China

It appears the PBoC is stepping up the monitoring and management of their gold reserves. Headlines, via Bloomberg, suggest controls tightening on the trading of gold away from official channels:

• *CHINA TO INCREASE MANAGEMENT OF GOLD TRADING, PBOC SAYS
• *CHINA GOLD TRADING RESTRICTED TO SHANGHAI EXCHANGES, PBOC SAYS
• *CHINA ORDERS UNAUTHORIZED GOLD TRADING PLATFORMS TO STOP: PBOC
• *PBOC ASKS SHANGHAI GOLD, FUTURES EXCHANGES TO BOOST MANAGEMENT

Remember, back in the day, when a bankruptcy was simply called a bankruptcy? Naturally, this was well before ISDA came on the scene and footnoted the living feces out of everything by claiming that a bankruptcy is never a bankruptcy, as long as the creditors agree to 99.999% losses at gunpoint, with electrodes strapped to their testicles, submerged in a tank full of rabid piranhas, it they just sign a piece of paper (preferably in their own blood) saying the vaseline-free gang abuse was consensual. Well, now we learn that as the global insolvency wave finally moves to China, a bankruptcy is now called something even less scary: "deferred loan payments" (and also explains why suddenly Japan is going to have to bail China out and buy its bonds, because somehow when China fails, it is the turn of the country that started the whole deflationary collapse to step to the plate). After all, who in their right mind would want to scare the public that the entire world is now broke. Certainly not SWIFT. And certainly not that paragon of 8%+ annual growth, where no matter how many layers of lipstick are applied, the piggyness of it all is shining through ever more acutely. Because here are the facts, from China Daily, and they speaks for themselves: "China's biggest provincial borrowers are deferring payment on their loans just two months after the country's regulator said some local government companies would be allowed to do so....Hunan Provincial Expressway Construction Group is delaying payment on 3.11 billion yuan in interest, documents governing the securities show this month. Guangdong Provincial Communications Group Co, the second-largest debtor, is following suit. So are two others among the biggest 11 debtors, for a total of 30.16 billion yuan, according to bond prospectuses from 55 local authorities that have raised money in capital markets since the beginning of November." So not even two months in and companies are already becoming serial defaulters, pardon, "loan payment deferrers?" And China is supposed to bail out the world? Ironically, in a world in which can kicking is now an art form, China will show everyone just how it is done, by effectively upturning the capital structure and saying that paying interest is, well, optional. In the immortal words of the comrade from Georgia, "no coupon, no problem."

In what may come as a surprise to some, the top 3 banks in the world by market cap, are not based in the US, nor the UK, nor, obviously, Europe. All three are Chinese, namely ICBC, CCB and the Agricultural Bank of China. The top two US banks by market cap, Wells and JPM, are 4th and 6th respectively. And what is probably scarier, and what is not shown on the chart, is the amount of "assets" that these banks need to hold on their balance sheets to generate the returns needed to maintain this market cap: off the top of our head we would imagine that the US banks, when adding derivative exposure, have balance sheet risk that is orders of magnitude higher than that of China. Yet the most fascinating aspect is the amazing speed with which China took over the banking world (and with which market caps have increased), in the past 20 years. Without a single bank in the top 10 as recently as 2005, China now has 4 banks among the ten biggest in the world. Yet should China be worried and is history poised to repeat? Back in 1991, 6 of the top 10 largest banks in the world... were Japanese. Now not one of the 6 is to be found anywhere.

Here is what the Internet will look like if the bill passes.

Bloomberg headlines confirm the Chinese export-led growth dynamo is growing dimmer by the day:

• CHINA'S `NOT TOO OPTIMISTIC' ABOUT EXPORTS IN 2012, CHEN SAYS
• CHINA'S TRADE GROWTH MARGIN DECLINED IN DECEMBER, CHEN SAYS
• CHINA EXPORTS 2 PERCENTAGE POINTS LOWER IN EACH MONTH OF 4Q
• CHINA 2011 IMPORT GROWTH RATE 5 PCT POINTS HIGHER THAN EXPORTS
• CHINESE COMMERCE MINISTER CHEN DEMING SPEAKS AT GENEVA BRIEFING

Translation: the next several Chinese monthly surplus reports will not be pretty, and even more importantly, The Chinese trade defict, as predicted by Albert Edwards some time ago, is finally coming (read here, here and here). Lastly, it means the CNY is about to reverse: expect Congress to go nuts once China undergoes several weeks in a row of Renminbi devaluation. The trade war that will follow should be quite epic.

And now a trade war has broken out. Politicians, have a word with your corporate sponsors.

Other than that, SOPA is just dandy …

Every year since 2005, more than 50% of China's GDP has consisted of construction-related spending. The law of diminishing marginal returns says this simply cannot continue. It represents a misallocation of the household sector's hard-earned savings on a colossal scale, and I believe it will end badly. Not a day goes by that there aren't riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point. Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered. And they're not hanging around.

Hours after the details of the Euro Summit were released when it became clear it will be yet another failure, following a drop in the Euro Basis Swap by 10 bps to 127 bps, to week earlier levels, and not following a rise in the all important EURUSD, it was time to recycle old rumors all over again, knowing full well some positive market reaction had to be engendered or else the entire rally of the past two weeks would be undone, here comes the latest regurgitation of the tried and (very much un)true "China to Rescue the World"^TM rumor, this time from Reuters. The media company which has become the latest conduit of favorable market rumors says that "China's central bank plans to create a new vehicle to manage investment funds worth a total of $300 billion to improve returns on the world's largest stockpile of foreign exchange reserves, a source with knowledge of the matter told Reuters. The vehicle would operate two funds, one targeting investments in the United States and the other focused on Europe, said the source, who asked not to be named because of the sensitivity of the matter. The vehicle's goal is to make more aggressive overseas investments for higher returns, said the source along with a second, independent source, who also declined to be named." So far so good. And the bad news: "Details of the venture are still under discussion but key personnel for managing the venture have been agreed upon, the sources said." Oh, and the funds have names, but that's all. So to summarize: details are unknown, China growth is collapsing, home prices and inflation are supposedly plunging, and it is now conventional wisdom that the PBoC will have to bail out China all over again from a hard landing, but... the key personnel for a fund that may or may not exist and which will have no impact whatsoever on the $2 trillion in rolling European debt over the next two years, have been selected? And futures are up on this?

The will-they, won't-they argument over the sustainability of China's capex-driven growth and the transition from an investment-led/high-growth economy to a consumption-driven/lower-growth model is becoming more polarized every day. Pivot Capital Management's take on the slowing growth and muddling transition will make the shift more painful and will likely lead to a credit bust. Their thesis focuses on the balance sheet transformation of the Chinese economy that has attempted to postpone such a transition at a time when the pro-cyclical shadow of global growth expectations demand it. They expound on three main reasons for the proximity of credit bust in China: shadow banking pushing credit expansion to the edge of a crisis (as the regulated markets lose control), real estate and infrastructure investment are at a critical juncture (as worsening fundamentals significantly dampen flows), and interdependence in China's financial system. They fully expect the upcoming credit bust to require government intervention, they expect this to dramatically slow the investment-led growth model and obviously this would be a global event as the world's reliance on China's 'economic miracle' is brought into question.

Creeping up on the outer edges of Wall Street and The City soothsayers’ economic crystal ball, until now dominated by American and Euro crises, is growing concern about China.

After hours last night, when all but the most dedicated of market savants (or late stumblers home from a night out checking the Bloomberg one more time) are sleeping, China released its Non-manufacturing PMI data and it was a howler. The series is very cyclical but we note that the November print fell dramatically to its lowest level since the middle of 2008's global economic meltdown. Dropping below the 50 (deteriorating) line for the first time since Feb2011 and combined with the dismal manufacturing PMI print from earlier in the week, we are reminded of David Rosenberg's critical insight 'Don't confuse resilience with lags' when we hear further chatter about the US apparent miracle decoupling. It seems that this 'lag' is already impacting US firms, as we noted earlier, and with EM nations increasingly starved of credit via European bank deleveraging, it seems a game-of-chicken between the Fed and the PBOC may begin on who prints/QEs first to save the world from reality once again.

UPDATE: HSBC China Manufacturing PMI prints at 47.7, deteriorating at fastest rate (and lowest level) in 32 Months

Suddenly this morning's RRR cut doesn't feel quite so much like China doing Europe a favor. Chinese Manufacturing PMI printed at a lower-than-expectations 49, signaling its first contraction (<50) since Feb 2009. As if it was really ever so, as clearly concerns were growing since we had the Flash PMIs earlier in the month. Across the board, sub-indices were weak with New Orders and New Export Orders falling significantly as the latter remains below 50 and Inventories rose significantly. Notably New Export Orders have now fallen the most over two months since Dec 2008.

Fast forward to 2:08: "It is puzzling to some that Major General Zhang Zhaozhong, a professor from the Chinese National Defense University, said China will not hesitate to protect Iran even with a third World War... Professor Xia Ming: "Zhang Zhaozhong said that not hesitating to fight a third world war would be entirely for domestic political needs...." And don't forget Russia, which recently said it is preparing to retaliate against NATO and has put radar stations on combat alert: "Russia is another ally of Iran, with similar policy to that of China. Toward Iran." Watch, and please forward the entire video, for an explanation of how China is approaching the situation not only in Iran, but a perspective of how they view the western "threat", as well as what tensions they face domestically.

China is leaving no shale deposit unturned in its effort to develop indigenous energy resources.  On 24 November China’s Ministry of Land and Resources geological exploration department head Peng Qiming said during a press conference that China’s combined oil and natural gas output, 280 million tons in 2010, is projected to rise to 360 million tons of oil equivalent by 2015, a 23 percent increase in four years and will rise to 450 million tons by 2030, a 62 percent increase over 2010 production, impressive rises in production by any yardstick. And Beijing authorities in their drive are embracing a controversial natural gas production technique that is coming under increasing government scrutiny in both the United States and Britain – hydraulic fracturing, or ‘fracking.” China has started drilling to meet an ambitious annual production target of 80 billion cubic meters by 2020 by which time the government is seeking to meet a target of generating 10 percent of its energy needs from natural gas and 15 percent from renewable sources and launched a national shale gas research center in August 2010.