China

Just in time for the Chinese 50 bps RRR cut, we get a note from Albert Edwards reminding us just why this desperate and sudden move from China comes: "We have identified a China hard landing as one of the biggest investment shocks next year." Not only that, but the SocGen strategist takes a long overdue swipe at the world's most ridiculous concept, Jim O'Neill's BRIC debacle: "Despite recent poor  performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept." It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started easning once again last night.

It appears that China has already forgotten its close encounter with inflation as recent as a few months ago leading to assorted riots, and is instead far more concerned with the collapsing housing market. As a result it just announced a 50 bps reserve ratio cut, well in advance of when most commentators thought it would happen, on what is now the start of a monetary policy loosening cycle. The kneejerk reaction is for futures to surge and gold to spike, and crude to pass $100, even as the EURUSD was once again drifting lower overnight. And while this is beyond bullish for commodities, we doubt equities will remain bid unless Europe mysteriously fixes itself overnight too. Which won't happen. More from Reuters: "China's central bank cut the reserve requirement ratio for its banks on Wednesday for the first time in nearly three years to ease credit strains and shore up activity in the world's second-largest economy." Naturally, this ties Bernanke's hand even more as Chinese inflation will now be stoked internally in addition to importing any excess inflation to be generated by the Chairman, likely leading to an even faster spike in global inflation the next time we get US-based quantiative easing. Look for Chinese-based purchases of gold to surge.

Arguably the least biased (or perhaps least cognitively dissonant) of the major ratings agencies, China's Dagong has just moved Portugal's rating to junk (BB+) from comfortably investment grade (BBB+) - a 3 notch drop. The rating agency also left the peripheral nation on negative watch. This action follows Monday's Greek downgrade from C to CCC. Is this a ploy for better entry levels when they save the world with their EFSF-buying bazooka? Or more likely a more honest reflection of a debt-laden, slow-growing, austerity-facing nation burdened with inadequate leadership and an inability to control its own fate?

Amplifies on three aspects of this issue:  (1) a war against Syria was planned 10 years ago (2) the American people don't want a new war and (3) Russia and China may strongly react against such a war ...

This will probably piss off everybody in big banking, mainstream media and inter-marital analyst relations. I still want to be invited to ALL of the Wall Street Christmas parties, though :-)

Adding Asian insult to European injury we just got the Preliminary HSBC China November PMI reading which posted the first drop since July, tumbling from 51 to 48, which is a 32 month low. Expect risk to be solidly off for the balance of the night... and then the BTPs will resume trading. Only this time they will be accompanied by the OATs which will likely spike to record yields on fears of an imminen French downgrade courtesy of the Dexia debacle.

Fukushima May Blow ...

The global dominant narrative about China is wrong, claims Gordon Chang. Don't expect it to be the 'pocketbook of last resort' that will rescue world markets from their current malaise. And don't expect its remarkable economic growth to continue. In fact, expect a "hard landing" for China - and soon. Gordon sees the first real signs of slowdown in China's economic growth looking at the year-over-year numbers for the past several months as the inevitable harbingers of a coming collapse in China due to excessive stimulus policies the government undertook starting in 2009. The bubbles and malinvestment created by this stimulus have not been addressed, and increasing weakness and transitions inside the political system are making it less likely they will be before market forces intervene.

As every central banker, politician (except Chuck Schumer), and bank CEO looks towards Chinese central planners as their apparent bottomless pit of dumb money, it seems that perhaps the cupboards are bare. Reuters, via The China Post, highlights in a recent article that while there are indeed reserves, they are gainfully employed and the unwinding of those positions (in size enough to matter) to provide the cash that is so desperately needed to keep the ponzi going, will itself cause a vicious circle of negative sentiment. In fact, analysts reckon China's armory has only about US$100 billion to spare.

As I listen to all types of perma-bull talk about how the S&P would be at 1400 if it wasn't for Europe (which is the equivalent of: if my wife was 100 pounds lighter... she'd be a supermodel), I can't help but pulling my hair out.  The situation in Europe is clearly bad, and after reading Michael Lewis' new book... appears almost impossible to be resolved without massive defaults.  However, the other domino in the equation is the Chinese real estate market. The 'global growth engine', China, is running out of steam.  Their policy of placing market orders on anything and everything to inflate stimulate the economy - surprise, surprise - is proving to be unsustainable.

For the first time since 1949, when the Communist Party took power, China will open the regional authority debt markets (muni markets) to the public. Much is being made of the fact that this first issuance - for Shanghai no less - enabled it to dramatically cut its interest expense - as investors were clearly comforted by the increasingly transparent documentation. However, we worry that that this will cause a multi-tier market to evolve very rapidly between the haves and have-nots as we suspect the more than 6000 companies set up by local governments will bifurcate just as the Chinese IPO market did in the US. Color us even more skeptical but when we read the Wall Street Journal's story on Wenzhou's Annus Horribilis this evening, even vibrant thriving (over-stretched and over-levered) city-states are feeling the recoupling pain of a European recession, US residential construction depression, and European bank deleveraging impacting credit conditions in Asia. The bottom-line is more openness is better, more transparency is better, and meeting the demands of yield hungry money managers is reasonable but we hope they go in with eyes wide open as we suspect this move is much more about $1.7tn risk transfer from the public central planner's balance sheet and on to the private capital markets of the world.

Whether it's Chuck Schumer or another headline-hungry banker/politician/long-only-equity-strategist, the one note of constancy among global macro perspectives has been - China needs to re-value the Yuan. The "it's not fair" crowd or "everything will be fixed if we can just compete on equal terms" talking-heads may want to take a look at the BIS effective exchange rates. It is evidently clear that since 2005 the USA has been on a path of very considerable currency devaluation - down almost 16% while the Yuan has strengthened almost 38% based on the BIS effective exchange rates. The effective exchange rates (EER) provide a better indicator of the macroeconomic effects of exchange rates than any single bilateral rate and are described here. After this morning's comments from China, perhaps it is time for our Asian trade partners (or should we say vendor financiers) to raise the rhetoric that the US is the one not playing fair?

You thought China was going to take this weekend's endless bashing by Obama, telling it to grow up and act as "an adult", lying down? You thought wrong. China main daily publication Xinhua has just released possibly the most scathing anti-America editorial via Liu Tian, to ever see the very public light of day. "For the United States, it should put its house in order before chiding others. Since the onset of U.S. subprime crisis in 2007, it was the country's domestic economic problems that triggered a disastrous financial crisis that swept the world. Excessive spending for many years has added up debts. Meanwhile, traditional strong industries such as finance and auto were devastated by the crisis, pushing up unemployment. In face of such serious domestic problems which probably could trigger a new global economic tsunami, many U.S. politicians seemed only to care about how many votes they could get, without having a single thought about what kind of the global responsibilities the country should take. Thus it should come as no surprise that the angry "Occupy Wall Street" protesters are calling for an end to the political tricks in Washington." Ball is in your court president Obama: it is now your turn to piss off your biggest creditor (at least until QE3 ends) even further.

The bank that never, ever needs capital, but will dilute the living daylights out of anyone to get it, and will sell all of its actually valuable assets as soon as a buyer materializes, has just gone ahead and proven its critics right yet again. Several minutes ago Brian Moynihan's rotting carcass of toxic Countrwide Financial mortgages, which has some negligible banking businesses on the side, just announced it would sell about 10.4 billion common shares of China Construction Bank Corp through private transactions with a group of investors. The purposes of the follow up CCB disposition - to pump about $2.9 billion in additional Tier 1 common capital at Bank of America. And with this the easy disposition targets are gone. Next up: just how will Bank of America be able to spin off Merrill. Have fun with all those CDS successor issues. And once that phase is over, the debate over just how Bank of America will spin the hundreds of billions of legacy CFC contingency liabilities off into an "asbestos" trust will resume.

In yet another accounting error (or not), a sovereign nation accidentally missed a large amount of debt that it owed. Bloomberg (via The Economic Observer) is citing data from Beijing Fost Economic Consulting that ~3tn yuan ($473bn) of debt in township governments was not included in China's National Audit Office reports. This is not a drop in the ocean as it raises the local government debt load by around 30% and represents debt in vehicle financings and bank loans. Of course, we should remain calm and walk (not run) to the exits as GDP, inflation, and whichever macro data point you choose that has subliminally met expectations recently is completely accurate - have no fear.