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

[Southernguy]

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

Thanks for your, as always excellent, comments, PoZ.

[GRG55]

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

Chinese manufacturing continues to contract

HSBC China manufacturing PMI for April is out at 9:45 p.m. ET.Economists polled by Bloomberg were looking for a reading of 48.3. And the number is down from the flash reading of 48.3, but up from 48.0 in March.
A reading below 50 indicates contraction.
Production at Chinese manufacturers fell for the third straight month, but as a slower pace. Meanwhile, staffing levels were cut for the sixth straight month and at a faster pace, “amid reports of company down-sizing policies which stemmed from lower production requirements.”
“The latest data implied that domestic demand contracted at a slower pace, but remained sluggish,” said Hongbin Qu, HSBC chief economist for China. “Meanwhile, both the new export orders and employment sub-indices contracted, and were revised down from the earlier flash readings. These indicate that the manufacturing sector, and the broader economy as a whole, continues to lose momentum.”
Beijing announced a mini-stimulus to help stabilize growth and this is expected to have improved business sentiment.
China’s official manufacturing PMI number climbed to 50.4. The HSBC survey has a smaller sample than the official number and is more tilted towards small and medium enterprises.
Here's a look at the trajectory of Chinese PMI:

[GRG55]

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

Talk about "supply destruction"

Enron times 1000?

Citic Resources Can’t Locate All Its Metals Held at Qingdao Port

Jun 17, 2014 6:55 PM MT

Citic Resources Holdings Ltd. (1205), the commodities trader controlled by China’s largest state-owned company, said a court has been unable to locate more than half of its alumina stored at China’s Qingdao Port.

Citic sought a court order to find its copper and alumina held at the port and the court was unable to locate about 123,446 metric tons of its alumina, Citic Resources said in statement to the Hong Kong stock exchange. The company holds title documents to 223,270 metric tons of alumina and 7,486 metric tons of copper it has stored at the port, it said.

Qingdao Port is counting industrial metals held in some of its bonded warehouses to determine if they match the amount in documents pledged to banks as collateral for loans, three people with knowledge of the probe said on June 5. The port is concerned that there has been multiple counting of some batches of metals including copper and aluminum, said the people.

“The group will conduct its own investigation to ascertain why the court has been unable to enforce its sequestration order in respect of all of the group’s alumina,” Citic Resources said in the statement. The company will also consider “legal proceedings if necessary”...

[ST]

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

The 'brilliant' ploy for some of these Chinese players was to use different receipts as collateral for the same physical commodities for too-eager-to-lend counter parties. Nice way to produce leverage.

[Polish_Silver]

Have they looked under the Sofa Cushions?

Talk about "supply destruction"

Citic Resources Can’t Locate All Its Metals Held at Qingdao Port

Citic Resources Holdings Ltd. (1205), the commodities trader controlled by China’s largest state-owned company, said a court has been unable to locate more than half of its alumina stored at China’s Qingdao Port.

Citic sought a court order to find its copper and alumina held at the port and the court was unable to locate about 123,446 metric tons of its alumina, The company will also consider “legal proceedings if necessary”...

This should be under "you can't make this stuff up".

One hundred thousand tons. How big a pile is that?

[GRG55]

Re: Have they looked under the Sofa Cushions?

TOP TEN REASONS WHY CITIC CAN'T FIND ITS ALUMINA:

It was claimed in a GM recall.

The Port moved and nobody told Citic.

The NSA knows but they're not talking.

JPM painted it yellow to increase the collateral value.

They can make it up on volume.

They made it up on volume.

Amazon says blame Direct Parcel.

Google Space says it's there if you use last year's update.

CNBC says "Everybody knows the Chinese aren't good at math".

Somebody stole the last reason.

[GRG55]

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

Repeat after me:

China property is a "cash market";

The Chinese government "won't let" the property market crash;

China has 1.1 Billion people that need homes so all the empty apartments will get filled;

It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...

(feel free to add your own China myth to the list)

Misallocation of capital? In China? Perish the thought...

Chinese companies have racked up $14.2 trillion in debt—more than any other country on the planet

The financial reality behind China's building binge is starting to become clear. Reuters/David Gray

Back in 2009, China’s 8,500 listed companies were in much better shape than their global peers. No longer. The average Chinese company now has worse cash flows and more debt than other similar firms elsewhere in the world, says Standard & Poor’s, a ratings agency.

So great has China’s borrowing binge been that its companies racked up $14.2 trillion in debt at the end of 2013, blowing past the US’s $13.1 trillion to become the world’s biggest corporate borrower. This, says S&P, is worrying since a “higher risk for China’s borrowers means higher risk for the world.”



How did China ascend to the top of the corporate debt list a year before S&P expected it to?

The story takes us back to the global financial crisis. After Lehman Brothers collapsed in late 2008, China’s leaders opened the lending taps, pumping huge sums of credit into the system via state-owned banks. Much of that went into growth-juicing sectors like real estate, shipbuilding, and steelmaking. The timing was bad; China’s economic growth had already peaked in 2007, and was starting to slow.

As Chinese companies expanded their ability to produce—building new factories, buying more land, and the like—they created a excess of supply that began to drive down prices. Then the slowing economy hurt cash flows even more.

But instead of letting companies default, leaders kept pumping more money into the system, in part through official channels, though also by allowing China’s off-balance-sheet credit system—better known as “shadow banking“—to flourish. That shifted money to companies with terrible credit records and weak cash flows that no sane banker would lend to. Now, as much as one-third of corporate debt—between $4 trillion and $5 trillion—comes from the shadow banking sector. An enormous amount of this funding was used not to invest in new businesses, but to pay off old debts.

Though these problems became too big to ignore last year, they keep getting worse. That could hurt the global economy, says S&P. “As the world’s second largest national economy, any significant reverse for China’s corporate sector could quickly spread to other countries,” it notes in a report.

Unfortunately, Chinese corporate borrowing isn’t really slowing down. S&P says that, by 2018, Middle Kingdom companies will have issued between $21.9 trillion and $23.9 trillion in debt—equal to one-third of global corporate debt, including refinancing and new issues. That implies an average annual increase of between 7.5% and 9%—much faster than China’s economy is able to grow.


China's Brewing Subprime Crisis

Jun 16, 2014 6:03 PM EDT

[Bloomberg] China's infamous "ghost cities" are even scarier than they sound.



As home prices across China have fallen 10.2 percent in the first five months of this year, property developers are showing signs of panic. Now they seem to be drawing their inspiration from Angelo Mozilo. Like the former head of Countrywide Financial Corp., they're doing their worst to evade regulations meant to tamp down on property speculation, and have even started offering no-money-down loans to China's 1.3 billion property-obsessed citizens. When you consider how badly such schemes ended for Countrywide, and ultimately the U.S. economy, you begin to understand why this is such a chilling development.

More and more economists are warning that China could be approaching a "Minsky moment." That's when a speculative boom comes to a sudden and nasty end as debt accumulation outpaces cash flow. In truth, no one really knows how bad the situation in China might be right now given how rapidly the country's vast and opaque shadow-banking system has grown.

When China bulls explain why the world shouldn’t worry about mainland finances, they often cite the requirement for a 30 percent down-payment on real estate. But as Bloomberg News reported on June 13, deals skirting those conventions are starting to appear from Guangzhou and Shenzhen in the south to Beijing in the north. This is adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years.

A failure to regulate America's non-depository banking system is what undid the world's biggest economy in 2008.

China's own shadow-banking monster is estimated at $7 trillion and encompasses many non-transparent financing vehicles that developers or third parties use to arrange funding to cover down-payment requirements. The overwhelming odds are that this dodgy sector is much bigger than anyone knows, including Xi's economic-restructuring team. It could be significantly larger than China's $8.2 trillion economy.


In a world obsessing about too-big-to-fail banks, China's entire economy could be too big to save. Well, bulls say, what about those $4 trillion of currency reserves? China would be hard-pressed to deploy those funds for bailout after bailout, each of which would dwarf the $85 billion lifeline the U.S. threw at American International Group Inc.

The moment traders got wind of the fire sale in Beijing, markets would crash and U.S. yields would skyrocket. China would suffer an unimaginable paper loss -- and a more tangible one for its export-reliant economy.

To its credit, the government is warning consumers to beware of too-good-to-be-true housing pitches. But the clampdown is cosmetic at best. As long as the real focus in Beijing is on meeting the official 7.5 percent annual growth target, the odds that authorities will choke off all these financing shenanigans are slim. Subprime lending has become both a way to fuel economic activity and to convince Chinese families that their wealth is rising enough not to challenge the Communist Party. It's delaying an economic, and possibly a political reckoning.

This kind of willful blindness means China's eventual crash could be even bigger and more spectacular than it might be otherwise. Those who insist that Xi is doing his best to control the situation are ignoring official data, which show new yuan loans exceeded forecasts at $140 billion in May (and "official" means the true figure is certainly higher).

The reason China's balance sheet is such a risk to Washington, Tokyo and beyond is that we just don't know how bad it is. Murky reporting infects all sectors of the economy. At the huge port in the northeastern city of Qingdao, traders were recently accused of using the same aluminum and copper stockpiles as collateral for multiple loans. Instead of adjusting to international norms of transparency and accounting, China is becoming even more of a black box as Xi clamps down on the foreign media.

In April, former Finance Minister Xiang Huaicheng let slip that local governments may have accumulated more than $3.2 trillion of debt, almost double the figure given in a 2011 report by the National Audit Office. In Hong Kong, where it's harder to censor financial information, regulators are scrambling to impose strict controls on mainland borrowing.

If the world learned anything from Wall Street's near-death experience, it's how fast risky actions in one sector spill over into others. The U.S. mortgage-frenzy quickly devolved into farcical offerings like "no-doc" loans with dodgy documentation requirements and "interest-only" contracts with no initial principal payments. As China makes the same mistakes, Xi may find China headed for a hard landing -- and quite suddenly so.

[EJ]

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

"... any significant reverse for China’s corporate sector could quickly spread to other countries."

My theory is that the eventual collapse of the Great Wall of Money will cause:

1. A global finished goods supply crash as tens of thousands of businesses in China shut down (inflationary)
2. Global recession and output gap (deflationary)
3. An explosion in unemployment and political unrest in China and an attendant need to externalize the crisis (inflationary)
4. A collapse in demand for UST from China that results from trade (USD-negative and inflationary)
5. Elimination of "America's IMF" as China loses its ability to finance the U.S. federal budget deficit that will explode during the resulting global economic crisis as outlays rise and tax receipts decline (USD-negative and inflationary)

The ultimate "Ka" event that leads to "Poom" via a failed reflation of the reflation of the reflation of the original 1995 to 2000 asset bubble.

[Southernguy]

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

I such a case: A) gold does very well, B) stocks and commodities (iron ore, coal, oil, agricultural, etc) plummet.
A should be caused by monetary chaos, particularly USD loosing value. B should be caused by demand falling from China, which is now supporting prices.

[GRG55]

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

I such a case: A) gold does very well, B) stocks and commodities (iron ore, coal, oil, agricultural, etc) plummet.
A should be caused by monetary chaos, particularly USD loosing value. B should be caused by demand falling from China, which is now supporting prices.

If the US$ loses value, commodities priced in that currency will rise.

But I think we may see the opposite happen...commodities down, dollar up (and yuan down as China falters)...

[GRG55]

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

And like all good bubbles it goes on much longer and inflates to a much greater extent than anyone could have imagined.

Is it finally the beginning of the end? Maybe. Maybe not...

China’s riskiest property market just collapsed. Is this how it starts?

February 25, 2013 at 11:05 am

Chinese 'Dubai' turns into deserted island
Posted: 24 February 2013 1349 hrs

SANYA, China: It was billed as China's Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country.

But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China's growing but sometimes unbalanced economy.

Hmmm. Maybe the time has come??

China Property Failures Seen as $33 Billion in Trusts Due

By Bloomberg NewsJun 20, 2014 2:15 AM MT

Chinese property trusts face record repayments next year as the real-estate market cools, fueling speculation among bond funds that more developers will collapse.

The trusts, which channel money from wealthy individuals to smaller builders that have trouble obtaining financing elsewhere, must repay 203.5 billion yuan ($32.7 billion) in 2015, according to Use Trust, a Chinese research firm. That’s almost double the 109 billion yuan due this year. New issuance of the products slumped to 40.7 billion yuan this quarter, the least in more than two years, Use Trust data show.

“Trust loan defaults will rise substantially,” said Fiona Cheung, head of Asia credit at Manulife Asset Management’s fixed-income team which oversees $44 billion globally. “It won’t be surprising if there are more collapses ofChina’s property companies. Those companies that suffer from weak sales, that bought land too aggressively last year funded by debt and that have poor access to capital markets will potentially experience cash flow pressure.”

JPMorgan Chase & Co. says the real-estate industry poses the biggest near-term risk to growth in the world’s second-largest economy after new home prices dropped in the most cities in two years last month. China’s banking regulator said on June 6 it will monitor developer finances, a sign of concern defaults may spread after the March collapse of Zhejiang Xingrun Real Estate Co., a builder south of Shanghai...

...“It’s unavoidable that property trusts will have defaults this and next year,” said Yao Wei, Hong Kong-based China economist at Societe Generale SA. “The industry has come to a turning point. The imbalance between supply and demand is so big that adjustments are needed.”

China is cracking down on off-balance sheet lending known as shadow banking, which includes trust companies and wealth management products issued by banks. The industry was worth 38.8 trillion yuan as of the end of last year, according to a Barclays Plc report last month. Concern that defaults could spread mounted in January after a 3 billion-yuan trust product called Credit Equals Gold No. 1, which had raised money for a failed coal miner, had to be bailed out days before maturing.

The yuan has fallen 2.8 percent against the dollar this year, the worst-performing Asian currency. The yield on the benchmark 10-year government bond has dropped 52 basis points to 4.04 percent in the same period as investors seek safe havens...

[GRG55]

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

One of the other things I have posted a few times in the past is my firm belief that, contrary to popular political opinion in the USA, the Chinese currency is OVERvalued, and if it was allowed to free float it would decline, not rise, against the US$.

Excerpt of an interview with Stanley Druckenmiller:

Stan Druckenmiller is Chairman and Chief Executive Officer of Duquesne Family Office. He founded Duquesne Capital Management in 1981, which he ran until he closed the firm in 2010. Previously, he was a Managing Director at Soros Fund Management, where he served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros


Q: What are the risks of investing in China that are not well understood in your view?

Stan Druckenmiller: The growth in credit at a time when GDP growth is slowing is a problem for China. And I think this is the 2009-11 stimulus coming back to bite. I understand that it had to be done to fund entrepreneurs and the private sector, but it’s easier said than done if you’re channelling funds through local government investment vehicles. I’m a believer in markets. A few men sitting around a table and deciding how to allocate capital goes against everything I’ve ever believed. Not only are they not great at capital allocation, such an exercise also needs to deal with a lack of property rights and corruption. In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments. And now, the system’s building enough leverage and misallocation of resources to warrant risks of a financial crisis, but the timing of that is still uncertain in my mind. What we’ve seen in China since 2009 is similar to what happened in the US in 2005, in terms of credit growth outpacing economic growth.

I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.

You also need to keep in mind that for China to grow and evolve further, it will need to compete with a more innovative Korea and now a more competitive Japan. I don’t think China can do that with where its exchange rate is today. I think productivity is a key concern too. And I think that could be one of the reasons why the US has been so supportive of Abenomics.

People mention lack of infrastructure as a constraint. But when I go over there, it looks like they have a lot of infrastructure. It seems ahead of the population, not behind. I see expensive apartments in empty cities that 300 mn rural Chinese are expected to migrate to. That looks very unbalanced to me. Nobody’s ever had investment to GDP at 47%. Japan and Korea peaked at 36%-38%, so as a result I think capacity is way ahead of demand in some areas in China...

Look Ma. No metal!
Imagine that...

And look what's been happening with the currency as this whole scheme of "world's second largest economy" starts to unravel. "World's second largest fraud" (after Wall Street) would be a more accurate description...

After port fraud, China's vast warehouse sector under scrutiny

SYDNEY/SHANGHAI Sun Jun 22, 2014 5:15pm EDT

(Reuters) - Shaken by a fraud investigation into metal financing in the world's seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China's sprawling warehouse sector.

The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing...

..."The banks still haven't looked under the hood," said an executive at a bank involved incommodity financing in China, referring to China's warehousing sector.At the heart of the issue is China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere.

Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations.Using commodities as collateral in financing in China is common practice and not illegal, but issuing receipts to repeatedly mortgage an asset is fraud and could leave more than one creditor holding claims to the same collateral.

Illustrating how difficult it may be to unravel competing claims, China's CITIC Resources Holding Ltd said that a court had been unable to secure more than 100,000 tonnes of alumina stored at Qingdao port.

Traders said there was a risk the metal could have been already claimed before part of Qingdao Port was sealed off, adding that at least two trading houses had moved metal out as soon as news of the scandal broke...

[shiny!]

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

"... any significant reverse for China’s corporate sector could quickly spread to other countries."

My theory is that the eventual collapse of the Great Wall of Money will cause:

1. A global finished goods supply crash as tens of thousands of businesses in China shut down (inflationary)
2. Global recession and output gap (deflationary)
3. An explosion in unemployment and political unrest in China and an attendant need to externalize the crisis (inflationary)
4. A collapse in demand for UST from China that results from trade (USD-negative and inflationary)
5. Elimination of "America's IMF" as China loses its ability to finance the U.S. federal budget deficit that will explode during the resulting global economic crisis as outlays rise and tax receipts decline (USD-negative and inflationary)

The ultimate "Ka" event that leads to "Poom" via a failed reflation of the reflation of the reflation of the original 1995 to 2000 asset bubble.

Any idea how long a finished goods supply crash will last and how severe the impact will be on day-to-day life? How will it effect things made in factories outside of China that depend on parts made in China. Are there other suppliers that can quickly get up to speed?

Thanks.

[GRG55]

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

Any idea how long a finished goods supply crash will last and how severe the impact will be on day-to-day life? How will it effect things made in factories outside of China that depend on parts made in China. Are there other suppliers that can quickly get up to speed?

Thanks.

China is predominantly an importer of semi-finished goods and exporter of finished goods, so the question might actually be "How will it effect parts made outside China that depend on factories inside China?"

[shiny!]

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

China is predominantly an importer of semi-finished goods and exporter of finished goods, so the question might actually be "How will it effect parts made outside China that depend on factories inside China?"

Can you perhaps give me some examples, e.g. clothing, computers, airplanes? I have a hard time visualizing generalizations.

Thanks.