Thursday, December 28, 2017

Reuters Report on Shadow Banking

The shadow banking system in China reminds leaders of the United States around 2005 — but China’s shadow banking is larger, more top-heavy, and less susceptible to centralized control. Authorities hope that reforms and arrests will prevent a sudden collapse in the future. From Reuters:

The danger is that a big default or series of loan losses could cascade through the world’s second-biggest economy, leading to a sudden halt in bank lending.

Top leaders in Beijing have acknowledged that the colossal volume of complex and potentially risky lending obscured in shadow banking compounds the threat posed by the economy’s tremendous accumulation of debt since the global financial crisis.

The full story is a long read at Reuters that may serve as a snapshot of the current state of the shadow banking system in China:

Friday, September 15, 2017

Cryptocurrency Exchanges to Close

Under new regulatory guidance, all cryptocurrency exchanges in China are telling customers today how and when they will stop trading. No new customers can be registered after today, and the exchanges have five days to send a wind-down plan to authorities. Exchanges cannot simply shut down today, but must minimize financial risk for their customers. Reuters story at Forbes: China Is Shutting Down All of Beijing’s Bitcoin and Cryptocurrency Exchanges.

The move is not a complete surprise after China banned cryptocurrency-based securities, released an official finding that cryptocurrency cannot be treated as currency, and urged licensed banks not to trade in cryptocurrency. Currency controls, though not fully effective, are seen by central government economic planners an important part of national economic controls, and cryptocurrency inherently has the potential to undermine or soften currency controls. One major bitcoin exchange had already announced it was closing at the end of the month, citing tighter regulation as its reason for closing.

Bitcoin has lost some of its value in recent days as officials and analysts have expressed skepticism about the format. Bitcoin fell 5 percent after China’s announcement on cryptocurrency exchanges, though bitcoin is highly volatile by nature. A 5 percent move would represent a panic if it occurred in a national currency but is expected in bitcoin, which is not considered a store of value.

Thursday, September 14, 2017

The Last Fuel-Burning Car

Fuel-burning cars are a problem. Everyone knows it, and several countries have already announced plans to phase out fuel-only cars within 20 years. It was policy announcements from France and the United Kingdom that go this particular ball rolling, and the list also includes Norway and India. Japan and almost half of Europe have official policies limiting the number of fuel-burning cars in the future, and still more countries have government programs such as tax incentives to boost sales of zero-emission vehicles. Germany, the inventor of the internal combustion engine, is guiding its automakers toward a zero-emission future, although no official policy has been adopted yet.

China might be moving slower, but no one should imagine that Chinese drivers will continue to watch the country’s most expensive import go up in smoke while rest of the world switches to electric. Officials involved in the planning have told reporters that China is likely to release a plan in line with the timetable that France has announced. I believe the timetable for the phaseout of fuel-burning cars in China will be a few years faster because of the enormous risks China faces if it falls behind on such a large worldwide trend. The risks China faces if it is ahead of the curve are slight by comparison.

The pre-announcement of a phaseout is meant as a signal to both domestic and foreign manufacturers. Factories in China are on notice not to invest in any more capacity for manufacturing fuel-burning cars. Foreign manufacturers are being told to have their zero-emission options ready within a few years or risk being shut out of the China market.

The move from gasoline to electricity has picked up in the last two months now that Tesla is shipping a mass-produced electric car that blends in on the road and has not demonstrated any obvious glitches in its first few weeks. The question is no longer, “Will it really work?” or “When is it coming?” but “How fast will it go?” As drivers gain confidence in electric cars, the transition could be much faster than the timelines that national planners are drawing up. Some traditional auto manufacturers, most notably General Motors, will surely not be ready in time.

Tuesday, September 5, 2017

Ban on Cryptocurrency Securities

There has been a boom in highly speculative securities issued in the form of cryptocurrency, and securities regulators are taking note. In the last two months, the United States, Canada, and Singapore have issued regulatory guidance that cryptocurrency that represents a kind of ownership interest must meet securities regulations. Now China, noting that recent cryptocurrency offerings have seen inordinate fluctuations in value, has banned this practice as a means of funding a business venture. The story at Reuters:

Thursday, August 3, 2017

Smuggling Into Spain, and Getting the Cash Out

Reuters has a feature story from Spain about money laundering suspects arrested in 2012. The striking thing about the story is the scale of the smuggling of ordinary manufactured goods from China into Spain. The smuggling was large enough that a money laundering ring could dictate which national retailers could get certain categories of goods and which could not. There was — and presumably still is — enough smuggling to keep banks busy in four countries. If similar tax evasion schemes are operating in other countries, then they are large enough that they would have to be an integral part of economic planning for exports from manufacturing countries.

Monday, July 31, 2017

The Long Christmas Season

How big a factor is Christmas when you are looking at manufacturing? It has been variously estimated that between 10 and 20 percent of U.S. discretionary consumer spending goes to Christmas purchases. Retailers have already placed orders for most of their Christmas-season merchandise with the holiday 147 days away. Manufacturing is approaching the halfway point, and shipments from Asia to ports in North America get going in earnest in August. When you take a detailed look at the logistics involved, the season could not be done much more quickly.

To look at the reach of Christmas another way, today in Pennsylvania I saw a pre-Christmas sale. The sale focuses on decorations left unsold last November rather than newly manufactured items, but it still serves to show how long the reach of Christmas is. If U.S. consumer culture changed so that consumers observed Christmas in a manner proportional to other holidays, it would require a massive adjustment in both U.S. retail and global manufacturing. It is hard to predict when such a shift might occur, but it is easy to see the early signs of it, with toy stores closing and other Christmas-leaning merchandise categories declining.

Wednesday, July 5, 2017

Investigators Look at Bus-Project Crowdfunding Platform

The bizarre-looking elevated bus project is dead. it was canceled weeks ago and city workers in Qunhuandao have removed most of the test tracks that the bus tried to run on. In canceling the project regulators said the bus never really worked, despite some almost-convincing video, and the idle prototype was causing traffic jams as drivers were forced to go around it. Now regulators are saying that the entire project and the crowdfunding platform that funded much of it might have been a scam. Huaying Kailai, a peer-to-peer lending company, was run by the same executive who was running the bus company. The lending company now appears to be out of business. The executive has been questioned by investigators, and law enforcement officials are asking investors to come forward with documents. (Story at CNNtech:

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. [ ] 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 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.

Tuesday, January 3, 2017

Ford Cuts Capacity

Ford has decided not to build a new $2 billion factory in Mexico. This is not merely a question of location but has more to do with the question of manufacturing capacity. The U.S. auto industry got burned nine years ago by building too much capacity for anticipated demand that never materialized. Now they are doing the same thing again — but the furloughs that cut across the industry starting last month are making them wonder if they have made a wrong turn. By not building too much unneeded capacity in 2006 and 2007, Ford weathered the crisis of 2008–2009 without the need for bankruptcy. The decision not to build a whole new facility this year will surely look like a smart decision by the time the year is over.