China

China: When you build roads so fast, sometimes you never know what you may run into at the end of the road. A very short story for your Sunday reading.

As promised, here is the complete article, "China's Fragile Economy, Its Housing Bubble, and What It Means To Us," in a downloadable PDF. You can download it, print it out, and read the entire piece at your leisure. The conclusions aren't encouraging, for them or us.

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the third part of a three-part series on this topic: The Consequences.

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the second part of a three-part series on this topic.

Looks like this is going to get done.

SCHUMER: CHINA FX'ONE OF THE CAUSES' OF GLOBAL RECESSION
SCHUMER: CHINA CONTINUES TO 'GAME THE SYS' ON CURRENCY
SCHUMER: CHINA FX'HAMPERING'GLOBAL ECONOMIC RECOVERY
SCHUMER: 'GROWING CONSENSUS'ON CAP HILL RE CHINA FX MANIPULATION
SCHUMER: WILL TRY TO ADD CHINA FX BILL TO'MUST PASS' LEG

We are now taking bets what China's re-re-retaliation to this next step will be.

Well that didn't take long. China just escalated the verbal quarrel with D.C. by retaliating right back. The Chinese Ministry of Commerce stated earlier that the "US should not seek to boost its exports by forcing other countries to appreciate their currencies." The spokesman for the Chinese Ministry of Commerce Yao Jian also told reporters that the US shouldn't be seeking to "develop its own economy" by forcing other countries to strengthen their currencies. We are holding out breath to see what China's reaction is when Geithner forwards them the petition signed by 130 very much erudite congressmen demanding that Beijing float the CNY immediately (or else America will be more than happy tolive with a 7% 30 year mortgage).

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic.

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).