Sunday, June 25, 2017

Drawing a Line Between Shadow Banking and Real Banks

Regulations meant to limit the reach of the shadow banking sector are having their biggest impact on the banks in China. I think no one quite understood the extent to which banks were making off-balance sheet loans through shell companies and mysterious investment funds to avoid scrutiny of those loans. A series of new rules make shadow loans much more difficult for banks to do. Some of the shadow loans have moved onto the balance sheets now, painting a less rosy picture of banks’ financial results. Some have moved out of the banking sector entirely.

The shadow banking sector is more than just banks getting around the rules, though. Real estate developers also seem to be steering clear of shadow-bank financing for now, worried about what might happen if authorities catch up with them. In other areas such as investing and trade, though, there are few signs that the stricter rules are reining in shadow-bank loans as intended.

Monday, June 19, 2017

Peak Pork

Peak pork? I guess we can call it that. Reuters reports that consumer demand for pork in China is down for the third year in a row, despite falling prices. [ http://www.reuters.com/article/us-china-meat-demand-insight-idUSKBN19A31C ] China consumes so much more meat than any other country that if pork is passé there, it must be declining globally. It is not that pork dumplings are disappearing, but manufacturers are mixing in more vegetables to appeal to increasingly health-conscious consumers. For the first time in China, large numbers of people are trying to eat less in general in order to be more healthy.

Pork producers in China could take losses on recent investments in plants and equipment, but it is foreign suppliers that hoped to sell into the Chinese pork market that will have to make the biggest adjustment. The decline in pork runs counter to official forecasts, much like the soft demand for dairy products in Europe and North America. It seems to have caught everyone by surprise, but it is just the latest example of a decline in quantity for manufactured products.

Tuesday, May 30, 2017

Credit Downgrade

A country can’t continue to spend its reserves indefinitely without facing the financial consequences, and China last week got a credit downgrade that by most accounts was long overdue. This raises the cost of borrowing overseas — hardly an issue for the Chinese government itself, but it may prompt banks and shadow banks to do more of their borrowing within China. That is a good thing in some ways, but it makes the Chinese financial system more top-heavy than it was already, increasing the risk of a rapid collapse after any of various kinds of failures that might occur in the future.

Friday, May 12, 2017

Polypropylene Prices

The bulk prices of polypropylene and polyethylene provide one way to measure the demand for manufactured goods. Polymer prices are also affected by oil prices and by improvements in product designs that require less plastic in a finished product or improve manufacturing yields so that fewer materials are thrown away. Nevertheless, the long-term decline in prices, with bulk polypropylene hovering around $1 per kilogram, shows a persistent softness in demand for manufactured goods.

Thursday, April 6, 2017

L Brands Report Seen as Reason for Hope

Stock traders are so discouraged about U.S. retail that a report from Victoria’s Secret parent company L Brands pointing to a 7 percent decline from the year before was strong enough to lift the whole sector. L Brands stock is down 28 percent from the start of the year and the news was not quite as bad as that. The L Brands report came days after trade reports from the U.S. and China showed a sharp drop in exports from China to the United States. It is a metric of significance to both countries. China is the largest supplier of manufactured goods to the United States. The United States is the largest buyer of exports from China.

Wednesday, January 11, 2017

Bitcoin Declines on Central Bank Scrutiny

China’s central bank is talking about heightened scrutiny of bitcoin exchanges. Just the mention of regulatory oversight was enough to send the value if bitcoin tumbling. Compared to the U.S. dollar, bitcoin fell 12 percent in about one day. The 12 percent move is not the crisis that a comparable move would represent in a national currency — bitcoin is more volatile by nature — but it is an indication of how much of bitcoin activity involves businesses that want their dealings to go unnoticed.

Thursday, January 5, 2017

Smog

Smog is the story of this month in China, with a “fog alert” in the early days of the month worsening to the point that the government issued a national air pollution alert. The smog was already so bad two weeks ago that some airplanes couldn’t land. By yesterday visibility was bad enough to disorient pedestrians in multiple northern cities. The pollution problems come in spite of a well-publicized central government initiative to reduce industrial coal use by one third. Eventually the wind will change direction, but the persistent pollution problem makes me wonder if China’s level of manufacturing activity already exceeds what the land area can properly support.