We might just strip out one more thing from Deutsche’s recent report on Bretton Woods 2.o, namely the bit about how the growth of Chinese “reserve holdings associated with export-led growth provided de facto protection for foreign private investors in emerging markets and thereby caused the gross flows” needed for China’s growth strategy.
The point being that private capital flows generate political risk — “haha, all your FDI are belong to us” — and, without some sort of collateral, flows from rich countries to poor countries will be held back. Think of China’s reserves as a $4tn hostage which stops China from throwing its weight around and stands in the way of a geopolitical breakdown. With it in place, foreign capital becomes more comfortable heading into China. The idea from Deutsche is that this was the only way to get China’s development model to work on the scale it has. Read more
Polled in March 2012, top academic economists overwhelmingly agreed that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”
This academic consensus has penetrated popular opinion to the extent that some people believe increasing cross-border trade flows is unambiguously good for everyone. Likewise, there is a relatively common — and wrong — belief that the Hawley-Smoot tariffs were a significant factor in the severity of the Great Depression.
We don’t want to suggest that trade is bad, but it is worth highlighting that the actual views of the experts who study these issues are much more nuanced than what the “pop internationalists” often spew out.
For example, a new paper by Daron Acemoglu, David Autor, David Dorn, Gordon H Hanson, and Brendan Price estimates that the sharp increase in bilateral trade between China and the US cost somewhere between 2 and 2.4 million jobs between 1999 and 2011 — about 1 percent of the entire civilian population in 2011. Less than half of those jobs were in manufacturing sectors that directly competed with Chinese businesses. Read more
This retrospective on predictions made in the 2003 Essay on the Revived Bretton Woods System by Deutsche’s Dooley, Folkerts-Landau, and Garber is brought to you by Deutsche’s Dooley, Folkerts-Landau, and Garber.
Their premise was and is that we are part of an international system characterised by newly industrialised countries pegging their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth furnished by an excess supply of labour. Those developing countries then ship their gains back to the US et al as a form of collateral against new lending as the net foreign assets of poor countries support the risks taken by their richer brethren.
More so, they suggested that we were in the China phase of this system, that it would last for 10 years-ish… Read more
Have a China rebalancing update in the face of a property downturn, the corruption crackdown and a reversion to type by Chinese leaders as they seek to prop up the economy.
To restate the obvious, China needs to rebalance its economy towards consumption over the next while if it’s to shift the economy away from a reliance on debt-driven investment and all of the “this is nuts” type excess that it can bring about.
And as UBS’s Wang Tao says: Read more
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever.
The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric.
Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers.
That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs. Read more
From UBS’s Wang Tao on the sharp slowdown in Chinese credit creation last month (with our emphasis):
China’s July credit data came in sharply weaker than expected. July new RMB lending declined to 385 billion from 1.1 trillion in June. More importantly, new total social financing (TSF) was only RMB 273 billion, led by the drop in new bank lending and a 400 billion shrinkage of bank bill acceptances. As a result, credit growth slowed visibly and our credit impulse plummeted (Figure 1).
Given recent signs of further policy easing and persistently low interbank rates, the market has been expecting additional monetary and credit support. Today’s credit data are therefore a negative surprise. However, we do not believe these data reflect a credit tightening by the PBC – as evidenced by recent policy intentions expressed by the Politburo and the central bank, as well as ample interbank liquidity and strong credit growth in June which surprised on the upside.
For a little while it looked as though demand for China property related charts was moving in the same direction as demand for China property, but that pattern appears to have broken recently.
With that in mind, here’s StanChart’s quarterly survey of 30 senior managers — most of them small, unlisted developers — in six cities (Hangzhou, Lanzhou, Baoding, Foshan, Huangshi, Nanchong). Read more
Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not.
At FT Alphaville we’ve presented the flow explanation on a number of occasions. The theory is that taper talk prompts dumb money to sell safety, and the smart money — which knows there’s no such thing as underpriced principal safety these days and that taper implies risk-off — to pile into safety at an even faster rate.
In this theory the whole process is then exacerbated by a feedback loop. Sellers of safety buy risky assets, like emerging market debt, instead. But the sellers/issuers of that debt then recycle that cash back into safe US dollar securities, rather than goods or services in the emerging market. So every risk-on signal from the Fed only ends up creating more buyers for dollar denominated bonds. Read more
You can’t shake everything up at once. Some sensible paragraphs from Bank of America Merrill Lynch’s China team who are searching for explanations in place of the trust defaults they expected:
..it’s understandable why local officials do not want to see any default and try all they can to avoid one. Given the amount of resources they command and how much influence they can exert on local financial institutions, it’s not a surprise to us that they have managed to do so. However, the central government, supposedly having broader interests and a longer horizon in mind, could have stepped in to force some defaults, make investors more aware of the hidden risks, address the implicit-guarantee moral hazard and improve resources allocation.
So, with the corruption investigation into taboo busting tiger, former Politburo Standing Committee member Zhou Yongkang, the first such investigation against a politburo standing member since 1949, are we calling the top of this thing?
Kinda, says Gavekal’s Andrew Batson: Read more
Or, how far is market pricing of credit risk catching on in China, after all?
Here’s your default-risk adjusted corporate bond yields in China from Nomura (our emphasis):
Liquidity injections and targeted easing so far this year has had a material impact on corporate bond yields. Corporate bond yields have dropped across the rating spectrum, while a similar narrowing of spreads can be seen relative to Chinese government bonds. Data provided by the China Government Securities Depository Trust & Clearing Co Ltd (chinabond.com.cn) shows that both 1yr and 5yr AA-rated bond yields have fallen, from highs of 7.22% and 7.63%, respectively, at the start of the year to 5.38% and 6.53% today.
And the reason we keep going on about lower tier cities, from Nomura:
Today in Chinese efforts to shore up the property market, from Bloomberg:
China will revive mortgage-backed debt sales this week after a six-year hiatus, as the government extends help to homebuyers in a flagging property market.
Postal Savings Bank of China Co., which has 39,000 branches in the country, plans to sell 6.8 billion yuan ($1.1 billion) of the notes backed by residential mortgages tomorrow, according to a July 15 statement on the website of Chinabond. The last such security in the nation was sold by China Construction Bank Co. in 2007, Bloomberg-compiled data show.
And from Nomura: Read more
Compare and contrast time. First Nomura, on China’s June credit and money growth data which grew at their fastest pace in three months in June:
M2 growth rose more than expected to 14.7% y-o-y from 13.4% on policy easing, and new total social financing also rose strongly to higher-than-expected RMB1.97trn in June from RMB1.40trn, largely led by off-balance sheet credit.
Stronger money and credit data are positive for short-term growth, but the renewed pick up in off-balance sheet credit raises a longer-term concern – if this is the start of another major upswing in TSF led by a less regulated shadow financing sector, it raises the risk of a sharper slowdown further out.
We continue to expect real GDP growth to stay at 7.4% y-o-y in Q2, unchanged from Q1, and also expect government to ease policies further in Q3, which should help growth to rebound slightly to 7.5% y-o-y in Q3 and 7.6% in Q4.
Then Peking University’s Michael Pettis, in his latest note: Read more
We’ve long reported about China’s amazing commodity collateral shenanigans, featuring almost every commodity or physical good under the sun.
None of which was a problem for the financing side of the equation as long as the deals could be rolled over and for as long as the collateral did not have to be liquidated.
A few bad loans later, however, and suddenly the need to check in on the underlying collateral has exposed a small problem with relying on commodity collateral to de-risk trade finance. So intense was the demand for cash financing in China that it seems the greatest shenanigan of all was rehypothecation — multiple use of the same collateral many times over for many different loans. Read more
A little too quiet.
Speaking of which, here’s Mr Qiao in the FT on his LGFV “trust product” — “Eternal Trust Number 37” — the proceeds of which are going to a big public heating project for the central Chinese city of Yuncheng:
Mr Qiao admits the Yuncheng heating project will not provide any returns for his company, an unsettling fact for any investor. But he is dismissive that this is the problem.
“All of our investments are public works that should actually be paid for by the local government so when the trust product matures the government should take this project off our hands and give us the money to repay investors,” he says. “Don’t worry, it is impossible for there to be any sort of financial crisis here in Yuncheng.”
Monetary policy probably not so much.
It’s a rare thing these days to see monetary policy taking the back seat but according to the WSJ an ever more influential PBoC is winning the argument against cutting interest rates and in favour of smaller more targeted measures like RRR cuts: Read more
We’ve said that this might be a dolorous year for the dollarless in China.
In which case, it’s nice of the State Administration of Foreign Exchange to loosen the rules under which Chinese companies can borrow abroad then — effective from June 1. Of course, as with all reform in China, attempts at liberalisation carry their own internal risks. In this case, the rise of external debt.
This is from Michael Pettis’s latest note (he’ll also be at Camp Alphaville, nudge-nudge): Read more
Yeah, we know, it’s semantic. China are already the kings of QE. But bear with us for a bit. The nature of their QE may be changing.
From Stephen Green and Becky Liu at Standered Chartered: Read more
That’s the Russian president on the left, rainbow-mantled former General Secretary Jiang Zemin on the right… and Gazprom’s gas deal not pictured because it is presently nowhere to be found. Read more
And so it goes, from Nomura’s Zhiwei Zhang:
Today’s 21st Century Business Herald reports that in Jiangsu Province the Rongchen Property Development Co. Ltd. defaulted on a RMB100m trust product that came due last August. The paper says that as yet the principal and interest have not been fully paid.
Separately, in Zhejiang Province, risks have increased with regard to entrusted loans totalling about RMB5bn made by 19 listed companies (as of end-2013) to mainly small and medium-sized property developers. These loans were extended at interest rates ranging from 7.25% to as high as 25%. Almost all entrusted loans made by one of the listed companies, Sunny Loan Top Co. Ltd., were extended to property developers at annual rates above 18%. The paper reports that some RMB600m of entrusted loans extended by four companies have either.
Even when a western government eases policy, the methods and transmission mechanisms involved aren’t that well understood. We’ll grant that things are even fiddlier in China.
A timely note from Goldman’s China economist Yu Song then, just as expectations of more easing build in response to fears of a systemic property market problem:
When China is loosening these questions are much more complex and less transparent, for several reasons:
Let’s face it. Chinese national statistics are to some degree always treated with a pinch of salt by analysts and economists alike.
That said, there’a s big difference between massaging subjective inputs in statistical methodologies and failing to adjust for misleading economic activity driven by actual economic behaviour.
Case in point, Chinese export figures, which according to Capital Economics are now suffering the consequences of a bad comparative due to last year’s carry-trade inspired over-invoicing fad (since cracked down on by the state). Read more
The bank that brought “adaptive pricing” to the China property euphemism table just two weeks ago is getting quite a bit blunter.
We’ll spare you more charts today, but here’s a chunk or two from Citi’s Oscar Choi and Marco Sze who have been forced into a shower of scare quotes by weaker than expected April data (emphasis in original):
A Powerful Loosening “Combo” now a MUST to Prevent a “Demand Cliff”: We believe the physical market has reached a critical point, with potential for broader- based demand shrinkage across different product-ends. Beside the recurring factors like tight credit, HPR [home purchase restrictions] policy, altered ASP [average selling price] expectations due to media reporting, etc, different to FY08/11, the downward pressure on demand is also intensified by new factors, like a weaker economy, RMB depreciation, anti- corruption, outflows of purchasing power to overseas, etc, We believe merely fine- tuning policy by the local gov’ts is insufficient to mitigate this potential correction…
June/July – Last Chance to Shoot the Silver Bullet:
We are now fairly sure there is a serious mismatch between the supply of and demand for charts about China property — more are being produced than will ever be seen. That said, here are a few worth paying attention to:
Much is being made of China being about to pass the US as the world’s biggest economy — and of China’s fight to massage down the figures.
We hate to side with Chinese statisticians, but at the very least Beijing may well be right to play down the comparison in its local media.
Here are a couple of surprises which come out from using similar adjustments to the PPP calculations used to show China’s economy is bigger (using the IMF’s World Economic Outlook database)…
- In 1980, Greece and Gabon (which was in default on its debt from 1999 to 2005, but has lots of oil) were ranked above the UK for PPP-adjusted GDP per person. Before adjustment they were about a third poorer.
- East Timor, on the IMF’s 2014 estimates, is ranked as richer on PPP-adjusted GDP per capita than Poland, Estonia or Hungary – and is ranked only 1.4 per cent poorer per person than Portugal, its former colonial master. It has discovered oil, boosting GDP. But before the PPP adjustment, GDP per capita is put by the IMF this year at $4,669 vs $14,166 a head for Portugal.
Some expansive credit-related thoughts arrive from Alberto Gallo at RBS, for a quiet May Day when Europe’s capitalists take the day off in honour of its workers.
In short, its the safe stuff that may not be safe anymore as/if/when the continent’s economy expands: Read more
It’s day two of the London TfL strike, which calls for another installment in the robot vs jobs debate. This time we present the findings of Daron Acemoglu, of MIT, in a new working paper which explores technological capital biases and why it is that the benefits of technological innovation don’t always flow neutrally across the economy.
Acemoglu’s paper expands on the seminal work of Atkinson and Stiglitz on technological change in 1969, and uses a neat North/South analogy to explain the why these biases develop in the first place (our emphasis): Read more
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.
But it’s hardly a revelation.
We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.
Goldman even blessed us with a more recent update about the shenanigans in March: Read more