From Ye Xie and Belinda Cao at Bloomberg:
While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.
Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.
Read more at China's Debt-to-GDP Ratio Just Climbed to a Record High – Bloomberg Business.
Great insight from Alicia García-Herrero:
….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..
The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.
Japan had zombie banks, looks like China could end up with a zombie stock market.
Read more at China's stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org.
The global economy faces deflationary pressures as the vast credit expansion of the last 4 decades comes to an end.
Commodity prices test their 2009 lows. Breach of support at 100 on the Dow Jones UBS Commodity Index would warn of further price falls.
The dramatic fall in bulk commodity prices confirms the end of China’s massive infrastructure boom.
Crude oil, through a combination of increased production and slack demand has fallen to around $60/barrel.
Falling prices have had a sharp impact on global Resources and Energy stocks….
But in the longer term, will act as a stimulus to the global economy. Already we can see an up-turn in the Harpex index of container vessel shipping rates, signaling an increase in international trade in finished goods.
The latest OECD export statistics show who the likely beneficiaries will be. Primary producers like Brazil and Russia have suffered the most, while finished goods manufacturers like China and the European Union display growth in exports. The US experienced a drop in the first quarter of 2015, but should rebound provided the Dollar does not strengthen further.
Australia and Japan offer a similar contrast.
Oil-rich Norway (-5.8%,-13.3%) has also been hard hit. Primary producers are only likely to recover much later in the economic cycle.
Michael Pettis quotes a Brazilian economist on the dilemna facing the US:
….As the US becomes a declining share of the globalized world, the costs of imposing stability (and I have no illusions that this is done for charity) rise, and its share of the benefits decline. It is only a matter of arithmetic that at some point the costs will exceed the benefits.
Pettis describes how other countries have gamed the system – notably Germany and France in the 1960s, Japan in the 1980s, and China in the 2000s – and argues that the costs to the US already outweigh the benefits.
….Many economists may disagree with me that the costs of the current role the US plays in the global trade regime exceeds the benefits, but the point of this essay is to show that even if I am wrong, as long as the world grows faster than the US, more of the world is incorporated into the global trading system, and more countries design growth models that suppress domestic consumption in order to subsidize domestic growth, there must of necessity be a point at which it makes sense for the US to opt out of its role as shock absorber, and – by raising tariffs, intervening actively in the currency, restricting foreign purchases of US assets and especially US government bonds, or otherwise reducing capital inflows – become simply one more member of a system with no automatic adjustment process.
The current system, in other words, is inherently unstable and will sooner or later force the US economy into a position of choosing either to take on excessive risk or to abdicate its role as shock absorber….
Sustained current and capital account imbalances are unhealthy except for the few rare instances where capital-rich economies invest or loan money to a capital-poor recipient. In most cases capital is used to purchase secure Treasury investments in the US in order to offset a domestic current account surplus. This has a destabilizing effect not only on the US economy, which has shed millions of manufacturing jobs and created a housing bubble of epic proportions, but on the global economy as a whole, destroying any benefit to the perpetrator.
Read more at How much longer can the global trading system last? | Michael Pettis' CHINA FINANCIAL MARKETS.
The Shanghai Composite is consolidating between 4000 and 4500. Breach of either of these levels would signal future direction. Declining 13-week Twiggs Money Flow warns of medium-term selling pressure, favoring the downside.
* Target calculation: 3500 + ( 3500 – 2500 ) = 4500
Short retracement on Japan’s Nikkei 225 Index is a bullish sign. Breakout above 20000 would offer a target of 22000*. Declining 13-week Twiggs Money Flow reflects medium-term selling pressure; recovery above the descending trendline would be a bullish sign.
* Target calculation: 20000 + ( 20000 – 18000 ) = 22000
India’s Sensex found support between 26500 and 27000. Long tails suggest medium-term buying pressure. Recovery above 28000 and the descending trendline would suggest another attempt at 30000. But 13-week Twiggs Money Flow remains below zero, warning of (long-term) selling pressure. Another peak below zero would warn of breach of primary support and a reversal.
Whoops. Try again. Chinese cement production. (From Capital Economics this AM) pic.twitter.com/k5W7pdRR2c
— A Evans-Pritchard (@AmbroseEP) May 13, 2015
Lowest cement production in more than 10 years reflects the decline in infrastructure investment. Not good news for Australian resources stocks. Where cement production goes, iron ore and coal are likely to follow.
Further to last week’s post on the US-Asia trade imbalance, here is the impact on the US current account (seasonally adjusted annual rate) over the last two decades. The last quarter shows reversal to an annual deficit greater than $500 billion.
The deficit remains at 3 percent of nominal GDP. This is clearly unsustainable.
Westpac produce a very detailed chart pack on the US economy called Northern Exposure. One item that stands out like a sore thumb is the trade imbalance between the US and Asia:
The trade balance between most countries and the US is close to equilibrium, where imports match exports:
But there are three notable exceptions:
Any large trade imbalance should cause the exchange rate between the two countries to rise or fall, making the exports of the net exporter more expensive and imports from the net importer cheaper, until balance is restored. But this has not happened with China and Japan. They are manipulating the system: investing a large portion of their trade surplus back in the US through the financial account, so that trade flows in one direction are offset by capital flows in the other. Their actions are clearly visible in the growth of Rest of World investment in US Treasury securities.
That is the reason why the US consistently runs massive trade deficits and why the manufacturing sector has been shedding jobs for the last two decades. This could be prevented if the US was willing to regulate capital flows on the financial account: “we will open our capital markets to you if you open yours to US investors”.
While commodity prices are tanking, with iron ore now trading below $50 per tonne, there are signs that international shipping of manufactured goods is on the increase. Shipbrokers Harper Petersen publish the Harpex, a weekly index of charter rates for container vessels. The recent up-turn reflects increased demand for container shipping — an important barometer of international trade.
Huw McKay at Westpac writes:
“The Jan-Feb FX positions of China’s banks imply that FX reserves fell in the early part of the year, despite back to back monster trade surpluses of $US60 billion. The logical conclusion is that money flowed out in a big way on the financial account.”
There are two reasons why capital would flow out on the financial account. The usual explanation is the PBOC buying US Treasuries, exporting capital to prevent the yuan appreciating against the Dollar. But Huw points out that the PBOC balance sheet shows a slight decline in foreign assets held. This could be a smokescreen, with investments channeled through an intermediary. Otherwise, it could be a sign that private capital is leaving for safer shores. This from the Business Times:
More than 76,000 Chinese millionaires emigrated or acquired citizenship of another country in the decade through 2013 amid global expansion by the nation’s companies.
Australia was among the most favored destinations, broker Knight Frank LLP said on Thursday, citing data compiled by law firm Fragomen LLP. The Chinese accounted for more than 90 percent of applications for the country’s significant investor visa in the two years to the end of January, representing 1,384 people. They also make the most applications for high-net-worth visas in the UK and the US.
Consumer confidence is below 2008/2009 levels and declining.
RT @TomOrlik: One victim of China's falling property prices – consumer confidence pic.twitter.com/d6chuyjh1A
— Patrick Chovanec (@prchovanec) March 18, 2015