Yes Virginia...It's a Bubble...

[GRG55]

Re: Yes Virginia...It's a Bubble...

Take a page from the US response to the Global Financial Crisis. Defer, delay, rinse, repeat....hope the economy grows and inflation returns.

And raise lots of equity while the capital markets still allow:

No Thirst for Qingdao Bank

Nov 26, 2015 8:46 PM EST

China's city banks are hoping that a revived appetite for Chinese companies, and Hong Kong IPOs, will help them to sell shares to investors skeptical of their bad-debt levels.

Bank of Qingdao's offering, at a time when Hong Kong IPO volumes are at a five-year high, doesn't augur well. The first Chinese lender to go public since a $1.3 billion sale by Shengjing Bank late last year, the institution raised $607 million after pricing its IPO at the bottom end of a HK$4.75 to HK$5.21 range.

The price couldn't have gone any lower, even if the seller had been willing: The HK$4.75 level is exactly equal to Bank of Qingdao's book value, and Chinese rules prevent the sale of state assets for less than that floor.

Demand was limp even after a record 72 percent was taken up by cornerstone investors, institutions or well-known individuals who signal trust in an offering by committing to buy shares and hold them for a minimum period. Bank of Qingdao's cornerstone investors included Soul Htite, the American co-founder of U.S. online peer-to-peer lender LendingClub. The bank's backers also include Italy's Intesa Sanpaolo , which held a 20 percent stake before the share sale.

A port city on China's eastern seaboard, Qingdao is a former German colony that is home to the nation's biggest brewer. More recently, the city has been better known for its role in a $10 billion fraudulent metals trading scandal that snared banks including Standard Chartered.

The struggle to sell Bank of Qingdao should hardly be surprising. The 14 Chinese banks listed in Hong Kong trade at an average of just 0.89 times book. That partly reflects doubts over the banks' bad-debt levels and concern that these will rise as China's economy continues to slow...

...Chinese banks' troubled loans swelled to almost 4 trillion yuan ($628 billion) at the end of September, more than the gross domestic product of Sweden, according to figures released this month by the China Banking Regulatory Commission. While non-performing loans were 1.59 percent of outstanding credit, that rises to 5.4 percent if ``special mention'' loans where payment is at risk are included.

Chinese borrowers are taking on record amounts of debt to repay interest on existing obligations, according to Beijing-based Hua Chuang Securities, echoing the ``Ponzi finance'' conditions that U.S. economist Hyman Minsky saw as a predictor of financial crises.

Against this backdrop, two more city banks are set to test the Hong Kong market. Bank of Jinzhou, which has disclosed making loans to troubled solar energy firm Hanergy, began taking orders this week for an IPO that could raise as much as $943 million. Also in the queue is Bank of Zhengzhou...

[GRG55]

Re: Yes Virginia...It's a Bubble...

I understand a lot of this was packaged and sold as income product to private individuals, and also that during the peak of the insane credit boom in China many local companies found it more lucrative to lend out the cash on their balance sheets and place loans with other companies instead of investing in expanding their own business. That is why there are guarantor entities for much of this debt; it was part of the marketing promotion to individuals.

I also think this is why there may not be a large risk of contagion as the debt is held widely, payments can be "deferred" and losses spread around across a broad swath of the economy and public.

China's shadow banking risk shifts to booming bond market

SHANGHAI, Nov 29 A year after China's financial regulators squared up to the systemic perils of "shadow banking", the threat is shifting to a booming corporate bond market, and risky borrowers' debt is finding its way into products aimed at retail investors.

An opaque network of trust companies and non-bank lenders had grown their annual market to a hefty 2.9 trillion yuan ($450 billion) in loans before regulators stepped in, spooked by rising defaults on wealth-management products (WMPs) backed by such high-interest shadow lending.

Now the high-risk borrowers who took those loans, such as unlisted real-estate firms struggling with a stagnant property market and financing companies backing shoddy local government investment, are finding a new avenue of funding after regulators began allowing unlisted companies to issue bonds on public exchanges.

New corporate bond issuance leaped to 914 billion yuan in the third quarter, accounting for 29 percent of all new credit, up from 381 billion yuan and just 8 percent in the first.
And the profile of new borrowers looks strikingly like the patrons of the shadow banking set.

Of the 57 firms posting bond listing announcements in Shanghai in October, 23 were local-government-owned project or infrastructure investment firms.

Beijing engineered the freeing up of the bond markets as a transparent alternative funding route, and the credit crunch that followed its clampdown on shadow banking guaranteed a high take-up.

But wealth managers are now turning these bonds into leveraged high-yielding products and selling them to investors desperate for returns after a real-estate slump and summer stock-market crash...

...Demand is hot for these products, and the higher the yield, the higher the risk, which is amplified if the fund's assets are partly bought on credit, or leveraged.

Colight Asset Management, a private fund offering bond-backed WMPs, raised more than 40 million yuan in just four days in November from an 8.7 percent yielding, 400 percent leveraged bond-based product, according to customer service staff member Chen Xun.

Much bigger companies such as Pacific Asset Management Co. and the Agricultural Bank of China also offer similar high-yielding leveraged products.

Investors, however, assume that products offered by big names are relatively safe.

"The risk of default is very slim," said a 45 year-old business manager in Shanghai surnamed Pan who invests in WMPs on an exchange backed by China's second-largest insurer, Ping An Group. "I'm sure such a big company as Ping An will make sure investors can get their money back."...

...Typical of such funds is the Great Wall Long Term Profit Gradated Debt Fund, whose top three holdings are all sub-AAA-rated local government fundraising company bonds.

The firm adds leverage by borrowing cheaply in the bond repurchase (repo) market, fund documents show."So for instance you can take 2 billion yuan of government debt as collateral and receive 750 to 800 million of cash, and use that to buy more debt," said an underwriter at an international bank in Shanghai who asked not to be named...

..."Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing...

[jk]

Re: Yes Virginia...It's a Bubble...

...Typical of such funds is the Great Wall Long Term Profit Gradated Debt Fund, whose top three holdings are all sub-AAA-rated local government fundraising company bonds.

The firm adds leverage by borrowing cheaply in the bond repurchase (repo) market, fund documents show."So for instance you can take 2 billion yuan of government debt as collateral and receive 750 to 800 million of cash, and use that to buy more debt," said an underwriter at an international bank in Shanghai who asked not to be named...

..."Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing...

if they take the pile of sub-AAA leveraged debt, and created instruments which had first, second, third etc claim to the payments, i'm sure they could create AAA rated debt instruments using the 1st and maybe the 2nd or even the 3rd tranche....

i wouldn't be surprised if it were happening already.

[GRG55]

Re: Yes Virginia...It's a Bubble...

if they take the pile of sub-AAA leveraged debt, and created instruments which had first, second, third etc claim to the payments, i'm sure they could create AAA rated debt instruments using the 1st and maybe the 2nd or even the 3rd tranche....

i wouldn't be surprised if it were happening already.

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.

The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.

I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?

The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

[touchring]

Re: Yes Virginia...It's a Bubble...

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.


The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.


I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?


The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

My 2 cents on the reasons why the bubble is going on a lot longer than what we believe it will (including myself).

1. Sudden fall of Europe into disarray, politically, socially (Islamic problem, Turkey racial violence) and economically. Even though not responsible for it, China is the greatest beneficiary from the sabotage of Europe.

2. China's huge under-developed rural economy and cities in west and central China - there's still >10% growth in these places.

3. Cheaper (relative to city living) cost of living in rural China provides a free safety net for urban workers. Savings can go a lot further in rural villages and towns. Migrant workers can work X years and earn enough cash to rest Y years in their home village - something which is impossible for many of us. Pensioners can live in rural China for peanuts by growing their own food.

4. Lower military outlay - relatively speaking - http://www.indexmundi.com/g/r.aspx?v=132

5. Improving transportation system - if you can read basic Chinese and speak Mandarin, you don't need to join a tour group to visit China. Cab taxis are also very affordable if you decide to go the easy way.

6. High domestic security - other than the notorious few, most cities are relatively safe even at night for women and foreigners - grown ups, not small children and infants as kidnapping for sale is common.

7. Improving confidence in the central government - crackdown on corruption and improvements in legal system. Retired senior leadership are not immune to persecution.

8. Improving workforce productivity and use of automation and the Internet - if you haven't been to China, you'll be surprised by the degree of business automation that exists in China. In my recent trip, I checked in and checked out from hotels in 5 minutes.

9. Practicality - Chinese businessmen are very practical and strive to deliver at minimum cost and at minimum price - you won't find workers smiling at you at the entrance like you do in Japan - there's no wastage of labor - labor is in short supply in China. Service is minimum (in some cases - non existent) unless you're paying top dollars. There is the website FAQ, contact form and telephone hotline though. One hostel I checked into even had a visitor's guide at the entrance with information such as how to get to various tourist places (bus service numbers and subway lines to take), how to get to a nearby city, how to call a cab, the checkout time, the WIFI password, a local map. Inside the room, there are signs with instructions on how to use the shower, where to find the hot water and cold water - not a joke.

Do not expect the kind of service you get at places like Phuket in Thailand or Bali in Indonesia unless you stay in a top end 5 star hotel.

10. Diversification through rising external economy and moving up the value chain - many Chinese companies, both state owned and private have invested hundreds of billions if not trillions overseas (I'm referring to business, not real estate).

11. Lower commodity prices - not many people remembers that China consumes more natural resources than it exports so cheaper commodity and oil prices actually subsidizes the consumer economy.


China faces serious problems such as an aging workforce and labor shortages and even the threat of earthquake to new construction in the longer term, but barring natural disasters such as a catastrophic earthquake or nuclear accident, I don't think the Chinese bubble will deflate as quickly as most hope or anticipate, at least in the near term.

[GRG55]

Re: Yes Virginia...It's a Bubble...

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.

The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.

I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?

The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

Imagine that...

Yuan Drops as SDR Approval Seen Prompting PBOC to Reduce Support

December 1, 2015 — 1:47 AM MST

The yuan weakened in offshore trading amid speculation China’s central bank will rein in intervention now that the IMF vote on reserve-currency status is out of the way...

...“The PBOC should be reducing its currency intervention and the yuan is likely to decline on weak economic fundamentals in China,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “That said, China will have to strike a balance between letting the market play a bigger role and not allowing any major depreciation.”...

[jk]

Re: Yes Virginia...It's a Bubble...

these developments will certainly sow confusion among the american politicians yammering about currency manipulation. in the meantime, yuan devaluation is another deflationary force, another push upward for the buying power of the dollar. also a weaker yuan will hurt chinese internal demand, e.g. for meat, and thus push down on commodity prices.

[GRG55]

Re: Yes Virginia...It's a Bubble...

these developments will certainly sow confusion among the american politicians yammering about currency manipulation. in the meantime, yuan devaluation is another deflationary force, another push upward for the buying power of the dollar. also a weaker yuan will hurt chinese internal demand, e.g. for meat, and thus push down on commodity prices.

I agree, if the yuan is allowed to fall, as expected, to support the broader export economy it will not do anything to enhance the shift to the allegedly desired "consumer economy".

China's Manufacturing PMI Weakens to Lowest in Three Years

November 30, 2015 — 10:49 PM MST

China’s manufacturing conditions slipped to the weakest level in more than three years as sluggishness in the nation’s old growth drivers add to risks facing the government’s growth target.

The official purchasing managers index fell to 49.6 in November, the National Bureau of Statistics said Tuesday -- the lowest level since August 2012...

...Six central bank interest-rate cuts since November last year haven’t been enough to spur a recovery in manufacturing, which has continued to weaken while activity in the services sector has shown more strength. Premier Li Keqiang’s goal of about 7 percent expansion for 2015 is at risk, even as employment has held up thanks to resilience the in services and consumption.
"The data show further divergence in manufacturing and non-manufacturing sectors," said Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co. "Considering further cuts in overcapacity, the divergence will continue into at least mid-2016."

The Shanghai Composite Index pared earlier losses and was 0.4 percent higher at 1:43 p.m. local time. The yuan -- which won approval Monday for addition to the IMF’s list of reserve currencies -- weakened in offshore trade.

Another manufacturing PMI released by Caixin Media and Markit Economics edged up to 48.6 in November, exceeding the median estimate of 48.3. The gauge has a smaller sample size and includes smaller companies and exporters.

[touchring]

Re: Yes Virginia...It's a Bubble...

these developments will certainly sow confusion among the american politicians yammering about currency manipulation. in the meantime, yuan devaluation is another deflationary force, another push upward for the buying power of the dollar. also a weaker yuan will hurt chinese internal demand, e.g. for meat, and thus push down on commodity prices.

It depends on how weak, but from my own experience, it won't make much of a difference at least for imported food since most of it are from NZ, Australia, Japan, Korea, Thailand, Taiwan, India, South Africa and the EU.

As for manufactured goods, including cars and plastic household stuff, they are mostly made in China anyway. Branded goods from the EU/Swiss/Sweden, and industrial goods, robots from Germany, France and Japan. Military hardware from Russia.

However, Hollywood movies from the US, XBox games, Nike sneakers and McDonalds' fries may cost more.

Wages in China have more than tripled since 2005, an annual growth rate of more than 7% a year. Any depreciation of the Yuan will be partially offset by higher wages.

http://www.tradingeconomics.com/china/wages


Meanwhile, a report on Australia's depreciation. Food for thought.

Why does depreciation help no more in raising the Australian CPI?

http://www.fxstreet.com/news/forex-n...a-4d6d49518fcb

[jk]

Re: Yes Virginia...It's a Bubble...

the u.s. is a large agricultural exporter and the commodities are priced in dollars. i would think that a stronger dollar would raise the global price of corn, which would in turn raise the price of pork. is this incorrect?

[touchring]

Re: Yes Virginia...It's a Bubble...

Don't know much about corn or pork but the $ price of soft commodities has been dropping in the last 2 years.

http://www.nasdaq.com/markets/corn.aspx?timeframe=10y

I believe the price for agri-commodities should have fallen even more if not for the El-Nino effect. But that doesn't mean farmers can earn more as they have to spend more on irrigation.

The price of Soy - http://www.nasdaq.com/markets/soybea...?timeframe=10y

China tipped to massively increase pork imports as price of the meat soars

http://www.scmp.com/news/china/econo...ice-meat-soars

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I am quite sure the price of beef shall go down. Most of it is produced using rations made essentialy of corn and soy spoils after oil is extracted. There is a time lag because you need several years to increase animal population. Unlike, for example, pigs, cows only have one calf at a time. And they need 9 months to do it. Corn began falling in 2013, soy beans did it in 2014. Beef prices should fall significantly in 2016-18.

Don't know much about corn or pork but the $ price of soft commodities has been dropping in the last 2 years.

http://www.nasdaq.com/markets/corn.aspx?timeframe=10y

I believe the price for agri-commodities should have fallen even more if not for the El-Nino effect. But that doesn't mean farmers can earn more as they have to spend more on irrigation.

The price of Soy - http://www.nasdaq.com/markets/soybea...?timeframe=10y

China tipped to massively increase pork imports as price of the meat soars


http://www.scmp.com/news/china/econo...ice-meat-soars

[jk]

Re: Yes Virginia...It's a Bubble...

more deflation.

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

Corn began falling in 2013

Back in 2012/2013 I identified the price collapse in corn and what companies this would affect. Chicken producers like Tysons and Pilgrims Pride came to the forefront of my analysis.

I surmised that corn prices being one of the highest input costs aside from labor for these companies that the 50% + decline in the price of corn would eventually feed its way into the margins of TSN for example and lead to expanding margins.

This is in fact exactly what occurred. The stock price of TSN went from 16 a share to a now 51 share price.

Chicken producers margins have expanded to all time highs and now the margins are bound to mean revert as they have over produced chicken hatchings.

This will eventually feed its way into the stock price of TSN and PPC but not yet.

The key is identifying these macro factors that will substantially change the margins in a business and be ahead of the eventual investor capital inflows or outflows that will inevitably enter these stocks.

Obviously because the market is perfectly efficient and all.....

[GRG55]

Re: Yes Virginia...It's a Bubble...

China is Planning to Purge Foreign Technology and Replace With Homegrown Suppliers

By Bloomberg News Dec 18, 2014 7:13 AM GMT-0200

...

Apparently China is Purging more than foreign technology these days

Tell me again how China is going to dominate the world economy...

Markets| Fri Dec 4, 2015 5:56am EST

Foreigners drawn in as fear and loathing grip China's finance industry

A widening regulatory probe into some of China's biggest brokerages has set nerves jangling in a financial industry still recovering from a summer of turmoil, with fear of becoming entangled in investigations spreading among foreign investors.

People working at domestic securities firms report an ugly mood after news in the past week of increased scrutiny of the sector by authorities. A nervous inertia is slowing new business as staff are encouraged to report their bosses or colleagues for corruption.

"It's creating a very dog-eat-dog environment," said a partner at a Chinese mutual fund. "People collect evidence on their bosses, because if they get rid of their boss, it means that they can get promoted faster."...

..."Everyone is absolutely terrified of China," said a director at an international brokerage in Hong Kong, echoing the sentiment of many in the industry contacted by Reuters. Most did not want to be identified due to the sensitivity of the issue...

..."They put a notice on all the floors with the number that you can call anonymously to encourage people to dial in. They say they just want people to report corruption," said a source at Guotai Junan...

...Brokers, consultants and lawyers said foreign investors operating in China were becoming increasingly reluctant to speak publicly on market issues in case they attract adverse attention from regulators.

While they welcome the need to investigate and prosecute rule breakers, they say a lack of legal recourse in China creates the fear about being caught up in the net. When authorities call executives in, they say they are never sure if they are being asked to help with enquiries or are under suspicion and when they might be released.

A lawyer who has assisted foreign firms caught up in the probes said some were introducing new onshore compliance programs, although that did not guarantee keeping out of trouble.

"You can't 'comply' because there is no rule of law," he said. "The best thing you can do is establish processes for who is likely to be taken away, and how to make sure they aren't disappeared forever."...