China

The first just released TIC data, post the latest major annual revision, indicates that the two biggest holders of US Treasury securities continue to pare their holdings. We will present a more granular look shortly as the revision has made all historical numbers irrelevant, however the consolidated picture demonstrates that China sold $6 billion in USTs going into January, with Japan paring just slightly, at $1 billion. This was more than compensated by accumulation by the three other major players: the UK, Oil Exporter countries, and Caribbean banking centers, a proxy for hedge funds, whose holdings grew by a substantial $28 billion, $11 billion and $15 billion, respectively. The UK, which is most certainly a proxy for China, has seen its holdings grow by $100 billion in 4 months, from $106 billion in October to $206 billion most recently.

The chairman of Morgan Stanley Asia Stephen Roach blasts China skeptics, "The idea that [China] is an overheated economy is very much overblown," in this Bloomberg TV interview. Roach, who despite his global skepticism, continues to see China as a source of growth despite the numerous flashing warning signs. One area of ongoing concern - protectionism "As we go toward the mid-term elections in the US, the protectionist drumbeat is something to take seriously." When looking purely at China, Roach notes that "the dynamic needs to shift from the export sector to 1.3 billion Chinese consumers. They need to build a safety net, they have to come up with new sources of job creation, and they have to provide stimulus to their rural population which numbers roughly 850 million people. Since 2000 between 15 and 20 million rural citizens have moved into urban settings, that's like two New York cities per year. The lack of a safety net is a profound drag on Chinese consumption." Good luck with creating a safety net that big. Yet despite that Roach takes a direct stab at Chanos, and concludes that the "fears of a bubble are vastly overblown, in China. The demand for shelter, the demand for office space in a nation that does rural-urban migration 15-20 million people per year, that demand is there. No country has such demand for urban dwellings and urban office space... The Chinese authorities are on top of it. Unlike the US, which lets bubbles get out of hand, and distorts the economy, that's not the case in China." Of course, if inflation in China continues at the current pace, all those villagers may just say no to Beijing and decide to stay put.

Picture China right behind Greece as the target of the market vigilantes.

China's local government to international bank, "Of course we'll stand behind that 30 billion Yuan loan your giving to our investment arm. It's government guaranteed!.... (a year or two after the deal closes...)

Syke, we were just kidding! :-)

The horrible news hits just keep on coming for Goldman's Jim O'Neill. First the BRIC acronym creator (soon to be largely forgotten when confronted with much more awesome comparables as CRAP and STUPID, the latter of which has already been subsumed for general consumption by CNBC) is rumored to be getting the boot from Goldman due to his involvement in the Red Knights group which is seeking to acquire the Red Devils (aka Manchester United), and now China just announced it is about to pull the rug out of the entire lending concept when it announces it is nullifying loan guarantees by all local governments. Just to put this in perspective, the impact of this is akin to what Obama did to Chrysler's secured lenders, multiplied by about one Fed dollop of MBS holdings (i.e., trillion), with debtors not even getting the courtesy Steve Rattner K-Y reacharound. The total potential impact: $3.5 trillion smackers. And some large, recently bailed out bank, has been seen as claiming the CNY is about to get revalued. HA HA HA. Oh, and goodbye BRICs.

The past week has made it clear that German public opinion, and therefore the German political process, will not tolerate a crude bailout of Greece; even if it is via “subtle” off balance sheet guarantees and the like. For example, why should Germans agree to a bailout of Greece with its statutory pension age of 61 when Germans do not receive pensions until the age of 67? Meanwhile, the level of fiscal austerity being demanded of Greece, namely a decline in the projected fiscal deficit from 12.7% of GDP in 2009 to 2.8% of GDP in 2012, is in GREED & fear’s view wholly incompatible with the reality of Greek democracy. In this respect the charge by the Greek Prime Minister George Papandreou over the weekend that the country was being treated as a “laboratory animal” by the European Commission is a reflection of the prevailing “Club Med” mentality. - Chris Wood

The US Treasury has issued its annual preliminary US Holdings report for June 2009. While the data for the June 30th period is obviously stale, what is notable is that the UST's estimates through December 2009, based on survey data, put China higher by about $140 billion compared to the previously disclosed number of $755 billion, at $894.9 billion. Alternatively, Japan which was consider the top holder of US Treasuries with $769 billion, saw its estimated holdings decline to $765.7 billion. This revision puts China back at the top with a commanding lead of nearly $140 billion.The revised Treasury report also indicates that as of June 30, the UK was the largest holder of US equities at $278 billion, Canada second at $242 billion, and the Caymans (i.e., hedge funds) third at $227 billion. Also, China was the largest combined holder of US securities of all kinds at nearly $1.5 trillion, with Japan and the UK second and third, respectively, at $1.27 trillion and $813 billion. It should still be pointed out that Chinese UST holdings have been declining since July 2009, when they peaked at $940 billion, while both Japan and the UK saw their biggest holdings at December 31, 2009.

As the roadshow was initially scheduled for the second half of February, this implies that the Greek bond offering is, for now, history. Furthermore, no new roadshow data has been set. It is unknown whether this is due to the massive deterioration in Greek financial perceptions over the past week, or if because the government has managed to arrange a private loan with Deutsche Bank (which hopefully does not have a downgrade put trigger as that would be the shortest loan in history).

Famous short seller Jim Chanos characterized China as "Dubai times 1,000, or worse.” While talking his books, Chanos could stand to lose big on his China shorts by basing his view on flawed analogies with the US real estate market.

While I am not predicting an imminent market crash in China, the possibility of a major slowdown in China is increasing in my view. Yet commodity prices and stocks do not seem to be priced for this scenario. I feel a short emerging market exposure offers a good risk reward trade at present. An interesting counter view to the current enthusiasm for China is presented in an intriguing note written by Paul Krugman, written as far back as 1994 called "The Myth of Asia's Miracle". The note laid out a bearish view on the Tiger economies of the time, which proved to be correct. However, on China he noted that in 1994, the World Bank estimated that the Chinese economy was 40% the size of the US economy, and that if it continued on its current growth rate of 10%, it would overtake the US by 2010. Alas that forecast has proven to be wrong, and I suspect that current forecast of Chinese growth will also prove to be exaggerated. Given the amount of stimulus rolling off, I believe we will see a long term peak growth rate in the second quarter of this year, with growth slowing substantially after that. - Horseman Global

Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion. Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

My presentation that explains that says: THIS TIME IS NO DIFFERENT – THE OVER-INVESTMENT BUBBLE

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I did three segment interviews
with TechTicker on Yahoo Finance: 

href="http://finance.yahoo.com/tech-ticker/vitaliy-katsenelson-reveals-%22the-...">Segment
1 – The Case for Pfizer and
Vodafone

href="http://finance.yahoo.com/tech-ticker/china-won%27t-crash-but-it%27s-time...">Segment
2 – China (My China
comments need slight clarification.  The Chinese slowdown will
have a significant impact on the Chinese economy and commodity-centered
economies, e.g., Russia; but I don’t believe it will tank the
world economy.)

href="http://finance.yahoo.com/tech-ticker/get-used-to-dow-10000-value-maven-p...">Segment
3 – href="http://finance.yahoo.com/tech-ticker/get-used-to-dow-10000-value-maven-p...">Get
Used to Dow 10,000

Just in case you were mystified what "excess capacity" cheerleader #1 Jim O'Neill thinks of the world, be mystified no more. Spoiler alert: Jim uses the words "remarkable analytical mind" and "Alan Greenspan" in the same sentence. And with that out of the way, read on, and while you are at it, buy buy buy.

Janet Yellen, who in mid-November completed a "fact-finding" trip to Hong King and China, provides some insightful observations into the closely tied monetary fates of China, Hong Kong and the US, as well as China's Catch 22 paradox of overcapacity. As Yellen points out, US monetary policy is a critical factor for both Hong Kong and the mainland "both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery." In essence, and in confirmation with Zero Hedge's "vassal theory" of the Sino-US relationship, China has a "considerable interest" in the Fed's exit strategy. Yellen demonstrates that while China is forced to look to growing its own internal economy now that the export-led, current account surplus model is over, the transition will require yet more stimulus, thereby further inflaming the asset bubble, spurred by the massive overcapacity already in place in the country, and further pushing the country into a monetary-fiscal zone of disequilibrium. This would be exacerbated by any move to strengthen the Yuan, which is what has to happen for the US to keep inflating its troubles, yet won't happen so long as China continues being in denial about its bubble conditions, thanks to a phenomenal precedent set by none other than the Federal Reserve itself. Yellen won't go so far as admitting it, but all the ingredients for a massive Chinese (and thus, U.S.) crash are now in place.