China

For the n^th time, China let loose that "excessive" holdings of US dollars are risky because "Washington could pursue a policy to weaken the dollar, a senior currency regulator said in comments published on a website that briefly pushed the dollar lower." Oddly this time, the statement which came from Guan Tao of China's State Administration of Foreign Exchange (SAFE) which is the entity responsible for managing the country's $3+ trillion in USD FX holdings, was promptly retracted, following an announcement by Tao to Reuters "that the comments had been made in private academic discussions and represented his personal view only." In other words this is an identical episode to the one when the BOC's Mark Carney told "a private circle" that the US is going to hell in a handbasket. While the announcement briefly pushed the dollar lower, is the take home message that everyone is secretly hating America, while in public keeping a rosy appearance? The answer, of course, is a resounding yes.

In its just released must read Statistical Review of World Energy, BP has many critical observations, the key of which, while not a surprise to most, is that as of 2010, the US is no longer the world's biggest consumer of energy. The new leader, with a 20.3% share of global energy consumption: China. Keep in mind that the Chinese economy is still (in whatever centrally planned terms it discloses) not even half the size of the US, thus one can only imagine how far this number will rise should China ultimately succeed in its goal of converting from an export-led to a consumer-led society. And here we have a market worried about a few million bpd in quota courtesy of the now defunct OPEC. From the report: "World primary energy consumption – which this year includes for the first time a time series for commercial renewable energy – grew by 5.6% in 2010, the largest increase (in percentage terms) since 1973. Consumption in OECD countries grew by 3.5%, the strongest growth rate since 1984, although the level of OECD consumption remains roughly in line with that seen 10 years ago. Non-OECD consumption grew by 7.5% and was 63% above the 2000 level. Consumption growth accelerated in 2010 for all regions, and growth was above average in all regions. Chinese energy consumption grew by 11.2%, and China surpassed the US as the world’s largest energy consumer. Oil remains the world’s leading fuel, at 33.6% of  global energy consumption, but oil continued to lose market share for the 11th consecutive year." And in terms of production reserves: "World proved oil reserves in 2010 were sufficient to meet 46.2 years of global production, down slightly from the 2009 R/P ratio because of a large increase in world production; global proved reserves rose slightly last year. An increase in Venezuelan official reserve estimates drove Latin America’s R/P ratio to 93.9 years – the world’s largest, surpassing the Middle East."

Too bad there is no central bank to sell weather future puts and induce a "great moderation" in climatic conditions, which lately have seen volatility surge through the roof. The most recent example of why the CBOE needs a weather VIX is China, where following weeks of inflation spiking near-record drought conditions, the weather has flipped, and heavy rainfalls since June 3 have created floods that have killed at least 52 people led to 32 more missing, and much more is coming. According to Xinhua, "Heavy rains have inundated parts of 12 provinces in
central and southern China and affected 4.81 million people so far since
the flood season arrived, Shu Qingpeng, deputy head of the Office of
State Flood Control and Drought Relief Headquarters, told a conference. Floods have destroyed 7,462 houses and submerged 255,000 hectares of farmland, incurring direct economic losses of 4.92 billion yuan (760 million U.S. dollars), he said. Heavy rainfalls since June 3 have drenched the previously parched lower and middle parts of the Yangtze River basin, increasing water of rivers to alert levels in the provinces of Jiangxi, Hunan and Guizhou." The PBoC's, which is preparing with spinning a record 5.5% CPI print imminently, just can't catch a fair weather break.

Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.

The high-flying price of hot China internet stocks is driven largely by enormous estimated revenue growth, but if we take a closer look, the growth rates implied by stock prices are totally out of line with reality.

While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs. Dylan Grice's latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package. This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government's balance sheet. The reason why this is actually a much bigger deal than perceived is that as Grice notes, a "bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008." In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares... Or more specifically, those who have long held a very bearish view on China, should certainly care, as what happened is that the unwind catalyst, so critical for most China bearish theses, was just pushed back by several years. And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

More bad news for China's stagflating economy: according to an industry group, China automobile sales dropped for the second month in a row in May, pointing to slowing demand after Beijing stopped offering incentives and introduced new limits on car purchases earlier this year. "Vehicle sales in China shed 13.95 percent on-month to 1.19 million last month, the China Association of Automobile Manufacturers (CAAM) said. It was a 29.74 percent increase compared to the same month last year. Auto output fell 14.36 percent from a month earlier to about 1.31 million units in May. The industry group attributed the continued decline in May sales to the end of the tax breaks and incentive policies in the country. The Chinese government ended tax breaks for purchases of small cars at the end of 2010 and reimposed a 10 percent tax at the beginning of this year. The tax breaks, introduced in 2009 to buoy domestic demand amid the economic slowdown, had boosted China's auto market and helped it overtake the United States as the world's largest in 2009 and 2010." This is yet another piece of bad news for GM, for whom China has recently become the dominant market (even as it stuff US dealers with record amount of inventory), and since the company has been unable to take advantage of the supply disruptions that have crippled Japanese car makers, expect to see GM stock take its current post-IPO low stock price even lower. "Wang Qingtao, analyst at China's Sealand Securities Co., expected the downward trend in the Chinese auto industry would likely continue for a while, saying "the market fundamentals are not likely to change drastically." And in the meantime, Goldman now anticipates China's May inflation to hit 5.5% Y/Y, the highest such increase in years, and the Stagflationary economy continues overheating, this time due to surging food prices as a result of the record drought previously discussed.

In the aftermath of last week's disclosure to preempt the massive hoax story sourced by one "Sorcha Faal" involving a whole lot of false allegations pertaining to DSK, Russia and gold, all of it based not one single, sourcable fact, we have now been inundated with emails directing us to a story which has appeared in CNS News (and the fact that it was carried by Drudge Report does make it any easier), titled "China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills." Once again, while most readers will see right through this superficial attempt at clickbaiting, for the benefit of everyone else, we would like to briefly respond to how this article would look like when one actually looks at the facts.

So much for the interesting theory presented a few days back from Bernstein that one contrarian response from China to its electricity shortage problem is not to hike prices but instead to slow down its economy by pushing the margin producers out and allow the economy to slow down on its own. As a reminder, last Friday Bernstein analysts Parket and Leung, in discussing the 30 gigawatt power shortage currently gripping China, was the following: "a nationwide power price increase to alleviate the problem is not likely. Letting the current stand-off run its course – in the worst case scenario, allowing electricity shortages and the high price of fuel substitutes to force factories to shut down - would slow the economy. And that's the key point in our view: increasing electricity prices is inflationary while holding prices steady would achieve the NDRC's current economic goals." Alas, China has opted for the convention path, and as Business China reports, "China will raise prices for electricity used for industrial, commercial and agricultural purposes to curb demand from energy-intensive industries and encourage power generators to increase electricity supplies." Sigh - add more inflation, more resultant PBoC tightening, and more of the same dog chasing its tail failed policies that will lead the world's fastest growing economy nowhere fast.

Two more indicators of a stalling global economy came out of China and the UK overnight, where manufacturing Purchasing Managers Indices posted substantial drops. Growth in the Chinese manufacturing sector slowed to a 10-month low in May, with both production and new orders gains moderating during the month, according to the final HSBC Purchasing Managers Index released Wednesday. The final May reading stood at 51.6, up from the May flash reading
of 51.1 reading but down from 51.8 in both April and March. Total new orders rose for the tenth consecutive month but at a slower pace than in April, while new export orders contracted for the first time in three months, though the rate of contraction was only marginal. This caused the pace of output growth to slow to a ten-month low, HSBC said. However, the pace of new employment rose at the fastest rate in five months. The rise in input price growth eased to a nine-month low in May. Yet the modest Chinese slowdown was nothing compared to the now confirmed stagflation gripping the UK, where Manufacturing PMI fell from 54.4 to 52.1 in May, weaker than consensus expectations (54.1) and its lowest level since September 2009. As Goldman reports,  consumer-facing manufacturers registered the sharpest contraction in output on the month. Some of this is attributable to temporary effects; some may be indicative of more sustained pressure on household incomes. Nowhere was the impact of this more evident than on the GBPUSD pair which took a nearly 100 pip overnight tumble, and has weighed on European markets overnight. Other global PMI readings also confirmed that the world economic is approaching stall speed, which should certainly be favorable for global bizarro stocks.

Man bites nature. Nature bites man back.

China's State Administration of Foreign Exchange (SAFE) has released its breakdown of 2010 international investments. In summary: financial assets abroad rose 19% last year to $4.126 trillion from $3.457 trillion. That includes the country's $2.914 trillion of foreign reserves at the end of 2010 as well as other assets such as direct investments, securities, and gold. As for gold, it increased by $11 billion from $37.1 billion to $48.1 billion, or a 29.6% increase (it is unclear if this number is at a fixed gold price or accounts for MTM). On the liabilities side, which increased from $1.946 trillion to $2.335 trillion, the biggest change was as a result of a surge in Foreign Direct Investment into China which increased by $162 billion to $1.476 trillion. Netting liabilities against assets leads to a net position of $1.79 trillion in external net assets.

The latest observations the spread of gold's popularity comes from none other than BRIC expert, Goldman's Jim O'Neill, who advises clients in his latest letter that it may be prudent that in addition to China and India as a source of ever increasing demand for gold, it may be time to also add the Middle East to the ever increasing list of investors (typically quite wealthy) who believe in the yellow metal. "Not because of this particular anecdote, but the Middle East being what it is, my meetings involved more discussion about Gold prices than is usually the case in other parts of the world. While the gold bar machine anecdote adds to all the other colourful stories I pick up, the recent remarkable resilience of gold, despite what has happened to silver and other commodities, is rather impressive. This gold price strength may perhaps be just a simple function of both the extremely low level of G7 real interest rates and the prospect that they might not rise anytime soon. I got the impression that there a quite a few bulls of Gold in the Middle East."

In a glowering example of humanist magnanimity, the tax expert, who also on occasion pens missives describing in detail the destruction that would ensue should dealers be hindered from perpetuating the US Treasury ponzy, known as Tim Geithner, just advised China that its low exchange rate impairs China's ability to curb inflation. This, coming from the man under whose watch the dollar has gotten pounded eight ways to Sunday. The announcement came as part of the semi-annual report issued to congress, which was due originally back in April, yet which as everyone knew was delayed for no other reason that more theatrics. And just to confirm how utterly toothless US game theory bluffs have become, Geithner, contrary to much bristling rhetoric to the contrary, decided not to name China a currency manipulator, a move that is sure to require the CME to promptly issued five margin hikes of Chuck Schumer's blood pressure. But lest someone accuse Tiny Tim of being not only a tax fraud, and a liar, but also a coward, he did add that the Yuan is "substantially undervalued." And so the USDCNY revaluation debate has been pushed back for at least one more year. And to those who experience a feeling of deja vu upon reading this, worry not: Geithner had exactly the same conclusion 3 months ago. Bottom line: China 2; US 0.

Jim Chanos is short China and solars. I say it's time to short Chanos...