Tag: China

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China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org

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.

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Another week another crisis

The crisis in Greece continues, dragging down stocks across Europe.

Germany’s DAX broke support at 11000, warning of a decline to 10000. Reversal of 13-week Twiggs Money Flow below zero would warn of a primary down-trend. Recovery above 11500 is unlikely, but would signal a fresh advance.

DAX

The Footsie found short-term support at 6500. Decline of 13-week Twiggs Money Flow below zero warns of a primary down-trend. A peak below zero or breach of support at 6100 would confirm.

FTSE 100

* Target calculation: 6700 – ( 7100 – 6700 ) = 6300

Asia

Events have been overtaken by collapse of Chinese stocks. The Shanghai Composite found support at 3500, but government efforts are unlikely to stem the rout. Reversal of 13-week Twiggs Money Flow below zero would warn of further selling pressure. Expect support at the primary trendline, around the 3000 level.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Nikkei 225 was unsettled by events in Shanghai, breaking support at 20000 to warn of a correction. The decline on 13-week Twiggs Money Flow is gradual, suggesting a secondary correction.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex retreated below 28000 warning of another test of primary support at 26500. A 13-week Twiggs Money Flow trough above zero, however, would indicate medium-term buying pressure. Breach of support at 26500 is also unlikely, but would signal a primary down-trend with support at 23000*.

SENSEX

* Target calculation: 26500 – ( 30000 – 26500 ) = 23000

North America

The S&P 500 is testing medium-term support at 2040. Declining 13-week Twiggs Money Flow suggests a test of primary support (1980/2000) but today’s rally in China may alleviate this. The index is likely to range below 2120 until the situations in both China and Greece reach a conclusion.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

The CBOE Volatility Index (VIX) is fairly subdued but likely to break 20, indicating moderate risk.

S&P 500 VIX

Dow Jones Industrial Average broke support at 17600. Follow-through below 17500 would warn of a test of primary support at 17000. Decline of 13-week Twiggs Money Flow below zero indicates strong selling pressure but this was aggravated by yesterday’s technical trading halt on the NYSE and recovery above zero is likely.

Dow Jones Industrial Average

Canada’s TSX 60 broke support at 850, warning of a test of primary support at 800. Decline of 13-week Twiggs Momentum below zero suggests a primary down-trend. Recovery above the descending trendline is unlikely, but would indicate the correction is over.

TSX 60 Index

* Target calculation: 850 – ( 900 – 850 ) = 800

Australia

The ASX 200 found support at 5400, highlighted by the long tail on today’s candle. Breakout above the trend channel is still unlikely, but would indicate the correction is over. It would be prudent, in the current climate, to wait for a higher trough or some other confirmation. Rising 21-day Twiggs Money Flow indicates moderate buying pressure.

ASX 200


More….

Gold Bugs warn of a bear market

Dollar calm while prospect of rate rises fades

Silver tests primary support at $15

Australia: Rising foreign debt

RBA strategy: Fight fire with gasoline

Crude breaks $54

Australian stocks: Buy in July?

Never let a serious crisis go to waste.

~ Rahm Emanuel

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China: Cement Production

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.

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China hot money heads for the exit

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.

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China’s infrastructure boom is over

China has been on a record-breaking infrastructure binge over the last decade, but that era is coming to an end. Fall of the Baltic Dry Index below its 2008 low illustrates the decline of bulk commodity imports like iron ore and coking and thermal coal, important inputs in the construction of new infrastructure and housing.

Baltic Dry Index

High-end commodities like copper held up far better since 2008, but they too are now on the decline.

Copper

With the end of the infrastructure boom, China’s economy may well prove to be a one-trick pony. Transition from a state-directed infrastructure ‘miracle’ to a broad-based consumer society will be a lot more difficult.

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China: Will history repeat itself?

China’s Shanghai Composite retreated from resistance at 3400, but this is a long way from signaling a down-trend.
Shanghai Composite Index

Hong Kong’s Hang Seng Index has shown much stronger gains over the last 3 years, but diverged in the second half of 2014, falling while the Shanghai Composite soared. Breach of support at 22500, and the rising trendline, would warn of a primary down-trend.
Hang Seng Index

This opinion by Andrew Sheng highlights some of the challenges facing the Middle Kingdom:

It is hard to find earlier examples of economies which experienced similar growth spurts to that enjoyed by China over the last decade. The closest are probably the US in the 1920s and Japan in the 1980s. Both of these should serve as a warning that times of rapid growth can generate vast imbalances within an economy that inevitably lead to periods of painful adjustment.

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Should Beijing raise subway fares? | Michael Pettis

Michael Pettis’ argues that not only are SOEs “destroying value in the aggregate on a huge scale” but misallocated investment is endemic in China.

I have to confess that the reason I started saying in 2006-07 that China was eventually going to replace 1980s Japan as the global archetype of investment misallocation was not because I had a lot of data proving my case. Overinvestment is almost impossible to prove until after the fact, especially when you consider the circularity of the data – the growth assumptions feed into the valuation of the investment, which then feeds back into the growth assumptions.

My reasons were much more “systemic”. I did not believe it was possible for any country not to experience significant wasted investment after so many years – more than a decade in this case – of the highest investment growth rate in the world funded by massive credit expansion at such incredibly low lending rates roughly one-third the nominal GDP growth rate, and 1-3 percentage points below the GDP deflator. Add more spicy ingredients to the stew – first, the very limited experience of Chinese bankers and regulators, and most of that in a one-way market, second, widespread moral hazard, third, weak corporate governance, fourth, very fuzzy data, and finally, no enforced system of accountability – and I found it impossible to doubt that investment was being dangerously misallocated.

He also dispels the counter-argument that “Western” models don’t apply to China and that “a very poor, low-capital-stock country far from the technological frontier like China” is able to absorb higher levels of investment.

In 2008 (Red Star) I compared China to a red star in astronomy:

Students of astronomy will tell you that a red star, far from indicating heat, is cooling appreciably. While its diameter may expand, its core is contracting and its temperature falling. Eventually it will either explode or shrink to become a dwarf star….

My warning of an imminent collapse may have been premature, but no economy can survive such high levels of investment misallocation without major upheaval. China risks following the boom-bust growth path of Japan and the Asian tigers in the 1980s and 1990s.

Read more at Should Beijing raise subway fares? | Michael Pettis' CHINA FINANCIAL MARKETS.

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Dollar surges as crude falls

  • Dollar surges
  • Treasury yields rally, but the trend is down
  • Crude oil prices fall
  • Gold uncertainty continues

Interest Rates and the Dollar

The Dollar Index followed through above resistance at 81.50, signaling a long-term advance to test the 2013 highs at 84.50. Recovery of 13-week Twiggs Momentum above zero strengthens the signal. Reversal below 81.50 is most unlikely, but would warn of another test of support at 80.00.

Dollar Index

* Target calculation: 81.50 – ( 81.50 – 79.00 ) = 84.00

The yield on ten-year Treasury Notes recovered above support at 2.40 percent, but the primary trend is downward. Respect of the descending trendline is likely and reversal below 2.40 would confirm a decline to 2.00 percent*. 13-Week Twiggs Momentum holding below zero strengthens the bear signal. Recovery above the descending trendline is unlikely, but would suggest a rally to 2.65/2.70 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

There are two factors driving the fall in long-term interest rates. The first is aggressive purchases of US treasuries by China in order to maintain a weak yuan. The second is the abysmal state of the employment market when we look past the official unemployment figures. Employment levels for males in the 25 to 54 age group remain roughly 6% — and females 5% — below their previous high.

Employment levels

Gold

Gold is consolidating in a triangle pattern, between $1200 and $1400/ounce. Price action is now too close to the apex (“>”) of the triangle for breakouts to be reliable, but breach of support at $1280 would test $1240, while breakout above $1320 would test $1350. Oscillation of 13-week Twiggs Momentum close to zero continues to signal hesitancy. In the longer term, recovery above $1350 would indicate a primary up-trend, while breach of support at $1240/$1250 would signal a down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Declining crude prices may be contributing to lower inflation expectations and weaker gold demand (as an inflation hedge). Brent Crude breach of $99/barrel would confirm a primary down-trend as would Nymex WTI crude below $92/barrel.

Gold and Crude

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For Chinese Power Game, a Changing Equation

From Sebastian Veg, Research Professor at the School of Advanced Studies in Social Science in Paris:

By shaking up the unwritten rules that have prevailed since Deng Xiaoping consolidated power, Xi is taking a political risk. In exchange for the immunity that PBSC members were granted, they were expected to retire at the end of their term, and to remain loyal to collective decisions. If immunity is denied, both of these tenets may begin to be questioned. Why should powerful leaders retire if they can then be targeted? Why should they accept decision by consensus if they can later be made to pay the consequences as is alleged in Zhou’s case with the vote on Bo? They may be better off spending their terms gathering compromising material on other colleagues. Xi no doubt understands the risk, and believes it must be taken because the Party’s legitimacy is in danger. However, by disturbing the carefully crafted institutional balance, he runs the risk of overplaying his hand.

Read more at For Chinese Power Game, a Changing Equation.

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