China in the Shadows

[seobook]

Re: China in the Shadows

Chinese depression as there is a giant sucking sound leaving Chinese markets, IMO.

With the way they are cutting interest rates it could be quicker than I anticipated. I don't see it as a way out I would see it as a catastrophic policy mistake.

What happened the last time the two world powers dominated financial markets and made economic policy mistakes for the greater part of 10 years? (England and the US).

Rut Roh Rorge ...

China Moves to Devalue Yuan

PBOC calls currency action a one-time fix

With Tuesday’s move the fixing will now be based on how the yuan closes in the previous trading session. As a result, the yuan’s fixing was lowered 1.9% Tuesday from the previous day, leaving the fixing at 6.2298 to the U.S. dollar, compared with 6.1162 on Monday.

[ProdigyofZen]

Re: China in the Shadows

Rut Roh Rorge ...

Uh oh is right.

When I saw last week that the IMF was not even going to consider voting on the RMB inclusion into the SDR basket in October I surmised that the pressure to devalue was too great on the PBoC.

That was the largest currency peg move by the PBoC ever I believe.

China still has a long way to go with rates at 4.8% to get to ZIRP but they could be there within a year if troubles continue.

[don]

Re: China in the Shadows

What China’s Devaluation Means to the U.S. Economy




By Pam Martens and Russ Martens: August 11, 2015

Markets received a seismic jolt from China on Tuesday as it devalued its currency, the Yuan, by the most in two decades, cutting its daily reference rate by 1.9 percent. The move sparked instant selloffs in stocks, commodities, and emerging market currencies as well as a drop in the yield of the 10-year U.S. Treasury Note, which is trading early this morning at a yield of 2.16 percent.

The devaluation was interpreted in the markets as a sign of capitulation by China to forego a stable currency policy in a last-ditch effort to revitalize sluggish export growth. On Friday, China reported that its exports had plunged by 8.3 percent overall in July with dramatic declines of 12.3 percent to the European Union and 13 percent to Japan. Exports to the United States fell by 1.3 percent.

While China announced that the currency devaluation was a one-off move, the prevailing fear in global markets is that it marks a new round in the raging currency wars where countries are now competing to debase their currencies in hopes of making their exports more competitively priced in global markets.

The move spells trouble for the U.S. on a number of fronts. As of 8:39 a.m. in New York, stock futures on the Dow Jones Industrial Average were in the red by 147 points.

The U.S. imports more goods from China than any other country. Through June of this year, the U.S. had imported $226.7 billion in goods from China versus $150.4 billion from Canada and $145.1 billion from Mexico, according to the U.S. Census Bureau. The Federal Reserve has been struggling to avoid importing deflation into the U.S.; this devaluation move now means that Chinese goods flowing into the U.S. just got cheaper and the ability of U.S. exporters to compete in global markets just got a lot harder.

According to a Federal Reserve report released on July 17, the rising value of the U.S. Dollar is having a significant negative impact on large U.S. based multinationals. The report noted that “The dollar’s strength likely explains roughly a third of the recent decline in profits earned from foreign subsidiaries” and that “Firms with high foreign sales tend to be larger and account for almost 75 percent of S&P 500 nonfinancial earnings excluding oil and utilities.”

As we have reported before, this global currency race to the bottom cannot be solved by central banks. The problem is directly rooted in the unprecedented levels of income and wealth inequality that plague this era. In the U.S., that problem springs directly from Wall Street’s institutionalized wealth transfer system.

and from Asia Times . . .

China yuan devaluation: Let he who hasn’t sinned …

BY CHAN AKYA on AUGUST 11, 2015 in ASIA TIMES NEWS & FEATURES,

Today’s 2% devaluation of the Chinese yuan is bound to cause multiple conniptions around the world, not the least across the political establishments in Europe and the US where the subject of China’s “unfair” advantages never cease to find willing commentators and gullible audiences.

To recap the news, the People’s Bank of China which administers the exchange rate within a tight 2% trading band on a daily basis, today moved the CNY to the bottom of the band effectively signalling devaluation; there had been some musings about China’s surprise decline in exports (numbers for July came out at the end of last week), which may have led to a pre-emptive strike in the currency markets to help boost the relative pricing especially against industrial companies in Europe where the decline of the euro against the US dollar since the beginning of this year has allowed some breathing room for otherwise beleaguered manufacturers to tap the export markets.

The 2% devaluation is likely to attract comment on the following fronts:

• Overall China continues to retain a manufacturing edge on most products, and hence doesn’t need a 2% change in prices to effect any buyer shifts
• The government should be focusing on the consumption sector (which benefits from a stronger currency) and away from the industrial sector if it wants to rebalance the economy
• The move is likely to cause competing devaluations across Asia (this has already happened at least partially with most major Asian currencies declining against the US dollar today) and elsewhere

It misses though a bunch of key initiatives from the PBOC perspective:

1. Real interest rates (nominal interest rates less inflation) in China are among the highest in the world, and have constrained consumption. Importing some inflation through devaluation isn’t a bad idea for reducing real interest rates thereby boosting the economy
2. The country’s fragile recovery has an impact on markets far and wide. Any measure to stabilize growth in China can only be positive for a range of economies across the world from Australia to Brazil
3. Chinese companies are major investors into the rest of Asia now, therefore a 2% devaluation isn’t going to change the trend of setting up new factories around the region

The move has many other important benefits for global markets, as mentioned below.

1. Volatility was expected to rise in bond markets as interest rates may be pushed up, albeit temporarily, by the US Federal Reserve. The Chinese devaluation creates a competitive exporter who will almost inevitably re-circulate all surpluses into global government bonds
2. By showing a clear focus on growth, the devaluation in addition to the various efforts aimed at easing the path to credit expansion within China, put the PBOC firmly in the camp of market stabilizers. This is counter to and even stands in sharp contrast to the US Federal Reserve’s premature move to raise interest rates, and the European Central Bank’s reckless adventures in the local government bond markets
3. By devaluing, the Chinese essentially give breathing room for other countries like India to weaken monetary policy; these are countries where otherwise the debate had centred around inflation concerns only – the move by the Chinese essentially gives them headroom on this front

In theory though…

There are bound to be critics of the Chinese move today; primarily from economic commentators and politicians. There is of course the whole “pot calling kettle black” story which is what happens when European and US politicians start protesting about Chinese government “intervention in free markets.” That sort of statement is of course very rich when it comes from countries where there hasn’t been anything like a “free market” for a while now. Remember:

1. 1. Loose monetary policy post the 2008 financial crisis across major economies such as the US and Japan
   2. QE 1, QE2 … all the quantitative easing done by the US Federal Reserve over and beyond the dictates of mere monetary policy
   3. The “whatever it takes” mantra of the European Central Bank (ECB) which pushed it to buy dodgy government bonds all over Europe as it tried to keep a lid on borrowing costs; but this pushed the currency sharply lower due to the flood of new liquidity
   4. Easing efforts by other countries including Australia that sent their currencies sharply lower, accentuating the decline caused by weakening fundamentalsThis list really could go on for a bit longer if all the other policy makers are to be arraigned; but suffice to say that there aren’t a lot of folks smelling quite of roses amongst the world’s central banks.If anyone can point to a central banker (still employed) who hasn’t employed devious tactics to weaken their currency or shore up their banks or float the local economy on a tide of easy money; then sure – let that person step forward and take a shot at what the PBOC did today. Everyone else perhaps needs to keep the peace.
   
   

[thriftyandboringinohio]

Re: China in the Shadows

This is fascinating to me.
Most of the theories we use to explain and understand relative currency strength are based upon the fundamental assumption of a free market filled with many rational actors.

China is a command economy controlled by a communist dictatorship and always has been.
Though China has recently behaved like a free market in some ways, they have never really been one.
In recent years the large western democracies have drifted into central control of their own financial markets with the heavy-handed action of their central banks, along with unprecedented consolidation of commercial banks and financial institutions into near monopolies.

Free markets with many rational actors are not the case here.
Our beloved theories may not work at all.

[sandwind]

Re: China in the Shadows

The chief Chinese reservation with the water route:

The United States Navy is a powerhouse. The fleet consists of roughly 430 ships in active service or reserve. The vessels run the gamut from the massive Nimitz-class aircraft carrier, which stretches more than 1,000 feet, to the Los Angeles-class submarine that slithers 900 feet below the ocean surface.


This map from @Naval_Graphics on Twitter shows all the commissioned and noncommissioned ships of every size as of April 2015. The ships are organized by size, from the humongous aircraft carriers at the top to the smaller ships at the bottom. Take a look:

The biggest potential obstacle to the "New Silk Road" plan is it takes only one country along the route, bending to US pressure, to break the chain.

Can China, mimicking early US Cold War mutually beneficial trade agreements, gather enough global self interest/support, to ward off that happening?

There's a lot of pieces in that puzzle.

As it is visible on picture US has not big amount of ships. Modern ships but on the sea amount of ships just counts as seas are huge. Per my understanding there are 3 scenarios debated in US how to attack China with only one of them includes attacks on China main land. This one could be too ambitious,scares US allies and could be interpreted as escalation by Chinese when both 2 scenarios left is about blocking China. Some US allies like South Korea is just not possible to defend so I wonder when some of them will change thier orientation to China.

[thriftyandboringinohio]

Re: China in the Shadows

EJ has commented that the G20 have a gentleman's agreement to take turns devaluing their currencies.
The Yaun has appreciated greatly over the last year due to it's peg to the rising US dollar.
Maybe it was just China's turn to devalue.

[don]

Re: China in the Shadows

EJ has commented that the G20 have a gentleman's agreement to take turns devaluing their currencies.
The Yaun has appreciated greatly over the last year due to it's peg to the rising US dollar.
Maybe it was just China's turn to devalue.

The principals may be in compliance, knowing the degree of global crisis we're in. Analogous to the 1930s.

[lakedaemonian]

Re: China in the Shadows

Save that graphic for your grandchildren and great grand kids when they ask "what happened, how did we get here?"

"Sorry kids, I think it was the 13th or 14th carrier battle group we built by 2025 that the did the trick."

The days of 13 or 14 CBGs are already well and truly over.

The days of carrier centric naval superiority may be going the way of the battleship anyway due to technological advancement, not just slow financial implosion.

[lakedaemonian]

Re: China in the Shadows

As it is visible on picture US has not big amount of ships. Modern ships but on the sea amount of ships just counts as seas are huge. Per my understanding there are 3 scenarios debated in US how to attack China with only one of them includes attacks on China main land. This one could be too ambitious,scares US allies and could be interpreted as escalation by Chinese when both 2 scenarios left is about blocking China. Some US allies like South Korea is just not possible to defend so I wonder when some of them will change thier orientation to China.

I couldn't even imagine a scenario where US naval forces would directly attack the Chinese mainland short of total war.

US Navy involvement in some sort of blockade a la the Cuban Missile crisis perhaps, but even that would be an incredibly serious escalation.

i don't understand the part about it not being possible for the US to defend South Korea, for two reasons:

1) the U.S. Already maintains considerable forces in South Korea as well as well coordinated plans for rapidly surging more to the Korean peninsula

2) South Korea possesses one of the most powerful and modern military forces in the world even if US forces packed up and left tomorrow. Surpringly that also includes growing South Korean expeditionary naval force.

Ive personally seen South Korean naval forces in a number of places thousands of miles from Korea.

Where Korea aligns in the future?

Who knows?

as its a strange 3 way relationship between China, Japan, and Korea. A lot of long simmering animosity below the surface.

I reckon the US plays a key role in it as a means for Korea and/or Japan to sit on the fence rather than choose a side.

Maybe a bit more like what India has done. Non aligned, semi-aligned, or aligned depending on issue.

[ProdigyofZen]

Re: China in the Shadows

I couldn't even imagine a scenario where US naval forces would directly attack the Chinese mainland short of total war.

US Navy involvement in some sort of blockade a la the Cuban Missile crisis perhaps, but even that would be an incredibly serious escalation.

i don't understand the part about it not being possible for the US to defend South Korea, for two reasons:

1) the U.S. Already maintains considerable forces in South Korea as well as well coordinated plans for rapidly surging more to the Korean peninsula

2) South Korea possesses one of the most powerful and modern military forces in the world even if US forces packed up and left tomorrow. Surpringly that also includes growing South Korean expeditionary naval force.

Ive personally seen South Korean naval forces in a number of places thousands of miles from Korea.

Where Korea aligns in the future?

Who knows?

as its a strange 3 way relationship between China, Japan, and Korea. A lot of long simmering animosity below the surface.

I reckon the US plays a key role in it as a means for Korea and/or Japan to sit on the fence rather than choose a side.

Maybe a bit more like what India has done. Non aligned, semi-aligned, or aligned depending on issue.

China in my opinion is absolutely zero threat to the world in terms of boots on the ground military advancement. The Chinese brass and military if they tried that would crumble within weeks as they always have.

They allowed a far smaller Japanese force to crush them during WWII, and have historically had disastrous external military campaigns as far back as Chinese history goes, including the An Lushan rebellion.

Now technology wise, that is a different story. Hacking and control of strategic resources is where China excels. This may well be unstoppable.

[touchring]

Re: China in the Shadows

Now technology wise, that is a different story. Hacking and control of strategic resources is where China excels. This may well be unstoppable.

Is this the reason why Warren Buffett invested in IBM? Maybe he sees something we that we don't?

Cloud systems are prone to being hacked. Better to put everything into mainframes.

[Milton Kuo]

Re: China in the Shadows

Is this the reason why Warren Buffett invested in IBM? Maybe he sees something we that we don't?

Cloud systems are prone to being hacked. Better to put everything into mainframes.

I look at IBM and the only way I see them surviving is suckling at the government teat by becoming a big-time government contractor. In the private sector, IBM has done far too much damage to itself over the past few decades thanks to poor management and it cannot compete with better-run companies that are now behemoths flush with cash.

Personally, I think Buffett made a very bad investment buying all those shares of IBM. It's strange how he has stated in the past that he does not invest in technology companies and yet he now has a huge stake in IBM.

It'll be interesting to see what, if anything, IBM has up its sleeve that would convince Buffett to make such a large investment on what I see as a company with a very bleak future.

[don]

Re: China in the Shadows

definitely another take on the devaluation . . . .

The People’s Bank of China is Magnificently Right

BY ASIA UNHEDGED on AUGUST 12, 2015 in ASIA UNHEDGED

After Franklin Roosevelt devalued the dollar against gold in the midst of a global deflationary spiral, the economist John Maynard Keynes declared in the Daily Mail, “President Roosevelt is Magnificently Right.” So is the People’s Bank of China. The soaring US dollar rose 25% on a trade-weighted basis between June 2014 and March 2015, for two reasons: The US Federal Reserve declared its intention to raise interest rates while the economy weakened, and China’s central bank allowed the RMB to rise in lockstep with the dollar. After the RMB devaluation, the trade-weighted US dollar index DXY fell from a high of 98.3 on August 5 to 96.2 as of 10:00 a.m. EST Wednesday. Gold has risen from $1,085 to $1,117. Oil is down slightly, but that’s probably more supply-related than currency-driven. Inflation expectations as registered by the bond market (“breakeven inflation”) are unchanged at the 5-year level. What’s bad about that? The flight to safety in equity and bond markets seems wrong-headed.

We would have preferred, to be sure, a clear statement from the PBoC announcing a general adjustment of monetary policy, including a reduction of interest rates. With China’s PPI at -5.4% YOY and CPI at +1.6%, most Chinese businesses and consumers are paying much higher real rates than their Western or Japanese counterparts. The PBoC’s penchant for doing things piecemeal appears to have confused the market. That doesn’t change the fact that it did the right thing.

Deflation, by definition, is an increase in the value of a currency against goods (and, relatively speaking, other currencies). During the year to date, the rise and fall in the oil price has tracked (inversely) the rise and fall of the trade-weighted dollar.



The press is full of reports that China’s RMB devaluation is a sign of economic slowing. On the contrary: the fact that the People’s Bank of China allowed the RMB to float upward with the dollar for the past year and a half is a major cause of China’s manufacturing slowdown (it’s hard to say taht the overall Chinese economy is slowing when the revenue’s of the country’s largest retailer, Alibaba, are up 34% year on year). A number of analysts, including the former chief China economist at the Bank for International Settlements, Dr. Guonan Ma, have been urging PBoC to abandon the dollar peg for quite some time. Dr. Ma wrote last February in the Financial Times:

This 20-year old dollar peg has served the Chinese economy well, but its time is up. First, as the biggest trading nation and second largest economy, China is too big to be anchored to any single currency, even in a loose fashion. Second, a dollar peg has often amplified external shocks to the Chinese economy, because of the dollar’s safe haven role. Finally, the US no longer welcomes a renewed Chinese peg to its currency and yet demands nothing but ‘one-direction flexibility’.

It’s high time that the PBoC lets the dollar peg go.

Reorient Group head of China research Steve Wang wrote in a note to clients Aug; 11:

To give a real boost to Chinese exporters, the USD/CNY needs to re-rack to 6.6, representing a 7% decline from the currency’s unproductive “SDR-peg” to the dollar at 6.2 during the past four-and-half months. That would directly help to offset the 7.3% contraction in Chinese foreign trade recorded for the first seven months of 2015, in which imports slumped by nearly 15% while exports fell 1% from comparable periods in 2014. Unbuckling the yuan’s unilateral adherence to the strong dollar would also lend more breathing room to China’s struggling wider non-financial economy, which has been threatening to decelerate below 6% real growth despite the Chinese government’s recurring easing moves.

The Chinese central bank’s decision to give interbank market makers more say in setting the renminbi’s daily midpoint reference rate vs. the US dollar is aimed at repairing PBOC credibility which was tarnished by the prolonged divergence of official fixings and the currency’s actual trading level, or “market expectations” as the central bank acknowledged in the accompanying press release posted on its website. The USD/CNY has been trading at or near the weak side of its daily allowed band since December as the PBOC tried to keep the yuan stable, but way stronger than what the market believes it should be given skittish economic reality.

Tuesday’s “one-off” correction for the reference rate has more to go as the spot currency pair has continued to trade on the weaker end, well above 6.3 for much of Tuesday given the 6.2298 fixing, meaning the 6.6 target is closer than one might imagine. The central bank notice said, starting Aug.11 that the daily midrate will be set “according to the previous market close price, while taking into account the foreign exchange supply and demand situation, as well as fluctuations of major international currency exchange rates.”

China’s move is a signal to the Fed that monetary tightening is a bad idea in a very weak economy. What’s broke in the US economy is investment and risk-taking, and monetary policy can’t fix that. If the Fed gets the message and puts off an adjustment in interest rates until the US economy gets out of its rut, markets should rally.

[ProdigyofZen]

Re: China in the Shadows

Thanks for that Don. They have no clue what will happen if China unpegs their currency.

Anyone have that chart/post that EJ posted over a year ago about the external debt of China and how they were setting up for a sudden stop?

[thriftyandboringinohio]

Re: China in the Shadows

Thanks for that Don. They have no clue what will happen if China unpegs their currency.

Anyone have that chart/post that EJ posted over a year ago about the external debt of China and how they were setting up for a sudden stop?

Is this the one you were thinking of, PoZ? From this thread?
http://www.itulip.com/forums/showthr...-Janszen/page2