PRC Economy - New Reflections : April 20 2015

[Austin]

Looks like Blood Bath in Chinese Market and even Indian Market at 26300

[Singha]

speaking of fires a large fire is burning today at a steel plant near haneda airport in tokyo. there was another one at a US army depot in japan somewhere(with no casualties)

[ashashi]

X-posted:

Lets see where the carnage stops in China. Looking at the charts 3000 seems to be resistance, so markets may not fall by much more - in which case they are still up 50% from June 2014. If they decisively breach that mark - all their fancy billionaires will get 'resized' for sure

The resistance levels in Shanghai Composite are pretty much meaningless at this point. Investors have pretty much gone away from Chinese markets. Only buying activity of any significance is coming from govt. sponsored institutions and that has not be succesful. It is likely Shanghai Composite will trade in 3000-3400 range for a few days before continuing the decline.

[Singha]

foreigners own only 1.5% of the chinese stock market - read it somewhere today.

govt can probably shut down the markets as and when needed, but the moment all the lay people who got conned see the door open, they are going to run for the 'exit' sign and cause further price drops.

and much of this money will be wasted, as not all these cos will do well to return a handsome ROI to the govt for buying up stakes like this.

its also going to create perception issue for chinese cos trying to list abroad and attract FII for a more 'global' profile.

[ashashi]

Chinese govt seems to be desperate to arrest the stock market decline at any cost. Today changed the policy to allow retirement funds to invest upto 30% in equities. If the market keeps declining and the retirees loose their pensions, it could potentially ignite a mass protests.

According to reports, capital outflows have accelerated. $90bil in July and $100bil in August (as of 21st). Surely, a sign of eroding confidence.

[niran]

its also going to create perception issue for chinese cos trying to list abroad and attract FII for a more 'global' profile.

there in lays the opportunity for India, till now do what India may China topped FII. BTW tis time to watch USA tonite (according to local time) if some proper steps are announced then tomorrow there will be a rebound cos Cheen is taking idiotic steps devaluing currency, pouring public moonay into stocks and whatnot

[Yagnasri]

Just what will you do if you lose confidence in the nation which has is your biggest production units and you know the unit is no longer viable ? You somehow manage it or take a serious hit. So MNCs will try to kick the can for the time being and top bosses take all the fat cat bonuses etc for one or two years. That is if they are not already doing it. Purchase gold or land in some rural areas if you are living in Khanland or EU.

If outsiders own only one and half % of share value in Shanghai stock exchange also it amounts to huge losses to outside investors. They will have to park their funds somewhere else.

One question may be important - how much US bills China has and what it will do with them in case of serious crises?

[chola]

Just what will you do if you lose confidence in the nation which has is your biggest production units and you know the unit is no longer viable ? You somehow manage it or take a serious hit. So MNCs will try to kick the can for the time being and top bosses take all the fat cat bonuses etc for one or two years. That is if they are not already doing it. Purchase gold or land in some rural areas if you are living in Khanland or EU.

If outsiders own only one and half % of share value in Shanghai stock exchange also it amounts to huge losses to outside investors. They will have to park their funds somewhere else.

One question may be important - how much US bills China has and what it will do with them in case of serious crises?

The problem is the not the production. If the concern was with production, the crash in the chini market and economy would drive down wages and make production even more viable.

The problem is the chini consumption that the MNCs rely on now. Wages are going up in PRC so the MNCs had built into their forecasts growth in the chini market. Everyone is planning on a chini market the size of the US or bigger (it was/is the right call for US car and heavy equipment industries as well as Hollywood.)

Not only is the chini market huge, it allows for far greater mark-up and profits than western home markets so the PRC form a larger part of their profits proportionally. It doesn't matter if it is cars or diapers, you can sell Western brands 50 to 400% over the rest of the world. With the crash and yuan deval, that would change. All of sudden, your future profits gotten much dimmer.

Tata Motors is a fine example, it depends on Landrover and Jaguar operations in China for 95% of its operating profit. If China goes down, the whole company goes into the red. A similar situation exists at GM, VW and a host of other Fortune 500.

[member_20292]

^^ Chola, a year or so back, you were very positive on China and mentioning that is may be a good country to move to, and for Indian exporters to target that market full swing.

Whats your view on the issue now?

[nachiket]

Tata Motors is a fine example, it depends on Landrover and Jaguar operations in China for 95% of its operating profit. If China goes down, the whole company goes into the red. A similar situation exists at GM, VW and a host of other Fortune 500.

BTW, JLR lost 5800 cars due to the Tianjin explosion apparently.

[Vayutuvan]

Hollywood would be a small (I would venture to say even "a very small") fraction of Auto and Heavymachinery imports. That can be ignored. What else does US sell in China? Not much I guess. Otherwise the balance of trade would not be so lopsided in favor of China.

[ashashi]

Tata Motors is a fine example, it depends on Landrover and Jaguar operations in China for 95% of its operating profit. If China goes down, the whole company goes into the red. A similar situation exists at GM, VW and a host of other Fortune 500.

BTW, JLR lost 5800 cars due to the Tianjin explosion apparently.

Insurance companies would bear the losses.

What are the chances both explosions are triggered for insurance claims?

[UlanBatori]

Amidst all the about Stock Market Crash, http://news.yahoo.com/us-stocks-plunge- ... nance.html

The Shanghai index suffered its biggest percentage decline in 8½ years. The market has lost all of its gains for 2015, though it is still more than 40 percent above its level a year ago.

Duh! The US stock market lost all its 2015 gains a WHILE back, and is ***NOT*** up by 40 percent above level of 1 year ago. So these are just Foreign Asset Readjustment Transaction(s) as far as the Chinese market is concerned.

One diagnosis from Informed Ppl:

Black money bought yuans heavily, anticipating REVALUATION against USD based on US hype, and fact of overblown USD value. Devaluation brought surprise, so draining out to buy USD back. Will settle down soon.

[vina]

So these are just Foreign Asset Readjustment Transaction(s) as far as the Chinese market is concerned.

FART(s) indeed ! The difference is that the 40% gain for the Chinese is locked in paper wampum, which you cannot sell and convert to yuan , while the US stocks are liquid and all you need to do is hit the sell button if you want dollars!

[somnath]

China cuts policy rates - as expected.

[Austin]

China cuts rates to boost economy

China cuts its main interest rate by 0.25 percentage points to 4.6% after two days of stock market turmoil.

Looks like Chinese version of QE

[adityadange]

Amidst all the about Stock Market Crash, http://news.yahoo.com/us-stocks-plunge- ... nance.html

The Shanghai index suffered its biggest percentage decline in 8½ years. The market has lost all of its gains for 2015, though it is still more than 40 percent above its level a year ago.

Duh! The US stock market lost all its 2015 gains a WHILE back, and is ***NOT*** up by 40 percent above level of 1 year ago. So these are just Foreign Asset Readjustment Transaction(s) as far as the Chinese market is concerned.

One diagnosis from Informed Ppl:

Black money bought yuans heavily, anticipating REVALUATION against USD based on US hype, and fact of overblown USD value. Devaluation brought surprise, so draining out to buy USD back. Will settle down soon.

UlanBatori, Didnt understand your post. Can you please explain? searched "Foreign Asset Readjustment Transaction" too but couldnt understand anything.

[deejay]

Amidst all the about Stock Market Crash, http://news.yahoo.com/us-stocks-plunge- ... nance.html

.....

Duh! The US stock market lost all its 2015 gains a WHILE back, and is ***NOT*** up by 40 percent above level of 1 year ago. So these are just Foreign Asset Readjustment Transaction(s) as far as the Chinese market is concerned.

One diagnosis from Informed Ppl:

Black money bought yuans heavily, anticipating REVALUATION against USD based on US hype, and fact of overblown USD value. Devaluation brought surprise, so draining out to buy USD back. Will settle down soon.

UlanBatori, Didnt understand your post. Can you please explain? searched "Foreign Asset Readjustment Transaction" too but couldnt understand anything.

Arre adityadange ji try searching for (俗)屁 or try this link: http://en.bab.la/dictionary/chinese-english/%E5%B1%81

OTOH, I may be wrong. With the Yak Herder you never know

[adityadange]

Ahh! got the point.

[A_Gupta]

http://www.telegraph.co.uk/finance/econ ... uffer.html
"China cuts rates to stem crisis, but doubts grow on foreign reserve buffer
'There are reasons to question the robustness of China’s reserves,' said Citigroup. Contrary to general belief, China has one of the lowest reserve ratios among emerging markets".

Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion.

“There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.

What is the Reserves/ARA-metric?

Thanks in advance!

PS: turned out to be easy to find: (PDF)
http://www.imf.org/external/np/pp/eng/2013/111313d.pdf

The EM ARA metric sought to broaden the analytical basis for determining the level of reserves
needed for precautionary purposes. Traditional measures of reserve adequacy—such as import or short-term external debt coverage—focus on a particular set of potential balance of payment risks and give disparate results. The ARA metric was designed to reflect a broader range of potential pressures as highlighted in ARA. Specifically it covers:
1 Short-term debt(remaining maturity).
2 Medium-and long-term debt and equity liabilities account for external liability stocks. Debt liabilities include both bank and portfolio liabilities.
3. Broad money to represent resident capital flight risk.
4. Export earnings to reflect the potential loss from a drop in external demand or a terms of trade
shock.

The relative risk weights for each potential source of outflow used in the metric are based on observed outflows from EMs during periods of exchange market pressure.

Specifically the potential outflows are computed from the distribution of the annual percentage loss of export income, short-term debt, other longer-term liabilities, and broad money observed during such exchange market pressure events. Separate distributions are estimated for fixed and floating exchange rate regimes, identifying differing risk levels, with final weights based on the observed tenth percentile outflows. There also appears to be little correlation between the types of outflows (Table).

Reserves in the range of 100–150 percent of the composite metric are considered adequate for precautionary purposes

Also (PDF)
https://www.imf.org/external/np/pp/eng/2011/021411b.pdf

PS: makes one feel good about India

[Singha]

the cut in credit reserve ratio will allegedly free up $200b more for the govt to prop up falling stocks lol.

[Singha]

http://www.wsj.com/articles/the-world-s ... 1440552939

China’s leaders have warned their people they need to accommodate a “new normal” of economic growth far slower than the rate that propelled the economy into the world’s second-largest in the past two decades.

Now, the rest of the world also needs to get used to the new normal: a China in the midst of a tectonic shift in its giant economy that is rattling markets world-wide.

The slowdown deepening this year is part of a bumpy transition away from an era when smokestack industries, huge exports and massive infrastructure spending—underpinned by trillions in state-backed debt—powered China’s seemingly unstoppable rise. Today, debt has swelled to more than twice the size of the economy, and some of those industries, such as construction and steel, are reeling.

Instead of them, China is pushing services, consumer spending and private entrepreneurship as new drivers of growth that rely less on debt and more on the stock market for funding.

Reorienting China’s massive economy, however, is proving challenging, and the difficulties are testing Chinese leaders with something they have been unaccustomed to in recent decades: a troubled economy that undermines their reputation for strong management.

...
he problem is that consumer spending isn’t robust enough to replace the heavy industry and investment in infrastructure and property that powered China’s nearly 10% average annual growth for the past three decades. For that to happen, a series of wrenching changes would have to take place, from giving migrants better access to social services to breaking the dominance of state-run banks and companies in many industries.

Two years ago, the government of President Xi Jinping unveiled a long list of planned initiatives designed to achieve many of those goals. But some of the reform plans have been left untouched as Mr. Xi has focused on a major anticorruption campaign and expanding China’s influence overseas
...
China now is exporting volatility. The CBOE Volatility Index, a measure of risk in the U.S. stock markets sometimes called the fear gauge, has surged over the past week, tracking the cratering Shanghai market. This is in contrast to previous Chinese share routs that barely registered abroad.

It has been five years since China’s economy last grew at a double-digit rate. Today’s economic drag reflects how Mr. Xi’s administration inherited weighty problems that all seemed to call for a further downshift in growth: heavy debt built up by government entities, endemic corruption and worsening pollution by aging industries.

Economists were initially hopeful that Mr. Xi would emerge as a business-minded leader intent on restructuring the economy more along Western lines. But he has used his political clout to wage a campaign against corruption, expand the military and rally support for party power.
...
But China also finds itself somewhere between a poor and rich country. This is a historically difficult position—dubbed the “middle-income trap” by economists—that South Korea escaped but that has held back much of Latin America.

“China is right there, where a lot of countries start to struggle,” said Peter Robertson, an economist at the University of Western Australia, adding that the “trap” often features conflict between a political system and economic reality over how a nation’s wealth is distributed.

[Singha]

imo china has a remaining window of 10 yrs to escape the middle income trap.
by 2025 the curves of <40yo and >40yo in population will cross over and open a huge gap of 300 mil by 2050.

their population is under control , with not many womb jihadis waging demographic war (unlike india).

their physical and telecom infra is good to go for 10-20 yrs, having been funded heavily. does not need much huge investments now, merely upkeep.

their high school/diploma system has wrapped up nearly 100% of the population.

they need to intensively work on energy efficiency, productivity, services, products, banking, transparency, courts to make the transition to a "continental south korea" ...atleast 100 chinese cos need to be near the top of food chain in their sectors with 10 diversified global leaders in the league of du pont, bayer, 3M, GE, shell types

unlike ASEAN or singapore, population/talent/market size is not a problem.

from USA pov, they would want to confine china to upper middle income monkey trap and keep it there. act as a huge market of western goods at high margins, west continues to hold the tech and finance high ground and not enough cash with GoC to fund a superpower style military buildup.

[Austin]

The best bet for China for short and medium growth is to devaluate their currency further may be by 10-15% as PBOC thinks its viable to make its export competitive for next 5 year and eventually move to a more fair and free floating currency and let market decide the rate of Yuan then let politics decide it.

Will China's Currency Devaluation Spark An International Trade War?

US is caught in a QE timewrap with prolonged ZIRP/NERP and QE has put them in a tight spot if to increase its interest rate and how much and how the market will react , Like ex Fed Allan Greeenspan has said in the link I posted in Prespective Dhaga no one know where this is going after so long low interest rates indirectly suggesting the day of reckoning is coming.

The Real Fun for China and US has begin to start now , as a spectator watching a thrilling movie it would be fun to watch with popcorn in hand

[A_Gupta]

There is an OpEd in the NYT, by Nicholas Lardy,
http://www.nytimes.com/2015/08/26/opini ... china.html

There is little evidence that China’s economy is slowing significantly from the 7 percent pace reported by the government for the first part of the year. Wage growth is running at about 10 percent annually; the pace of creation of nonagricultural jobs is stronger than in any recent year; both real disposable income and consumption expenditures of Chinese households are growing strongly. It is not the picture of an economy heading for a hard landing.

Services, not industry, are driving China’s growth, as has been the case for three full years. This is likely to continue since per capita incomes in China are reaching a level where a growing share of spending is on entertainment, travel and other services rather than on goods.

Naysayers question government economic data, continuing to focus on weakness in China’s industrial sector and the extremely slow growth of electric power output. But steel production, for example, is significantly more energy intensive than entertainment, so the demand for electricity has fallen sharply as the structure of the economy has evolved.

Assuming that electric power growth is a good proxy for China’s overall economic expansion is like trying to drive a car by looking in the rearview mirror.

After a very modest two-day depreciation earlier this month, the exchange rate of the renminbi has changed little against the dollar for eight consecutive trading days; capital outflows continue at a moderate, very sustainable pace; bank liquidity remains strong. This does not yet look remotely like a financial crisis.

Rather than a financial and economic meltdown, China is experiencing an overdue correction in its equity market.

[A_Gupta]

CFR's appropriately named Elizabeth Economy on the economy of the PRC:
http://blogs.cfr.org/asia/2015/08/25/wh ... ina-story/
"What’s Missing in the China Story?"

[Theo_Fidel]

imo china has a remaining window of 10 yrs to escape the middle income trap.
by 2025 the curves of <40yo and >40yo in population will cross over and open a huge gap of 300 mil by 2050.
their population is under control , with not many womb jihadis waging demographic war (unlike india).
their physical and telecom infra is good to go for 10-20 yrs, having been funded heavily. does not need much huge investments now, merely upkeep.
their high school/diploma system has wrapped up nearly 100% of the population.
they need to intensively work on energy efficiency, productivity, services, products, banking, transparency, courts to make the transition to a "continental south korea" ...atleast 100 chinese cos need to be near the top of food chain in their sectors with 10 diversified global leaders in the league of du pont, bayer, 3M, GE, shell types

There is a lesson in this for India too as we too are middle income, if lower middle. China will have to tackle the democracy problem at some point as well, the CPC if anything more in control now than ever.

And we too have our zombie companies and zombie power groups that need to be driven into bankruptcy so fresh young nimble blood can take over.

One other advantage China has is that their society is more fairly and evenly organized.

[ArmenT]

http://news.yahoo.com/china-market-chao ... ector.html

Basically, during 2008, Chinese government took advantage of the Wall Street crisis to persuade experienced Chinese origin financial people to come back to China, so as to help guide their stock markets. Unfortunately, due to bureaucracy, many of these experts got disillusioned over the years and by 2015, they have moved on to other jobs, leaving behind people who don't really understand how markets work.

Article has the gory details.

[chola]

^^ Chola, a year or so back, you were very positive on China and mentioning that is may be a good country to move to, and for Indian exporters to target that market full swing.

Whats your view on the issue now?

I wouldn't say I was very positive on China. I said Indian corporations should be aware of the amount of money being made in China by the MNCs. The PRC is the one important economy that is on our periphery. The US and most of the Anglophone countries have legions of investors and researchers on the Chini economy. Same with S. Korea, Taiwan and Japan. India doesn't which unfortunately pigeon-holes us as a South Asian economy onlee instead of the wider (mainly East) Asian one.

Indian companies should target China just as Korean, Japanese and Taiwanese companies do. If you give up on the largest economy contiguous with you then what chance do you have in the markets further away? There is a tyranny in numbers. The closer the market, the greater the efficiencies and therefore profits.

For years, we allowed everyone else to make money there while we boxed ourselves in.

Look, Bollywood only started to crack this market and yet Aamir Khan's PK made over $20 million in China. This is the largest haul by an Indian film outside India. Think about this, the largest overseas box office for an India film did not come from the US or UK where the Indian diaspora is far larger. It was in the China.

Now as far as moving as an individual to China, I would not be the right person to ask. I'm not there. But I have worked with many individuals from some of the most powerful firms in the US. Many have had tours there.

For the the American white male, China is a playground and a major rung in the corporate ladder. Chinese posts are prestige positions (in spite of the lousy quality of life -- pollution, language barriers, etc.) because they generate massive numbers. The elite of US business -- including Secretaries of Treasuries like Hank Paulson and Tim Geithner -- include a disproportionate amount of China experts. Traditionally China studies had been a white Anglo preserve, especially in economics.

That said, Arvind Subramanian, current economic advisor to the GOI, is now considered a leading chini economic expert. Same with Eswad Prasad.

So as an Indian in a leading Indian company or MNC, China can't hurt and most probably will help no matter want happens with their stock market. But as an individual looking for opportunities, China won't beat India. The greatest growth in the coming decade will be in India bar none. The question is the degree. The difference between a growth of the our current 7-8% and the 10-11% of China and the other Far East Tigers and Japan during their boom years was the ability to attract manufacturing. If India can capturing the jobs flooding out of China now then the latter numbers are a certainty. If not, the former numbers aren't too bad either.

[Austin]

The difference between a growth of the our current 7-8% and the 10-11% of China and the other Far East Tigers and Japan during their boom years was the ability to attract manufacturing. If India can capturing the jobs flooding out of China now then the latter numbers are a certainty. If not, the former numbers aren't too bad either.

There was China Economic Discussion on DD Rajya Sabha today and all the panelist which included well known names agreed on one fact that what ever job opporitunuties that china is loosing is going to countries like Malaysia , Indonesia , Philippines and Vietnam .....India barely stands to gain from China Job loss , the reasons were , expensive labour , poor labour law and lack of reforms.

[Austin]

Origins Of China’s Credit Bubble And Stock Market Crash—–The Key Explanatory Charts

[A_Gupta]

China - from someone who has been wrong all his adult life:
http://www.huffingtonpost.com/brad-delo ... 1440772415

[Prem]

http://www.rt.com/business/314632-china-fx-drop-yuan/
China's forex reserves down by record $93.9bn

China’s foreign exchange reserves fell to $3.56 trillion last month as the country’s central bank intervened in the currency market to prop up the yuan and prevent capital outflow.
The reserves were down by almost $94 billion from July, plunging for four consecutive months, the People’s Bank of China (PBOC) said on Monday.The multibillion cutback is the sharpest monthly drop in reserves on record. China’s FX reserves, which have been falling from last year’s June peak of $3.99 trillion, stood at $3.65 trillion in July.

Citi: #China reserves depreciation at this level could be kept up for 3 years before the pot would run dry.

[RamaY]

http://www.rt.com/business/314632-china-fx-drop-yuan/
China's forex reserves down by record $93.9bn

China’s foreign exchange reserves fell to $3.56 trillion last month as the country’s central bank intervened in the currency market to prop up the yuan and prevent capital outflow.
The reserves were down by almost $94 billion from July, plunging for four consecutive months, the People’s Bank of China (PBOC) said on Monday.The multibillion cutback is the sharpest monthly drop in reserves on record. China’s FX reserves, which have been falling from last year’s June peak of $3.99 trillion, stood at $3.65 trillion in July.

Citi: #China reserves depreciation at this level could be kept up for 3 years before the pot would run dry.

Does this mean the FX reserves fell by $94B in addition to the loss of $20b/month normal net additions for July and August? Then China lost nearly $150B forex reserves in just two months. At this rate $3.56T would last about 3+ yrs, enough cushion I would say.

[Prem]

http://www.rt.com/business/314632-china-fx-drop-yuan/
China's forex reserves down by record $93.9bn

Does this mean the FX reserves fell by $94B in addition to the loss of $20b/month normal net additions for July and August? Then China lost nearly $150B forex reserves in just two months. At this rate $3.56T would last about 3+ yrs, enough cushion I would say.

Instead of accumulating the reserves, they are loosing the $$$. So its a double whammy . The loosing process is supposed to accelerate by the weeks, months for a year or two. Lets hope it continue over longer period. Money is flowing back from China into US/WEST.

[Austin]

Central Bank Accumulate reserves to maintain Balance of Payment and to Defend their Currency. They are selling off US Treasuries

[Austin]

Japan Isolated on China as G-20 Embraces Zhou's Yuan Plan

[gakakkad]

oops wrong thread..

[Abhay_S]

What impact does this turmoil have on the Fate changing CPEC?

[disha]

Moved out of chinese dukhonomy dhaga.... into the political dhaga under burkha.