Leading Indicator recently marking an 6-year high.[26] And while we expect the Fed to tighten and trade policy to become less friendly to imports from China, we do not think the magnitude of these changes will do much damage to 2017 growth as a whole.

A more challenging external shock would be a combination of a big protectionist move by the United States and a hawkish shift by the Fed (perhaps reacting to the growth and inflationary consequences of tighter US trade policy). This could result in a substantial blow to Chinese growth, perhaps magnified by interactions with China's domestic imbalances. Still, as the new administration is still making key personnel appointments in trade-related areas, and we expect the Fed to wait until June for its next hike, this is probably a bigger risk for 2018 (or perhaps late 2017) than for most of this year.

* * *

Policy buffers large but eroding

It's important to point out that Chinese policymakers still have large—though shrinking—policy buffers relevant to both domestic and external shocks.

External policy buffers include:

  1. A solid current account surplus. The current account surplus was $210bn in 2016, or 1.9% of GDP. Unlike many countries in the runup to the Asian Financial Crisis, China is not borrowing from abroad to fund imports.
  2. A strong net international investment position (15.7% of GDP as of Q3 16). As China has run large surpluses for years, it has accumulated a substantial net long position in foreign assets.
  3. Low external debt as a share of GDP. Looking at the liability side, FX debt is large on an absolute basis at ca $1.5trn, but quite modest relative to the scale of China’s economy ($11trn GDP). From a macro perspective, FX liabilities should not be a major constraint on depreciation, though some sectors that have borrowed significantly in dollars (e.g. property developers) are exposed to this risk.
  4. Still-substantial PBOC reserves. Official reserves stand at just under $3 trillion, within the IMF's recommended range for a fixed currency regime. Even if one assumes some off-balance-sheet FX selling, the amount is still large and our tally of Chinese holdings of US/German/Japanese fixed income and equity assets (presumably an effective lower bound for liquid reserves, as it excludes holdings via financial centers like the UK, as well as holdings of other countries’ securities) is $1.7 trillion based on data as of mid-2016.

On the domestic side, key resources available to policy makers are:

  1. Fiscal deposits. These currently total 5.4% of GDP, although they have come off their recent peak in early 2015.
  2. More generally, a high credit rating and still-substantial “fiscal space” for the central government. The government has recourse to large assets in the form of the SOEs, although to be sure there are also considerable contingent liabilities throughout the economy—for example the debt of local governments and central SOEs. There appears to be still-considerable scope for government-driven infrastructure investment, even if the ROI of such investment is declining in some areas.[28]
  3. Monetary policy space. Interest rates are still well above zero and there is the potential to loosen constraints on the banking sector (e.g. RRR cuts).

As policymakers spend down this "ammunition", the market and economic reactions to shocks could become more volatile.

* * *

Conclusion: Key risks and their transmission

In conclusion, we see the biggest risks in China centering on the country's rising credit imbalances, with mis-calibration of policy or a sharp external shock as possible triggers of a sharp tightening in credit conditions and "hard landing" in growth. To reiterate, this is not our base case for 2017 (and not yet for 2018 either, for that matter). But it deserves close monitoring, and we will be watching the fiscal stance, credit market conditions, and other metrics—as well as comments by policymakers—to update our assessments of these risks.

Should China's economy slow significantly, it would clearly have effects throughout the region, transmitted via three key channels:

  1. Trade. Just as China would be affected by a drop in export demand, so other countries in Asia would face a growth hit from a slowdown in China. Small open economies would be particularly hard-hit.[30]
  2. Commodities. A slowdown—to the extent it involved goods-producing and construction activities—would have implications for commodity prices, helping the terms of trade in much of the region but hurting it for commodity producers such as Malaysia, Indonesia, and Australia.
  3. Financial conditions. As we observed with renminbi volatility over the past 18 months, financial volatility and growth weakness in China has the potential to tighten global financial conditions, slowing growth and prompting further monetary easing abroad.

Our past work has suggested that the biggest effects of weaker Chinese growth would come in Korea, Taiwan, and Southeast Asia, where most economies would feel the impact through two or all three of these channels.

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CHoward's picture

Yu wong!  Eveyting in China a okey dokey!!

Croesus's picture

Confucius say:

Buyer who buy high, get stoned broke.


China is fucked - they went FED bat shit crazy, and printed the living rat fuck out of the yuan to power throuth the 08 recession. 

Only way out temporarily, is to print at fucking light speed until the whole fucking mess implodes like a black hole sucking in the entire galaxy of financial lying fuck institutions.

Only problem is - the entire world economy goes down the shitter with them. 

You, me, everybody. 

Got lead ? 

just the tip's picture

so does this mean there is not going to be a silk road?


xythras's picture
xythras (not verified) newmacroman Feb 21, 2017 12:01 AM

I'm worried about ALL GLOBALISTS not just China

U.N. LEADER: It’s Your Fault Muslims Kill You

Plenty of sick fucks aka Marxist Islamists around. Especially in the UN

Treason Season's picture

Plenty of sick xythrases aka Spamming sik fuks around. Especially in the ZH

zeebjii's picture

I am a finance fool and i don't get it. Why can't china print at lightspeed to infinity? They print and they are swallow assets all over the world, from moive studios, palaces, paintings, football clubs. Can anyone explain to me, why can't they continue to print, why will it implode?

Orly's picture

The short answer is hyperinflation.

When you print your own money unchecked, that makes more money buying too few goods (relatively speaking...).  That makes inflation.  Inflation becomes a self-feeding cycle because now that widget costs more because he had to charge more, etc., etc.

Eventually, that leads to a complete loss in the faith of your currency because it takes a wheelbarrow full of dollars to buy a loaf of bread.

See Weimar Germany and Zibmabwe.


Addo: As for the movie studios, etc.; that is people trying to move money out of China because they have a lot of money- or are trying to hide it from government.  When the RMB devalues further due to economic turmoil, they will have to sell those properties at a steep discount, resulting in the destruction of great paper wealth.

The Japanese did the same thing in Cali in the '80's.

SoDamnMad's picture

I got lead but reading your blog I am running out and doubling down.  Think I might have to lease a fork truck to move it.

J S Bach's picture

Not me... I ain't worried at all.

turnball the banker's picture
turnball the banker (not verified) J S Bach Feb 20, 2017 8:49 PM

Me either..Could not even give one fuck

Yen Cross's picture

 I love this spike in the $usd!  It just shows how connected the YUAN is.

  I'm loading the euro truck. After the French elections. The euro is going to spike so hard!  So will the GBP

 Manage your risk~ Bitchez  [ You'll be richly rewarded]

turnball the banker's picture
turnball the banker (not verified) Yen Cross Feb 20, 2017 8:47 PM

Fuck off you annoying shepwave spammer

Yen Cross's picture

  Lay off the psychotropic  DRUGS .

  The only banking you do is/are financed by George Soros.

 Take your BS somewhere else<  Nork Boy!

  turnball the banker Troll> 35 weeks 3 days


turnball the banker's picture
turnball the banker (not verified) Yen Cross Feb 20, 2017 8:57 PM

You and that scubasteve are the same accounts spamming shepwave dickhead

Pareto's picture

you're retarded.  YC's been callin it since - forever and long before this shepwave stuff.  So EABOD

Mustafa Kemal's picture

" After the French elections. The euro is going to spike so hard! "

Yen, I was thinking of shorting the euro, in preparation for a Le Pen win. How is it you think it is going to spike?




buzzsaw99's picture

yen i up voted you but gotta disagree with your premise.

the upvote is because right or wrong you have ballz of steel my friend.

Yen Cross's picture

 Thanks buzz. This isn't a popularity contest.

RogerMud's picture

lol..i see what you did there

dimwitted economist's picture


are stocks still going up....


NugginFuts's picture

Anyone else in here bold enough to keep shorting the market?

zagzigga's picture

Why? Stocks are purely trading on technicals these days. Infact, even 70+ RSI for several weeks doesn't result in a dip. At best, there is sideways action for a bit and then the market legs up higher. Rinse and repeat. New all time highs for the market built over the graves of shorts.

turnball the banker's picture
turnball the banker (not verified) NugginFuts Feb 20, 2017 8:51 PM

Fuck off 30000 here we cum

Omega_Man's picture

just spend your US treasuries on domestic weapons and all will be fine... put people to work, and prepare to defeat USA... two birds with one stone 

Cabreado's picture

In other words, all bets are off until the grand ol' USA finds a new equilibrium.

Which it won't until the Fed is put out to pasture.

Mustafa Kemal's picture

According to this

Prince is starting Operation Pheonix also against ISIS ( since it worked so well in Vietnam).

Sounds like its coming to a theater near you also

Aquarius's picture

China is in Growth

Russia is in Growth

The real money is in GOLD and China and Russia

The USA is in a state of Devoltion n Collapse - Land of Losers and the Lost and Fake News = "extremis". Tinsel and Glitter


Ho hum



Orly's picture

Thank you ZeroHedge and Goldman Sachs.  Terrific presentation.


Yen Cross's picture

  Orly, it's nice to have you back. I'm amazed at how far back 2007 is for some people.

Orly's picture

Back when everything imploded and EURJPY was the trade of the century?

It is coming again.  And, again, it will be China that sets it off.  Remember even before Lehman, the Shanghai markets were jumping like catfish and no one noticed.

It is funny that this time, these fluctuations have been kept to a minimum and nary a word about the precarious position of the Chinese is coming out of Beijing.

I suspect they are keeping it on the downlow and that they are far more afraid of certain "consequences" this time than they were the last.  Soon, though, the restlessness will bubble over and real emotional moves are going to return with a vengeance.  If they don't remember 2007, they are going to remember this one.


LePen is going to lose, I agree with you there.  Sell the rumour, buy the news in this case for the EUR.  Then the time-bomb sets in: tick, tick, tick.

It may well be another time to sell EURJPY because when it comes, it is going to come in a hurry.


Yen Cross's picture

 Pretty Funny. I agree... The crosses are very "range bound".

Orly's picture


Do you realise what you would have had to pay for this analysis before the days of the "internets"?

Say what you want about Goldman-Sachs but they are certainly thorough, thoughtful and experienced.

And Tyler posts this great information for us to have at our fingertips...even on our "smartphone."

That's not funny.  It's super nice.


besnook's picture

the 210 bil current account surplus plus the quickly domesticating economy says china controls the world economy. the fact that the rmb trade is internationalizing says the dollar is in trouble. the euro says that if it can rid itself of greece, italy , spain and portugal the euro will spike which also puts pressure on the dollar.

Orly's picture

Unfortunately for the Chinese, that is not true.  While $210B is a giant surplus, the way their credit system and the backbone of the Chinese economy is built relies on that money and the "pedal to the metal" credit boom is already priced to perfection.

In short, the massive ramping of the Chinese economy is no longer sustainable.

If the US bought fewer products from the Chinese, bought Made in the USA stuff instead- even to a small degree-that perfect situation dissolves.

If the Chinese allow and encourage the RMB to depreciate against the USD in order to generate cheaper exports, people will take their bitcoins, Canadian real estate, whatever they can get, to preserve their paper wealth.

As money leaves China, the amount of money available for loans starts to dry up, thus the credit-based economy will dry up.

If the US raised interest rates, the US economy would slow, thus reducing the amount of Chinese stuff imported from overseas.

With all of these facts, it is very unlikely that the Chinese RMB will overtake the USD or even come close to the Euro for many, many years.

The situation is simply not sustainable.


besnook's picture

you duidn't account for a coupla things. the current account is a huge buffer against both capital flight and reduced exports(capital flight is export so the current account includes capital flight). so far capital flight looks to be dollar accounts. china's need for dollars is reduced by the swap accounts it has with trade partners ex dolars. in other words the chinese want to get rid of dollars but not other currencies in their portfolio. the diminishing need for dollars because of the swap accounts with their other trade partners is more of a problem for the dollar and not the rmb(devaluing the rmb vs the dollar peg).

the increase in the domestic economy as a % of gdp reduces the influence of the export side of the chinese economy. that is a longer term event but still provides a cushion against global events since the chinese economy still has a ways to grow both domestically and globally. the other thing is the trade partners of china in asia and the pacific are all growing with export and import to china being the primary driver of their economies(including japan which is still miraculously growing when the demographics are factored in). the usa is just not that important anymore compared to even 5 years ago. even a recession with increasing dollar prices in the usa would not have a material effect on china because the usa does not produce any consumer goods. the usa would still have to import goods from china. vietnam, thailand and other chinese "competitors" are not big enough to make more than a transitory dent in the chinese economy on the export side.

now, the most difficult psart of this analysis is understanding that small increases in the international use of the rmb is likely to have a multiplied effect upon the value of the dollar on the devaluation side while the dollar will have to raise rates, not as a function of an expanding economy but to attract investment in the dollar(dollar shortage).

yes, if the dollar shows signs of collapsing even moderately, 1987 notwithstanding, the chinese economy, like the rest of the world will have a difficult adjustment to make but china is seting itself up to weather the storm simply by decoupling from the dollar when the downward trend in dollar value reaches some equilibrium that will least affect the value of the rmb. my guess is around 70-80 on the dxy. rmb use is around 4-5% of global usage. the yen is just above 3%. once the rmb reaches 10% with a bullet(my guesstimate) the dollar will be in serious trouble. at that point a new forex regime will be implemented that will include gold plus other commodities plus other currencies as the benchmark for forex values. that has been china's goal for 15 years.

Orly's picture

It has been the goal of the IMF all along as well, to move away from the USD as the end-all and move towards SDRs or some other basket of currencies and goods to set global prices.

The problem I would have in your analysis is that the growth in the Chinese middle class economy has been a lot about "breaking windows," with ghost cities and skyscrapers that get torn down and rebuilt before they are even occupied.  In other words, most of this production has been empty production and adds little value and efficiency into the economy.

I can understand the motivation of trying to move peasants from farms into productive cities but will that transition take place quickly enough?

The Chinese population has peaked and is set for a drastic decline because of the one-child policies of the preceding governments.  How will people from the farms occupy these cities, assimilate into a suburban lifestyle and go to work if they have to be essentially re-educated into that lifestyle?  That will take a lot of time and my guess would be that there would be many people who would reject that lifestyle for life back on the farm.

Colour me skeptical that the Chinese middle class will be the driver of global economics in the future.  If the gains were real and not part of a fictitious bubble of elevated property prices on veritably empty buildings, I may believe it.

But as constructed now, it seems the Chinese miracle has created a lot of hot more ways than one.

Thanks for your response.


Yen Cross's picture

   The half-life of those PBoC "reverse REPOs" is looking troubling?  It must have been the seven day rolloffs?

TheRideNeverEnds's picture

There is no problem too big for more printing to solve.

luna_man's picture



@ NugginFuts, yes, I'm "short" this market...Cause I know what I'm doing!  I take it, you like to follow the crowd.


Get some guts man!

NugginFuts's picture

I sold my stocks and went long PMs and miners back in December. Is that following the crowd?

I really really want this thing to blow up and the wait is making me impatient.

devo's picture

I don't know anyone worried about anything, which is a bit concerning.

Orly's picture

So...concerned but not worried?


devo's picture

;) That was the joke...or attempt at wit.

Orly's picture

But the market "Climbing the Wall of Concern" just doesn't have that same ring to it.


Hongcha's picture

Tuesday Stock Index futures are bright green and gold is down $1.90.  Sorry shorts, if the Money isn't worried it does not matter.

When the money decides to move somewhere, then we turn the page.

Orly's picture

So...the market Climbing the Wall of Worry doesn't concern you?