China

China has created a monster for itself that has already begun to turn on its master, and will one day devour it.

War does not determine who is right, only who is left. - Bertrand Russell

The U.S. SEC denied the application by China's Dagong credit rating firm of NRSRO status citing concern with cross boarder supervision. Dagong immediately issued an angry rebuff calling the SEC’s decision discriminatory, and that Dagong aims to enter the U.S. market to protect China's interests as the largest creditor there.

Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.

Things are getting wierder and wiered: China has confirmed it has detained 4 Japanese officials due to "violation of a Chinese law relating to protection of military facilities." Xinhua reports: "The state security authorities in Shijiazhuang, capital of Hebei, have taken measures against the four people according to law after receiving a report about their illegal activities." It is unclear if the four suggested recommending nuking the 3 Gorges dam for risk of cracks and terminal collapse during the next massive earthquake. Next up: Chinese defense forces amassing in Manchuria. In other news President Obama believes he can tell Hu Jintao what to do...

And now the idiot politicians are finally really involved: Reuters reports that the House will vote this coming Friday to pressure China into revaluing its currency (uh... what?). While it is unclear just what passage of this law will do (send letters full of harsh language signed "Love Schumer", or pretend Americans will no longer buy iPads and Kindles, or better yet, offer to pay a refund to the $840 billion in US bonds held by the Chinese), this will merely accelerate the collapse of world trade into all out protectionism. As we presented a week ago, Goldman's Alec Phillips was right. His conclusion offers some hope that traditional trade relations won't collapse for at least a few more months: "We think that the risk that such legislation is enacted this year is still fairly low. There is little time left on the legislative calendar, and not yet a clear legislative strategy. That said, we also don’t expect this issue to disappear after the election, given that the current political reaction is driven by the weak economy and labor market as much as it is by the political cycle." Yet with the Democrats calling this vote, it is inevitable that it will pass. What happens next is really anyone's guess.

Some disturbingly insightful observations from UBS Macro Sales' John Clemmow: "Risk On - Risk Off is caused by the Chinese government alternatively pressing the accelerator before slamming on the brake of the only part of the economy they can directly control. Fear of unemployment cause the government to step on the gas - dread of cost-push inflation the need to apply the break."

President Obama and Secretary Geithner are talking yuan tough again as the currency has risen only 1.53% since June. Economists estimate the yuan is undervalued by 12% to 40%. This makes yuan an effective political diversion of the high U.S. unemployment in an election year. The prevailing argument in Washington is that a yuan appreciation would bring manufacturing jobs back to America. Nevertheless, I believe this is overly hyped, exaggerated, and mostly politically motivated. Besides, not everyone is as certain about how large a role the RMB's value would play in the U.S. economy.

On the anniversary of the 1931 Japanese invasion of China, tensions between the world's second and third largest economies are escalating. The Associated Press reports that late Sunday, China broke off high-level government contacts with Japan "over the extended detention of a fishing boat captain arrested near disputed islands. The rare move pushed already tense relations to a new low, and showed China's willingness to play hardball with its Asian rival on issues of territorial integrity." The latest straw on the camel's back was the detention of a Chinese fishing boat and its captain, after it hit two Japanese Coast Guard boats in the East China Sea, a territory claimed by both countries, as previously reported by Zero Hedge.Furthermore, " the captain's detention for further questioning — pending a decision
about whether to press charges — has inflamed ever-present anti-Japanese
sentiment in China." China reaction has been swift and merciless, proving just great the ego of the now second largest economy, and largest holder of US debt, has become: "Beijing has suspended ministerial and provincial-level contacts,
halted talks on aviation issues and postponed a meeting to discuss
coal." Also, attached pictures of Japanese flag burning can not instill much confidence in Sino-Japanese relations stabilizing any time soon.

Today's TIC data came in showing a surprising and robust inflow of foreign capital into the US in the month of July, with a net inflow of $61.2 billion on expectations of $47.5 billion, and a solid jump from last month's $44.4 billion. On a gross basis, purchases of a total of $74.8 billion in US securities consisted of $30 billion in Treasurys, and $17.3 billion in Agencies, but more surprisingly $13.9 billion in Corporate Bonds and $12.5 billion in Corporate Stocks. The last two categories were outliers consider the prior two months had seen outflows in foreign holdings of both bonds and stocks (a total of $27 billion across the two categories for both months). What may or may not come as much of a surprise is that of the $74.8 billion in total Long-Term investments, pretty much all of it came from capital originating in Japan ($29.7 billion) and the UK ($30.9 billion). Ah, good old UK, which as a covert depot for central bank operations, is now no longer content with accumulating Treasurys at a torrid pace, now holding a total of $374.3 billion (a $12 billion increase M/M), but is also aggressively bidding up bonds and stocks. In July the UK (which itself can barely fund its own QE-prompted deficit funding), also bought $12.4 billion in corporate bonds and $2 billion in corporate stocks.

Well, that didn't take long. Just headline for now, will bring more asap.

BN 11:32 *U.S. SAYS IT WILL FILE TWO NEW WTO CASES AGAINST CHINA

BN 11:33 *U.S. SAYS WTO CHINA CASES ARE ON STEEL, FINANCIAL SERVICES

• Yen tumbles as Japan FM Noda confirms currency intervention- first time since 2004.
• Singapore authority to intervene second time in a month to bring down the S'pore dollar.
• Yuan climbs to record as gains quicken ahead of US Committee meetings.
• API sees 3.3-million-barrel increase in oil inventory.
• China's steel output cut to continue through 2010: Industry Ministry.
• Fed differ on question of how weak the economic outlook should get before they move to take major steps to boost growth.
• Japanese shares rise as currency intervention drives down Yen; Gold climbs.
• OPEC sees no change to production quota at meeting in October.
• Retail Sales in US increase more than estimated in second monthly rise.

You're on your own. Be guided accordingly.

Last week the Chinese Customs Administration released its August trade balance details, which came at a hair over $20 billion, slightly short of analyst expectations. The number was a substantial decline from the July surplus of $28.7 billion, which had also resulted in a surge in the US trade deficit to $49.8 billion in the past month, which subsequently declined to $42.8 billion in July, prompting Morgan Stanley's David Greenlaw to boost its Q3 GDP estimate to 2.4% from 2.1%, after it had reduced its economic forecast three short weeks earlier. Notably the decline in the overall surplus was almost exclusively a function of declining exports, which dropped from $145.5 billion to $139.3 billion, which imports increased modestly to $119.3 billion from $116.8 billion. Most interestingly, for all those who considered this month's US trade data as indicative of a moderation in the reliance on Chinese exports, and a preemptive resolution of upcoming US-China trade wars, may want to reevaluate that assumption in the face of the Customs data showing that US Imports declined just marginally, from $27.4 billion to $26.7 billion, which was still the second highest number ever. In other words, with numbers near all time record on the margin, fluctuations at this point are merely noise as exporters and importers shifts shipments temporally: next month's data will most likely demonstrate a continued deterioration in the US trade deficit, putting further pressure on 2011 US GDP expectations, which an increasingly more pessimistic Goldman will likely soon reduce to sub-1%.

Morgan Stanley's Qing Wang has created a new tracking concept, the China Macro Risk Radar (CMRR), whose sole goal is to provide a framework to asses and monitor risk events of low to moderate probability (high probability events already have their own standing at the firm and are singled out in client calls) and high impact. As part of its inaugural edition, MS has assigned 10 risk events to four different categories on the CMRR - each risk event is assessed according to six aspects, including its description, content, potential impact, likelihood, timeframe, and evolving direction. We present the top 10 items that are of concern to investors in China, and are likely to provide even more ammunition to the ever increasing roster of China bears.