Noted China bear Zhiwei Zhang, once of Nomura and now at Deutsche, is talking up China’s near-term economic prospects.
The reason? He thinks its fiscal slide — predicated on falling land sales which accounted for 22 per cent of general government revenues in 2014 — has come to an end.
You may remember this, from Zhang, in January:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market…
This assumes China has a plan. Maybe it doesn’t. Or, if it does, maybe it’s not primarily aimed at reducing its debt burden while avoiding a hard landing.
But, for the purpose of narrative sanity, we’ll assume for a bit that it does and it is.
So, with that in mind, what to make of this? Read more
I mean, if this is right…
From BNP Paribas’ Richard Iley (with our emphasis):
The release of preliminary data on China’s Q1 balance of payments, while incomplete, nonetheless furnishes us with the hardest evidence yet of the alarming scale of hot money outflows from the mainland.
If you want something done right, do it yourself
- The People’s Bank of China, recently… (probably).
With that in mind, here’s Michael Pettis’s on the PBoC’s renewed distrust in the banking system’s ability to allocate credit — which spawned the flawed comparisons to ECB LTROs made as China tried to help out local governments yearning for a debt swap:
Because it cannot ease credit conditions without encouraging a continuation of the worst kind of lending, the PBoC is trying to direct lending by targeting the types of lending it will support. To the extent that this lending flows into small and medium enterprises, agriculture, services, or other parts of the Chinese economy that are using capital efficiently, this is a good thing, but if capital continues to flow into large infrastructure projects, especially into the poorer provinces, it seems to me that this only leaves the country with a worse debt burden.
If you wanna know why China cut policy rates again over the weekend this chart from UBS’s Wang Tao goes a fair distance towards explaining it:
The cut was earlier than expected, but the reasoning is pretty simple. As Tao says (with our emphasis): Read more
Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.
Or to paraphrase a bit further: more signs of capital flight and depreciation pressure in China. Read more
This is gonna be speculative, so bear with us.
It’s the idea that China will — as more and more capital threatens to flow out of the country — start to shut its doors and look inwards once again. Read more
“China reported the largest deficit in its capital and financial account in more than a decade for the last quarter of 2014, the latest evidence showing that capital is flowing out of the country,” you say?
It “recorded a deficit of $91.2 billion in the period under its capital and financial account, which covers investments, the State Administration of Foreign Exchange said Tuesday, based on preliminary estimates,” you add?
A Great FX Outflow, indeed. Read more
Here’s 28 of China’s 31 provincial and municipal governments adjusting to reality:
Remember Roubini going off about the art market in Davos? About how “Whether we like it or not, art is used for tax avoidance and evasion” and “While art looks as if it is all about beauty, as a business it is full of shady stuff”?
Well here are two bits of related Chinese art market shenanigans for you.
The first, from the Epoch Times, is about corrupt officials who peddle their works of calligraphy to disguise bribes (via Climateer and The Art Market Monitor): Read more
The thing about a “pervasive implicit state guarantee” is that it’s pretty pervasive. It gets everywhere. Well, just about everywhere. Everywhere that an implicit state guarantee can get.
Futhermore, it’s hard to get rid of once it spreads. (We’ll spare you an analogy) Read more
Pretty obviously — with ECB QE, a presumed resultant euro funded carry trade, and all sorts of central banks rushing to cut rates — there’s some sort of renewed currency war movement going on.
And while we’re all ears for arguments about positive-sum outcomes (in a deflationary world), it’s worth remembering those who might struggle to get involved. Read more
Like 97th percentile fast.
From Goldman, do click to enlarge: Read more
As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):
The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…
The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.
The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.
So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more
Here’s what 33 months of negative Producer Price Index inflation in China look like:
Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.
Dramatic. But the question is, should we care? Read more
Sentences to warm the New Year heart, from Deutsche:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market.
Assuming the second bit is true… Read more
You’ve read about the scope for a dynastic bull market in the Economist… now read the report. If you can read Mandarin, like P/E ratios and have a good feel for Chinese imperial history that is.
Do click through the below for the pdf from Cinda. Joseph Cotterill, our resident Mandarin translator, assures us that it’s a chart of the last two millennia of order and chaos in China… which is nice: Read more
Biggest fall in five years that, even if it’s still up 35 per cent this year. Might be time to talk about the potential consequences of all this, no? Read more
And in the Shanghai Composite, from Fast, “as of 2:34pm in Hong Kong, turnover today is already $91.4bn, a record high according to Bloomberg data going back to 2005.”
Blame retail, blame leverage but don’t, as already mentioned, put too much weight on the Shanghai-Hong Kong Stock Connect scheme — uptake has been light and the timing is off. It’s up to you how much weight you put on that rate cut in late November. YEAH the equity rally got off the ground well before the rate cut with the Shanghai Composite up by 23 per cent between the start of June and 21st November, more than any other major equity market. BUT shares have also gone up 17.5 per cent since the rate cut so it’s obviously part of the story.
But to get back to the more important retail, leverage stuff…. Read more
Consider this from Gavekal’s Chen Long on the run up in China’s A-shares:
More on that Friday PBoC rate cut — and just as China goes ahead and cuts its 14-day repo operation rate by another 20bp to 3.20 per cent too. That move on Tuesday, according to Nomura, suggests that the PBoC will continue to ease monetary policy… which would be true to form.
As Barc note, “the policy rate cut suggests that China is once again following the typical sequence in a monetary easing cycle – the pace of CNY appreciation is often slowed in advanced, followed later by the same directional moves in the policy rate and banks’ required reserve ratio.” Read more
This man is in charge of China. Like, really in charge:
And he wants to make sure everyone he’s in charge of remains nice and calm. So he’d like them kept busy. That, for the most part, means they should be working — call it a social compact or call it a security measure, it doesn’t really matter. Read more
If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?
In this episode, crowd funding. Read more
With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.
Most particularly where China is concerned. 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
Via Reuters on Monday (H/T Marc Ostwald):
BEIJING, May 12 (Reuters) – A capital account deficit would be a good thing for China, the head of the central bank’s research unit said on Monday, because it could be used to offset the current account surplus and China would not need to accumulate foreign reserves continuously. Jin Zhongxia, director of the Finance Research Institute of the People’s Bank of China, made the comments during a business forum in Beijing. The previous day, Premier Li Keqiang had said China’s war chest of foreign currency reserves had become a headache as its continued rise could stoke inflation in the long term.
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: