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People Are Suddenly Very Worried About China

People Are Suddenly Very Worried About China

Considering that in the past 3 months the only daily topic of relevance for the media has been “Donald Trump” both in the US and abroad, one would assume that when it comes to global policy uncertainty the primary source would be, record S&P 500 paradoxically notwithstanding, the United States. One would also be wrong, because while Trump seemingly remains the only topic worthy of discussion blanketing the airwaves, as the following chart from Goldman demonstrates, it has been China where policy uncertainty has stealthily exploded in the past three months according to policyuncertainty.com, while making virtually no new headlines.

But how is it possible that China, which is seemingly far more “concerning” at this moment than it was a year ago when fears about Chinese financial conditions and devaluation led to global market selloff and pushed the S&P into correction, has had virtually no impact on risk assets so far in 2017: clearly either the chart above, or the market, is wrong.

Conveneintly it is the same Goldman which has published an exhaustive report laying out the key risks to China’s growth, many of which have been discounted by the market which erroneously assumes that just because the world went though a China “scare” period one year ago, that the world’s second biggest economy remains contained. Far from it.

For those pressed for time, below is the summary of Goldman’s “Risks To China’s growth In The Year of the rooster” report, from the team of MK Tan:

  • After meeting the 2016 growth target, Chinese policymakers are focused on stability ahead of the upcoming leadership reshuffling. This relative calm–we expect only a modest deceleration in growth in the Year of the Rooster—is coming at the cost of further increases in credit and other imbalances.

…click on the above link to read the rest of the article…

Not Nearly Enough Growth To Keep Growing

 


Jackson Pollock Shooting Star 1947

It’s amusing to see how views start to converge, at the same time that it’s tiresome to see how long that takes. It’s a good thing that more and more people ‘discover’ how and why austerity, especially in Europe, is such a losing and damaging strategy. It’s just a shame that this happens only after the horses have left the barn and the cows have come home, been fed, bathed, put on lipstick and gone back out to pasture again. Along the same lines, it’s beneficial that the recognition that for a long time economic growth has not been what ‘we’ think it should be, is spreading.

But we lost so much time that we could have used to adapt to the consequences. The stronger parties in all this, the governments, companies, richer individuals, may be wrong, but they have no reason to correct their wrongs: the system appears to work fine for them. They actually make good money because all corrections, all policies and all efforts to hide the negative effects of the gross ‘mistakes’, honest or not, made in economic and political circles are geared towards making them ‘whole’.

The faith in the absurd notion of trickle down ‘economics’ allows them to siphon off future resources from the lower rungs of society, towards themselves in the present. It will take a while for the lower rungs to figure this out. The St. Louis Fed laid it out so clearly this week that I wrote to Nicole saying ‘We’ve been vindicated by the Fed itself.’ That is, the Automatic Earth has said for many years that the peak of our wealth was sometime in the 1970’s or even late 1960’s.

…click on the above link to read the rest of the article…

There Are 66,719 Empty Mansions In Vancouver

There Are 66,719 Empty Mansions In Vancouver

One year ago, when we first started discussing the Vancouver housing bubble, which as we first speculated – and was later confirmed – was the result of Chinese oligarch money-launderers parking “hot cash” in this offshore housing market (at least until a 15% property tax on foreign purchases made Seattle the new Vancouver), we said that Vancouver houses had become the de facto new Swiss bank account, and because of that the houses – once purchased – would remain a highly overprized, if vacant tribute to China’s soaring capital outflows.

Now, courtesy of data by urban planner Andy Yan of Simon Fraser University’s City Program, this has been confirmed because according to the latest census numbers, as of 2016 there were 25,502 unoccupied or empty housing units in the City of Vancouver. Expanding to include the entire metro area, Yan found that vacant or temporarily occupied dwellings have more than doubled since 2001 to 66,719 last year as neighborhoods have hollowed out.


A home sits empty, and awaiting demolition, at the corner of Parker Street 

and Victoria Drive in Vancouver on Wednesday

Yan compared census data for Vancouver over several decades to see how the percentage of “unoccupied” units or ones “occupied solely by foreign residents and/or temporary present residents on Census Day” has doubled during that time the Vancouver Sun reported. In 1986, it was 4%. By 2016, it had doubled to 8.2%.

“Exact definitions and measures have changed slightly over 30 years and patterns should be interpreted as directional,” Yan writes in a report released Wednesday.

The number of Vancouver’s prized, if vacant, mansions far outstrips other municipalities with 25,502 units that are either unoccupied or owned by temporary or foreign residents.

Yan said most of these were concentrated in three areas: Coal Harbour, Marine Gateway and Joyce-Collingwood. Surrey came in second at 11,195, Burnaby at 5,829 and Richmond at 4,021.

…click on the above link to read the rest of the article…

Unprecedented Moves Towards War With China Would “Upend Supply Routes, Trigger Global Recession”

Unprecedented Moves Towards War With China Would “Upend Supply Routes, Trigger Global Recession”

russia-china-usa

Economic tensions are tipping over into military ones.

Warships have sailed, and the rhetoric of Trump’s officials has shifted dramatically from the previous era.

The larger threat to the petrodollar and the continuance of U.S. hegemony has been put face-to-face with a China gaining in power and confidence, and ready to depose American dominance. It has become bold enough to make fresh claims on territory, and the U.S. has taken it as a call to war.

How much more pressure will this situation take before it explodes into a deadly confrontation? And why is world war three suddenly back on the table?

The Trump Administration is starting off on a highly aggressive posture with China – with taboo calls to Taiwan, loose talk from President Trump (since the campaign trail) about a trade war with China, and now stern warnings from Secretary of State Tillerson about China’s activities in the South China Sea.

It might come off as just a scolding, if not for the huge military assembly surrounding the region, and the unprecedented level of ICBM missile testing and genuine threats/predictions of war to come. Someone clearly means business:

via London Independent:

China has accused Donald Trump’s administration of putting regional stability in East Asia at risk following remarks by the President’s defense secretary that a U.S. commitment to defend Japanese territory applies to an island group that China claims.

Foreign Ministry spokesman Lu Kang has called on Trump’s administration to avoid discussion of the issue and reasserted China’s claim of sovereignty over the tiny uninhabited islands…

[…]

…click on the above link to read the rest of the article…

Chinese Banks Begin To Raise Mortgage Rates

Chinese Banks Begin To Raise Mortgage Rates

Raising rates on reverse repos, hiking the cost it charges on its Medium-Term Loan Facility and Standing Lending Facility, five consecutive day without a reverse repo liquidity injection (or rather a CNY715 billion liquidity drain), and now in the latest indication of overall tightening of monetary conditions, China has started to hike mortgage rates.

According to press reports, some bank branches in Beijing, Guangzhou and Chongqing have raised mortgage rates for first-home buyers recently. The China Securities Journal confirms as much, reporting that China’s banks in some big cities have started to lower discounts on lending rates for fist-time home buyers, joining recent steps to curb financial risks stemming loose credit conditions.

Following up on the Chinese report, Reuters notes that since the start of 2017, banks in Beijing have started discounting mortgage rates as much as 10 percent off the official benchmark rate, reducing from as much as 15 percent previously, CSJ said on its website. The current one-year benchmark lending rate set by the People’s Bank of China is at 4.35 percent, the lending rate for loans up to five years is at 4.75 percent and loans longer than 5 years is at 4.9 percent.

Few lenders in Beijing and Shanghai still offer mortgage rate discounts more than 10 percent off the benchmark, the Chinese paper said. “There are indications that the financial environment for the property market will no longer be loose in 2017,” it said.

In the southern city of Guangzhou, for example, the Postal Savings Bank, Industrial Bank and Rural Commercial Bank have also adjusted discounts on mortgage rates to as much as 10% off the benchmark rate from as much as 15%, the paper said.

…click on the above link to read the rest of the article…

Only ‘large-scale war’ would allow US to block Beijing from S. China Sea islands, state media warns

Only ‘large-scale war’ would allow US to block Beijing from S. China Sea islands, state media warns

Only 'large-scale war' would allow US to block Beijing from S. China Sea islands, state media warns
Chinese state media has warned that the US would have to launch a “large-scale war” to prevent Beijing from accessing islands it has built in the South China Sea. It comes after secretary of state nominee Rex Tillerson said such access should be restricted.

“Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent Chinese access to the islands will be foolish,” the state-sanctioned Global Times newspaper wrote on its English-language website.

It went on to stress that the US “has no absolute power to dominate the South China Sea,” warning that Tillerson “had better bone up on nuclear power strategies if he wants to force a big nuclear power to withdraw from its own territories.”

The article also said that China has so far “shown restraint” when Trump’s cabinet picks have expressed “radical views,” as the president-elect has not yet been sworn in. However, it stressed that the US “should not be misled into thinking that Beijing will be fearful of their threats.”

“If Trump’s diplomatic team shapes future Sino-US ties as it is doing now, the two sides had better prepare for a military clash,” the article reads, adding that Tillerson’s statements are “far from professional.”

The former ExxonMobil CEO’s comments were made during his Senate confirmation hearing on Wednesday, in which he said that China’s activities in the disputed South China Sea were “extremely worrisome.”

“Building islands and then putting military assets on those islands is akin to Russia’s taking of Crimea. It’s taking of territory that others lay claim to,” Tillerson said, referring to the reunification of Crimea and Russia, which took place following a referendum in 2014.

…click on the above link to read the rest of the article…

China Slams US Hacking Accusation As “Groundless Smear Campaign”, Demands Washington Explain Its Own Spying

China Slams US Hacking Accusation As “Groundless Smear Campaign”, Demands Washington Explain Its Own Spying

While Russia continues to mostly mock and ridicule, and generally take in good humor, the constant allegations by the Obama administration that it “hacked the election”, without actually hacking the election – as in actually rigging or changing the votes – but merely exposing the corruption of the DNC and the cronyism of the Clinton Family Foundation, even if so far the highly confident US “intelligence agencies” have yet to demonstrate a shred of proof substantiating such allegations, China’s reaction to a similar accusation has demonstrated far less sense of humor.

That may explain why Beijing quickly slammed Washington’s claims it engaged in mass spying, and demanded an explanation from the US about its own global spying activities, after a US report accused China of using two Chinese hotels as spy centres, an allegation Beijing dubbed a “groundless” smear attempt.

Last Wednesday, the Washington Times accused the 4PLA, a unit attached to the Chinese Defence Ministry, of using the Jintang and Seasons hotels in the capital Beijing to conduct espionage. As evidence publication cited an open-source intelligence dossier produced by the Army’s Asian Studies Detachment, as the source of its report. The document does not explain why and how the hotels were allegedly used by the Chinese for hacking.

In any case China was displeased, and on Friday the Ministry of National Defense angrily denied that hotels in the Haidian District of Beijing served as a base for any cyber-espionage operations.

“The Chinese military has never supported any hacking activities, and the Chinese government has always been firmly opposed to and cracking down on relevant criminal activities in accordance with law, including network attacks,” China’s Defence Ministry said.

“Relevant accusation is totally groundless and a bad act of smearing China,” the statement added, calling on Washington to stop making “groundless accusation against China.”

…click on the above link to read the rest of the article…

 

While Blaming Trump For “Arms Race”, Obama Signs Momentous “Star Wars II” Defense Bill

While Blaming Trump For “Arms Race”, Obama Signs Momentous “Star Wars II” Defense Bill

As politicians and mainstream media blast Trump’s apparently incendiary tweet regarding nuclear arms, none other than President Obama just signed legislation that, by striking a single word from longstanding US nuclear defence policy, could heighten tensions with Russia and China and launch the country on an expensive effort to build space-based defense systems.

Oh the irony… Following Trump’s tweet…

The United States must greatly strengthen and expand its nuclear capability until such time as the world comes to its senses regarding nukes

The mainstream media has lambasted the president-elect for “endangering the world” and “starting another nuclear arms race.” However, that same mainstream media appears mute in their response to what President Obama just did…

The National Defence Authorisation Act, a year-end policy bill encompassing virtually every aspect of the US military, contained two provisions with potentially momentous consequences. As AP reports,

One struck the word “limited” from language describing the mission of the country’s homeland missile defence system. The system is said to be designed to thwart a small-scale attack by a non-superpower such as North Korea or Iran.

A related provision calls for the Pentagon to start “research, development, test and evaluation” of space-based systems for missile defence.

Together, the provisions signal that the US will seek to use advanced technology to defeat both small-scale and large-scale nuclear attacks.

That could unsettle the decades-old balance of power among the major nuclear states.

Huge bipartisan majorities in both houses of Congress approved the policy changes over the past month, with virtually no public debate.

Although the White House had earlier criticised the changes, it stopped short of threatening a veto. On Friday, Obama signed the legislation.

…click on the above link to read the rest of the article…

China Losing Control? PBOC Imposes New Yuan Outflow Limits For First Time In Two Decades

China Losing Control? PBOC Imposes New Yuan Outflow Limits For First Time In Two Decades

Late last week, we reported that in its latest push to limit and/or halt capital outflows, China unveiled new capital controls meant to stem further capital flight disguised as outbound M&A by clamping down with tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. Beijing was said to focus on “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business. The new controls would apply to deals yet to receive approval from China’s top economic planning agency.

It did not end there.

ADVERTISING

One month after we noted a Bloomberg report that China was preparing to impose curbs on Bitcoin – which has in the recent past become a widely accepted mechanism to bypass capital controls – including policies restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad, overnight we learned that China was taking a page out of the Indian demonetization playbook, and was curbing gold imports in another attempt to clamp down on capital leaving the country.

As the FT reported, some banks with licences have recently had difficulty obtaining approval to import gold, they said — a move tied to China’s attempts to stop a weakening renminbi by tightening outflows of dollars, the banks added.

To summarize, in just the past month, China has unveiled at least three distinct sets of “controls” aimed at curbing capital flight out of China, at a time when as Goldman calculated recently, the true extent of capital outflows if far greater than what is reported by the central bank.

 

…click on the above link to read the rest of the article…

Russia Threatens Retaliation If Washington Engages In “State Cyberterrorism”

Russia Threatens Retaliation If Washington Engages In “State Cyberterrorism”

In the latest startling revelation that the US and Russia are ever closer to a state of, if not “kinetic”, then certainly cyberwar, overnight NBC reported that U.S. military hackers had penetrated Russia’s electric grid, telecommunications networks and the Kremlin’s command systems, making them vulnerable to attack by secret American cyber weapons should the U.S. deem it necessary. As noted earlier, American officials have long accused Russia, China and other nations of probed probing and leaving hidden malware on parts of U.S critical infrastructure, “preparing the battlefield,” in military parlance, for cyber attacks that could turn out the lights or turn off the internet across major cities.

What has been less noted is that the US has done exactly the same thing and as NBC wrote, “it’s been widely assumed that the U.S. has done the same thing to its adversaries. The documents reviewed by NBC News — along with remarks by a senior U.S. intelligence official — confirm that, in the case of Russia.”

But it’s not just infrastructure that is threatened: the story coming out just three days before the election was hardly a coincidence as NBC said that U.S. officials again expressed concern that Russia will use its cyber capabilities to try to disrupt next week’s presidential election, even though all such allegations of Russian mingling in the U.S. political cycle have so far remained unconfirmed.

In any case, Russia responded to the report, and said that it expects Washington to provide an explanation if it is indeed true that Pentagon hackers have penetrated Russia’s power grids, telecommunications networks, and the Kremlin’s command systems for a possible sabotage.

Regarding the recent media reports that US military hackers have penetrated Russian’s telecommunications networks and electric grid, as well as “the Kremlin’s command systems”, we expect a response from the US authorities, including the White House and the Department of State with a legal assessment of the reports.

…click on the above link to read the rest of the article…

China Moves Forward with Its De-Dollarization Strategy

China Moves Forward with Its De-Dollarization Strategy 

The world monetary order is changing. Slowly but steadily, global trade and currency markets are becoming less dollar-centric. Formerly marginal currencies such as the Chinese yuan now stand to become serious competitors to U.S. dollar dominance.

Could gold also begin to emerge as a leading currency in world trade? Over time, it certainly could. But the more immediate implications for gold’s monetary role center on its increasing accumulation by central banks such as China’s.

As of October 1st, the Chinese yuan has entered the International Monetary Fund’s Special Drawing Right (SDR) basket of top-tier currencies. It now shares SDR status with the U.S. dollar, euro, British pound, and Japanese yen.

Before the yuan officially becomes an SDR currency, the World Bank intends to sell $2.8 billion in SDR bonds in Chinese markets. The rollout of SDR bonds in China began August 31st. According to Reuters, China’s promotion of SDR bonds “is part of a wider push in China to… boost demand for Chinese yuan and diminish reliance on the U.S. dollar in global reserves.”

King Dollar won’t be dethroned overnight. But the place of prominence the U.S. dollar enjoys as the world’s reserve currency will indeed diminish over time.

Yuan’s Inclusion in the SDR Currency Basket: Merely a Part of China’s De-Dollarization Strategy

China and Russia have mutual geostrategic interests in helping to promote de-dollarization. Toward that end, the two powers are engaging in bilateral trade deals that bypass the dollar. Annual bilateral trade between China and Russia has surged from $16 billion in 2003 to nearly $100 billion today. When China hosted the G20 summit in September, it will make Russian President Vladimir Putin its premier guest of honor.

U.S. officials are none too pleased. They fear Putin aims to expand his global reach by forging stronger ties with China.

…click on the above link to read the rest of the article…

Satellite Imagery Reveals China’s Strategic Petroleum Reserve Is Vastly Greater Than Disclosed

Satellite Imagery Reveals China’s Strategic Petroleum Reserve Is Vastly Greater Than Disclosed

At the end of August, we did a follow up article on what we believe is a far bigger marginal driver to the price of oil than OPEC production (which may or may not be reduced by up to 750kbpd in November), namely the Strategic Petroleum Reserve of China, a major importer of oil in recent years, along with India, taking advantage of low prices and largely supporting global oil demand growth at a time of rampant oversupply, and which we profiled most recently in “A Chinese “Mystery” Has Become The Biggest Wildcard For The Price Of Oil.”

The simplest reason why Chiina’s SPR capacity (and storage) is of key importance, is that it determines the ongoing demand China has for oil – of which much ends up in storage –  and also allows analysts to calculate how much more oil China would need, in order to fill up its SPR. While China has traditionally kept any data about its SPR inventory as opaque as possible, in a rare release this month, Beijing reported adding about 43 million barrels of crude to its strategic reserves between mid-2015 and early this year. Reserves totaled 31.97 million tons in early 2016, equivalent to about 234 million barrels, the National Bureau of Statistics said in a statement that was the first government update on reserves since December.

 


A guard stands before the oil SPR tanks at Zhoushan

As Bloomberg confirmed, emergency stockpiles of the second-biggest oil user have been a source of speculation among analysts and traders, who rely on customs figures and infrequent construction updates to estimate how much of the country’s imports go into strategic inventories, and for how long they will continue to fill.

…click on the above link to read the rest of the article…

China Is Cracking Down On Shadow Banking, But One European Country Is Encouraging It

China Is Cracking Down On Shadow Banking, But One European Country Is Encouraging It

When you hear about Shadow Banking, most people still associate it with dodgy Chinese schemes where more and more financial transactions were conducted outside of the normal and regulated banking system. In a previous column, we already briefly discussed how the Chinese shadow banking system had an impact on the copper price.

The scheme was actually pretty simple, and was aimed at maximizing the potential profits on borrowed money as even though copper importers in China received letters of credit valid for 3-6 months, the purchased copper was immediately sold on the domestic market, meaning the importer basically had a ‘free’ line of credit as it could invest the proceeds from the copper sales before having to repay the money drawn down from the letter of credit.

China has been trying to reduce the size of the shadow banking sector, and we argued this was one of the main reasons for the copper price weakness. As the world economy is correlated with how China is doing, the world is obviously keeping a close eye on the Chinese policies, and several first world countries blamed the Chinese regulators for letting things escalate.

But the truth is, the shadow banking issue is much more wide-spread than just China. Sure, the Chinese situation escalated pretty quickly, so it attracted more (unwanted) attention, but let’s have a look at how the shadow banking system is working elsewhere in the world. There is very little doubt peer to peer lending, which is essentially the basis of any shadow banking system, is booming and crowdfunding websites and simple P2P websites are popping up everywhere.

shadow-banking-1

Source: ECB

…click on the above link to read the rest of the article…

Mexico, China and Beyond

Mexico, China and Beyond

Ron Patterson’s post asking if China’s oil production has peaked reminded me of Mexico
which also produces mainly from supergiant fields. Mexico’s oil production peaked in 2004 and has averaged a 3.5 percent per annum decline rate since, with a peak yearly decline rate of 9 percent in 2008. China’s oil production has fallen 10% from its peak in 2015. Part of that is oil price-related as the Daqing oil field has an operating cost of $46 per barrel and could reverse as the oil price rises. The comparison of China and Mexico with a projection to 2023 is shown in the following figure:

da-1

The production histories tracked each other from 1965 until they parted ways in 2005. Themainstay of Mexican production had been the Cantarell field as shown by this graph from The Economist with data up to 2011:

da-2

Cantarell production had been pumped up with nitrogen injection until sudden collapse in2005. Part of the decline from Cantarell was offset by increased production from Ku-Maloob-Zaap. Mexico is now producing slightly more oil than it consumes. In the absence of successful privately funded oil exploration from here, Mexico will become an importer of both oil and food.

A good description of the Chinese oil production industry is provided by a paper by Aleklett, from the University of Uppsala, et al from 2010 using data up to 2007. One field, Daqing discovered in 1959, had been producing about a million barrels per day for close to 30 years:

da-3

Table 2 from that paper is reproduced following. It shows that only one of the Chinese giant oilfields would not have entered decline by 2015:

da-4

…click on the above link to read the rest of the article…

Foreign Buying Plummets In Vancouver: Sales To Foreigners Crash 96%

Foreign Buying Plummets In Vancouver: Sales To Foreigners Crash 96%

China’s favorite offshore money laundering hub is officially no longer accepting its money.

According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value.

According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks. The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax (spoiler alert: most of them were).

Across the province, the participation of foreigners dropped to 1.4% of transactions by value in August, from 13% in the preceding seven weeks.

Prior to the new real estate tax home prices were almost double the national average of C$473,105; however we expect a sharp corretion in the coming weeks – as we pointed out at the beginning of September, the average price of detached Vancouver properties promptly crashed following the news tax, dropping 17% on the month, and 0.6% on the year, to C$1.47 million ($1.13 million) in August, wiping away one year of gains in a few weeks.

As Bloomberg notes, the plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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