Sunday, December 25, 2016
Wednesday, December 21, 2016
Thursday, December 8, 2016
Tuesday, November 29, 2016
Saturday, November 26, 2016
Wednesday, November 9, 2016
Tuesday, November 8, 2016
Saturday, October 29, 2016
China’s currency is almost the lowest it has ever been in comparison to the U.S. dollar, and no one is quite sure why it has fallen so much. These are some of the theories that have been proposed:
- The Chinese central government and central bank want to slow the decline but aren’t able to.
- Some speculators thought a Trump victory in the U.S. presidential election could boost trade (though the proposed mechanism was not well explained), and a Trump win now seems highly unlikely.
- With exports level or declining, there is less demand for Chinese currency.
- Real estate investors are buying more foreign real estate.
- The Chinese central government and central bank are allowing the currency to decline to support exports and the stock market bubble.
Friday, October 14, 2016
Thursday, October 13, 2016
Wednesday, October 5, 2016
Tuesday, September 27, 2016
Vague and draconian new ethics rules for mergers and acquisitions are another sign of economic anxiety in the Chinese central government:
Under new rules unveiled by China's State Council, or cabinet, last month, managers will be held accountable if they "fail to, or incorrectly, perform their duties" with respect to deals that result in a loss of state assets.
The story at Reuters:
Wednesday, September 7, 2016
Thursday, August 11, 2016
A map shows recent bank capital provided by local governments. Note that every province is included, a sign that the bank bailout regime is centrally coordinated.
Tuesday, August 9, 2016
Wednesday, July 13, 2016
Saturday, July 9, 2016
While there are notes of caution about the global economy from various sources, only China seems to view the world through the lens of of an economic depression. Note the comparative language in this Reuters story on the G20 meeting:
Given China’s world-leading position in manufacturing, the difference in perspective makes sense if the manufacturing sector is going into a multi-year decline globally. The transition away from manufactured goods would create challenges in many places, but would pose the threat of a depression only in a country as heavily invested in manufacturing as China is.
Tuesday, July 5, 2016
Wednesday, June 29, 2016
Friday, June 24, 2016
Tuesday, June 21, 2016
How bad is training in banks? A short video that shows a bank trainer beating bankers with a stick in the northern Chinese province of Shanxi suggests that bank managers and trainers are not always taking training very seriously. Regulators suspended two executives at the bank when the video came to light.
Sunday, June 19, 2016
Saturday, June 11, 2016
An IMF official warned about the high level of business debt in China and said the solution includes better corporate governance, especially in state-owned enterprises. Reuters story:
Tuesday, June 7, 2016
Wednesday, June 1, 2016
Tuesday, May 31, 2016
China plans to boost government debt to help reduce the load of business debt, but don’t expect any sudden changes. The country’s total debt is 2.5 years of GDP and is expected to grow to 3 years of GDP in the next four years despite incremental policy changes. The high levels of business debt in China are worrisome to ecoomists, and debt is growing faster than the economy is growing, leading some to describe the Chinese economy using colorful phrases like “debt-fueled binge.” While the problem is obvious enough, the solution is not, and policymakers are taking a cautious approach.
Monday, May 23, 2016
Thursday, May 5, 2016
Is China borrowing too much for unneeded make-work projects? That’s the opinion of a Wall Street money manager, Stanley Druckenmiller. The CNNMoney story by Matt Egan:
China is in the midst of an "extremely rare and quite dangerous" explosion of debt, argued Druckenmiller, whose fortune Forbes estimates at $4.4 billion. He compared the situation with "subprime mania" in the U.S. . . .
He specifically warned about an overhang of real estate development in China.
As for the U.S., Druckenmiller worries that persistent low interest rates have created a speculative bubble in securities, with the Fed now stuck in a position of trying to prevent a near-term global stock market crash.
Friday, April 29, 2016
China has turned again to real estate projects financed with local government loan guarantees as a way to boost its economy. That strategy worked reasonably well six years ago but left a worrying loan overhang that has caused some instability in the financial sector that continues to the present. There were also some boondoggles, projects built 20 years or longer ahead of any realistic need. The new projects are generally more practical. The first category I think of is parking lots. With more vehicles in China, there is an immediate need for parking spaces in some places. On the other hand, there are also projects like housing construction, a worrying trend after many of the larger residential buildings built five years ago remain vacant, or in some cases, unfinished. In a make-work program like this, the quality of execution is everything. If the boondoggle ratio is low enough and the loan performance is strong enough, the real estate projects will be seen as a practical way to boost a sluggish economy. If the reverse is true and the bad loans crash the economy, the program will be judged as the height of folly.
Thursday, April 28, 2016
Thursday, April 14, 2016
China is ending its most controversial export subsidies, according to a Reuters article that cites U.S. sources, “U.S. says China to end export subsidies in seven sectors.”
. . . China had agreed to end a program known as its "demonstration bases-common service platform" . . .
The Chinese industries that have received the subsidies under the program include textiles, light industry, specialty chemicals, medical products, hardware, agriculture and advanced materials and metals, including specialty steel and aluminum products . . .
Export subsidies can help to increase capacity and employment in specific sectors, but at the same time they put downward pressure on wages. They are generally harmful to an economy if carried on for an extended period or on too large a scale. Export subsidies can also fail if other countries enact retaliatory tariffs, and this becomes more likely than not if subsidies are carried on beyond an initial year or two.
Wednesday, April 13, 2016
The bankruptcy today of Peabody Energy, the world’s largest coal producer and a dominant force in international coal trading, was partly the result of the ongoing downsizing of the global steel industry. Since 2002, U.S.-based Peabody has made major acquisitions in Australia, mainly in metallurgical coal, and in the last two years these operations have failed to produce the profits needed to cover payments on the huge loans taken out to make the purchases. Much of the coal from eastern Australia was shipped to steel producers in China, but China’s steel production is being trimmed by a third in a government-led restructuring initiative, leaving Australian mines nearly idle. Steel production cuts are occurring elsewhere in the world at the same time. China was the least efficient global steel producer, using more coal to produce steel than any other country, so its cutbacks have a disproportionate effect on coal production. Peabody Energy coal mines are still operating during a restructuring process. The restructuring in bankruptcy could see the U.S. coal mines sold at auction.
Coal from Peabody Energy supplies 2 percent of the world’s electricity. One possible scenario is that electric utilities that operate coal-burning power plants could be forced to buy coal mines (at a low price, but still with considerable financial risk) in order to be sure that coal production continues.
Saturday, April 2, 2016
It looks like a trade war in the offing with China selling steel at a loss worldwide while at the same time imposing a 46 percent tariff on imports of steel from Europe. The new tariff puts more pressure on European governments to withdraw the favorable treatment steel from China gets in Europe. That’s a move that trade unions and industry groups have been pushing for in Europe for three years.
Wednesday, March 30, 2016
It is not just China that is cutting back on steel production. Demand is down worldwide and Tata Steel says it may sell off its U.K. steel operations. According to this morning’s CNNMoney story on steel production, steel plants have been closing across Europe, and “European officials say as many as 40,000 steel jobs have been lost in recent years,” the result of Chinese steel producers selling steel at a loss.
Monday, March 21, 2016
Friday, March 4, 2016
China holds huge, mostly secret, stockpiles of basic commodities and sometimes doesn’t know what to do with them. Accounting rules prevent authorities from selling at a loss, so they may bend rules or restrict imports to make sales possible. Some of China’s stored corn is three years old and feared to be moldy. The government is preparing to sell a large amount of it without disclosing the volume or the buyers. Supposedly the corn will go to manufacture basic industrial material such as starch and ethanol, but there are fears that some of it might secretly end up in industrial food products such as corn syrup and corn starch. There are similar, if less serious, problems with selling old rice. Meanwhile, global cotton prices are holding steady in spite of dry weather in key growing areas because of the expectation that China will temporarily bar cotton imports in order to sell off parts of its huge cotton stockpile.
It is a different story with copper, which China is buying to guard against future price increases on the global market. Copper stockpiles can be estimated with some confidence because most of it is registered with exchanges. For the first time that anyone can remember, China has the largest stockpile of finished copper in the world.
Monday, February 29, 2016
The announcement of the cut in banks’ reserve requirements made a general reference to economic restructuring. The move does not seem so large when you put it up against the specifics announced today: 15 percent across the coal and steel industries, or 1.8 million workers, which I believe qualifies as the largest single layoff announcement in history. Coal and steel are closely connected in China because so much of coal production feeds into steel production. The Reuters report at The Guardian:
This announcement was unexpected because coal and steel are far from the heart of the overcapacity in China’s industrial economy. The excess capacity in construction, for example, is surely greater than 3 million workers. Nevertheless, it all ties together. Cuts in construction, industrial equipment, or any of a dozen other industries would necessitate cuts in steel, which in turn requires cuts in coal. Reducing capacity in coal and steel might as well come first.
The nature of the adjustments points to past imbalances in the economy as the central government pursued glamour over substance in economic development. In solar panels, for example, central government policy supported solar manufacturing strictly for export, even though domestic need for solar capacity was and remains greater than that of the countries factories were trying to export to. Surely China’s economy could be more balanced if practical and domestic needs were not so subservient to marquee export categories.
The drastic cuts in steel point to quality issues. China for the past half century has been known for cheap steel — low prices, but also the lowest quality of any steel producer in the world. Product quality scandals in a wide range of categories have made it a challenge for China to keep exporting.
One of the latest scandals involved laminate flooring which U.S. retailer Lumber Liquidators had custom-manufactured in China. Tests shows illegal levels of industrial solvents in the products. Chemical levels were so high that the Centers for Disease Control (CDC) estimated the cancer risk of a person living with the tainted flooring to be not much less than 1 in 100, and other less serious diseases were far more likely. Lumber Liquidators could go bankrupt because of the scandal, and it has responded by banning all Chinese-made laminate products from its stores. This story at USA Today:
This is just the latest example of how an entrenched indifference to quality can make it difficult to maintain a market position. In a world that is becoming more product-conscious, China will have to make that adjustment as well. Other U.S. retailers pulled similar products, and at least a generation will have to pass by before Chinese-made laminate flooring can get a second chance at the U.S. market.
For these and other reasons, the 1.8 million job cuts announced today for the coal and steel industries are just the tip of the iceberg, and it is hard to imagine that the industrial restructuring can get very far before more monetary easing is forthcoming.
The People’s Bank of China is cutting the reserve requirement for banks from 17.5 percent to 17 percent effective tomorrow. Detailed context and analysis from Pete Sweeney at Reuters:
In theory a reserve requirement cut makes banks more active and profitable but less stable. The move makes it easier for banks to make new loans. It also makes it easier for banks with stock market loans and other problem loans to extend those loans even though the borrower may not soon be in a position to repay them. In a similar way, it makes it easier for the central bank to leave financial troubled banks standing a little longer.
Friday, February 26, 2016
China’s central bank governor Zhou Xiaochuan held a press conference today only to say that the central bank wasn’t doing or seeing anything particularly new and different in China’s national economy. Zhou said stability remains the key objective of the central bank and rejected any suggestions of using monetary gimmicks to prop up exports or any segment of the economy. He offered an optimistic assessment of the national economy. The story at Xinhua:
In the United States there are mass layoffs in factories that produce medium-sized trucks, ones roughly 7 to 14 meters in length. Orders for trucks in this size range have almost come to a stop in some regions. Indirectly, this is bad news for manufacturing in general. These are the trucks of the distribution system, the ones that move manufactured products from factory to warehouse to store to home. There is no need for more of these trucks this year because U.S. consumers are purchasing a smaller total volume of goods, a trend that is expected to continue into next year.
Wednesday, February 3, 2016
Has the Chinese banking system grown too large?
CNBC interviewed a fund manager, Kyle Bass, who is betting that it has.
The premise of Bass' bet goes like this: China's banking system has grown to $34.5 trillion, equal to more than three times the country's GDP. The country is due for a loss cycle . . . central bankers will have to dip into China's $3.3 trillion of foreign exchange reserves to recapitalize the banks, causing a significant depreciation in the value of the yuan . . .
For comparison, the U.S. banking system is around 1 times annual GDP, making it considerable smaller than that of China. The United States pursued deeply inflationary policies for years (though the economy proved resistant to inflation) after 2007 to rescue its banking system. After just a few large-scale shocks such as failed real estate or energy projects or natural disasters, China’s banking system could be weakened enough that China may be forced to follow a similar path. If that were to occur, there is no guarantee that the Chinese economy would resist the subsequent inflation.
Sunday, January 31, 2016
The headlines tell the story of the three-year decline in oil prices, but it is not just oil that is declining. Metals and a wide range of materials have seen prices erode over the same period. Of course, materials of all kinds serve as input to manufacturing, so if manufacturing is barely holding its own, it makes sense that demand for materials would be soft. Mining is especially affected, with mining stocks down sharply. “There is a global fire sale of copper and coal mines,” writes Matt Egan at CNN.
Japan is the latest country to go to negative interest rates. The central bank lowered rates on excess reserves from 0 to -0.1 percent. The negative interest rate doesn’t mean much (as summarized by Shan Li at Los Angeles Times) but should help encourage consumers to spend sooner when they can, and large businesses and banks to complete payments earlier and faster. Both effects tend to encourage economic activity, though the speed-up may be too small to detect.
Saturday, January 30, 2016
Reuters says Chinese central government insiders have told it the government is likely to lower its growth target to a range below 7 percent. A range of 6.5 percent to 7 percent annual growth in GDP is the current thinking, but there is still time for revision before the new target is formally introduced. Worries about the global economy could prompt leaders to choose a lower range. If there is a decline in global demand for manufactured goods, China cannot realistically expect to expand its exports this year.
Thursday, January 28, 2016
U.S. statistics released this morning show a surprising decline in factory durable goods orders in November and December. From USA Today:
Orders for manufactured durable goods such as autos, computers and electrical equipment tumbled 5.1%, far more than the 0.7% decline economists expected. And November's flat reading was revised to a 0.5% drop.
It is a similar story in South Korea, which exports manufactured goods especially to China and the United States. From a closer look at the statistics it is clear that businesses and households alike in multiple countries are cutting back on purchases of most kinds of manufactured goods, and mostly not out of a sense of austerity, but in an adjustment to the changing nature and purpose of manufactured goods.
U.S. December activity was affected by mild weather, which dampened demand for winter items and Christmas gifts.
The U.S. durable goods report comes after four straight down days in China stocks which has seen the Shanghai Composite fall 10 percent.
Tuesday, January 26, 2016
Stocks were down again, but less than 7 percent on the Shanghai Composite Index. The 6.4 percent decline is a long one-day drop for stockholders, but there are two good things about the decline. Stocks are now within 25 percent of a sustainable level, making a panic less likely. Having the afternoon slide stop before 7 percent (even if state intervention was required) makes the removal of the market circuit breaker look like a success.
Wednesday, January 20, 2016
Ikea says the Western world has hit “peak stuff,” or “peak curtains” as some are calling it. The term, in either case, is meant to be analogous to peak oil, but does not refer to the world’s limits in creating the raw materials for furniture and housewares. Rather, Ikea’s chief sustainability officer was talking about saturating demand for home furnishings, so that consumers are not interested in buying more new home furnishings in 2016 than they did in 2015. Most home furnishings last for decades, and people will use what they have or buy used furnishings in many cases, so that the demand for newly made items will begin to decline. To stay relevant, Ikea plans to find ways to repair and recycle some of the items it sells, areas of work it had never taken an interest in before. A skeptical summary by Sean Farrell at Guardian Business:
Ikea won’t talk about this angle, but many Western homes simply don’t have any spare space to put more stuff, and the previous reaction of buying ever-larger houses seems to have run its course seven years ago. With limited space, consumers can buy new stuff only if it is so improved that they can justify throwing away something old, and this cycle of product improvement also has its limits. It is certainly a difficult challenge for the factory sector: how do you sell consumers more stuff when the stuff they have already is good enough and there is no room for more? It is not as if people will stop buying stuff, but they may slow down, and that is what both Ikea and the global manufacturing sector seem to be seeing now.
Monday, January 18, 2016
China’s official government read of fourth quarter GDP was up 6.8 percent from the year before. The full-year GDP growth was 6.9 percent, the first time in 25 years that GDP growth has been below 7 percent. The report was in line with expectations and official policy, but it was not enough to spark a stock market rally. Stocks were narrowly mixed in the first two hours of trading, a sign at least that volatility might be less after the report met expectations.
Monday, January 11, 2016
The down market today should be enough to wipe away the theory that the presence of stock-market circuit breakers was the cause of the stock market declines. In six sessions so far this year the Shanghai index has been down four times for an average decline of 4.9 percent. The two up days have averaged 2.1 percent. Stock market technicians are probably correct in saying that the market circuit breakers added to volatility,but there is not much evidence of that either. Stocks should be at sustainable levels when the Shanghai index is near 2200, so nearing that value should in theory diminish volatility. That too is a theory that is hard to support in the data, in spite of closing a third of that gap this year. Another credible theory about the circuit breakers is that regulators didn’t like them because they gave individual investors a better chance of keeping up with the stock market action. If the thought is starting to sink in that Beijing doesn’t really like individual stock investors, that too will change the dynamics of the market. That may be what we are seeing if the more superficial policy changes meant to reassure the markets seem to fall on deaf ears.
The stock market audience Beijing would especially like to impress is well-funded foreign investors, and there, the past seven years of hype seems to have worn off last year with little hope of bringing the audience back to the theater anytime soon. One problem there is that manufacturing for export is one of the most verifiable business activities, an important factor in a country where economic results are exaggerated on a daily basis. If the manufacturing game is starting to fade, is it possible to lend the same kind of credibility to other business categories — and if so, how?
Thursday, January 7, 2016
Despite a flood of government money, the Chinese stock market fell 7 percent today for the second time this week, triggering the new circuit breaker and closing trade early for the day. At the end of the day word came that regulators are suspending the market circuit breaker. Absent any word of how long the suspension will last, I assume it is for a matter of weeks.
Circuit breakers are a double-edged sword. If they are almost never triggered, they provide something of a safety net for traders. But if every trading session opens with the question, “Will we trigger the circuit breaker today?” it changes the dynamic of trading. Sellers want to sell early in the session if waiting for later means they could miss their chance. The traditional stock-trading question of up or down may give way to the question of circuit breaker or not, creating a mentality of high volatility and rapidly declining prices that can be hard to shake. That appears to be the thinking behind suspending the circuit breaker rule, but after two shortened sessions out of the first four sessions of the year, it will be hard to create a back-to-normal feeling.
There is special concern because thousands of stockholders who were restricted from selling for most of last year can now start selling. These stockholders obviously would like to sell at the current elevated levels, but risk being hauled off to jail, despite the nominal rule changes, if they try to close their position in a short time, such as a couple of weeks. They will be testing the waters to find out how much selling they can get away with. The uncertainty of the rules combined with the new selling pressure will create unusual volatility.
At the same time, the Chinese government is starting to run out of money it can use to support the stock market without triggering a broad increase in prices. Regardless of details, the central government has to balance the demands of defending China’s influential position in the world and defending the price of stocks. In the short run it probably cannot do both.
There is continued talk of a U.S. recession, with forecasts calling for a 0.2 percent decline in production hitting bottom around July, then recovering before the end of the year. As I have said before, I believe forecasters and analysts are being misled by the decline in demand for factory output, specifically, manufactured consumer goods, excluding automobiles and food. Analysts are also treating the recent 0.25 percent increase in interest rates as if it were a 3 percent increase, leading to exaggerated fears of a slowdown.
Some analysts are repeating a meme from last month, saying that China can’t be blamed for a decline in demand from U.S. consumers. I believe that message is also a mistake. Demand is a two-way street. It is based not just on the financing and desires of the buyers, but also on the relevance and quality of the products. To say the same thing in more extreme terms, if a factory is making products that no one wants to buy, is it reasonable to say that the factory is not responsible? To the extent that it is true that consumer tastes are changing, all suppliers must adapt accordingly, and there is no logic in exempting China from this rule of markets.
Monday, January 4, 2016
Well, that didn’t take long. Circuit breakers went into effect on China’s stock markets today and cut short the first trading session of the year after a 7 percent decline. Investors were unsettled by the latest PMI report, which shows a small but faster-than-expected decline in manufacturing in China. Hostilities between Saudi Arabia and Iran are another global concern, and closer to home, the detention of several more media figures in China is sign of systemic breakdown.