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Has China Finally Lifted its Thumb off of Gold?

Has China Finally Lifted its Thumb off of Gold?

There’s a lot of talk about the Yuan price of gold falling out of a price suppression channel.  Both Zerohedge and Nomura have weighed in on this.

The Yuan price of gold surged overnight to above CNY 8500 per ounce which is a major breakdown  But it’s also indicative of something that has long been suspected during this gold bear market.

China doesn’t want the price of gold to rise.  Those accumulating gold — China and Russia — have zero incentive to accumulate at higher prices.   And the gold chart of the last three years bears out that they have had to come in at higher prices on pullbacks because market bottoms keep coming in higher and higher.

The 2015 low was around $1050.  2016 at $1146.  2017 the low after a pullback in July couldn’t breach $1208 during a strong post-U.S. election rally.  This year the price was briefly pushed below $1200 in the longest downtrend of the seven year bear market but has since popped back over $1230 with its sights now set on  $1250.

China may have no choice here but to let the price of gold rise.  Because conditions in other markets are changing rapidly.  So, ultimately, what China wants really may not matter anymore.

Remember, the eurodollar markets broke in late May this year as Jeffrey Snider at Alhambra Partners reminds us daily.

The PBoC cut the reserve ratio again recently to free up liquidity in Chinese banks but it doesn’t seem to have stemmed the tide.  And that’s why it has continually loosened the Yuan fix rate, now approaching 7 vs. the U.S. dollar.

Offshore dollar markets are the pool of real savings in the global economy and it determines where we are headed.  And the offshore dollar hoarders are pulling out of China… and Europe… and Japan…. and South America.

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

Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling

Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling

Bigger issues than propping up the stock market beckon.

Today, the Shanghai Composite Index dropped another 2.9% to 2,486.42. In the bigger picture, that’s quite an accomplishment:

  • Lowest since November 27, 2014, nearly four years ago
  • Down 30% from its recent peak on January 24, 2018, (3,559.47)
  • Down 52% from its last bubble peak on June 12, 2015 (5,166)
  • Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
  • And back where it had first been on December 27, 2006, nearly 12 years ago.

The chart of the Shanghai Stock Exchange Composite Index (SSE) shows the 2015-bubble and its implosion, followed by a rise from the January-2016 low, which had been endlessly touted in the US as the next big buying opportunity to lure US investors into the China miracle. Investors who swallowed this hype got crushed again:

Over the longer view, the implosion is even more spectacular. Today’s close puts the SSE back where it had first been nearly 12 years ago, on December 27, 2007. This dynamic has created a double-bubble and a double-implosion, with every recovery rally in between getting finally wiped out. The index is now down 59% from its all-time high in October 2007, the super-hype era in the run-up to the Beijing Olympics.

It is not often that a stock market of one of the largest economies in the world is whipped into two frenetically majestic bubbles that implode back to levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

During the 2015 implosion, there had been big efforts by Chinese authorities to prevent the market from collapsing further, ranging from arresting wrong-headed market participants to forcing large brokerages and funds to buy the shares.

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

Oil Markets Tremble As Chinese Stocks Crash

Oil Markets Tremble As Chinese Stocks Crash

China Yuan

China’s stock market fell sharply on Thursday, dragged down by a range of concerns that should offer a warning to the broader global economy.

The Shanghai Composite Index fell nearly 3 percent on Thursday, falling to its lowest point in nearly four years. The problems in China are dragging down markets across Asia, including in Japan and South Korea.

The Shanghai Composite is now down more than 25 percent since the start of the year, and is down more than 10 percent in the last three weeks alone. Viewed another way, the Chinese stock market has lost more than $3 trillion in the last six months.

(Click to enlarge)

Shanghai Composite Index, last 12 months

The troubling thing about the recent declines is that the factors driving the losses are multiple. The trade war with the United States, mountains of debt held by local governments within China, a broader slowdown in growth, a weakening yuan and high oil prices are all creating headwinds for the Chinese economy.

China’s central bank said that it still has plenty of tools that it could use defend against the trade war. Looser reserve requirements took effect a few days ago, a move the central bank made to inject money into the economy.

The IMF says that China’s GDP growth could slow from 6.6 percent this year to just 6.2 percent in 2019, although the risks are skewed to the downside because of the trade war. The Fund said that a worst-case scenario in which the U.S. slaps stiff tariffs on nearly all imports from China would shave off 1.6 percentage points from Chinese growth.

China won’t see any relief from the U.S. Federal Reserve. Minutes of the Fed’s last meeting in late September were released on Wednesday, and they reveal a determination on the part of the central bank to continue to tighten interest rates.

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

“One Size Fits Germany” Math Impossibility, Get Your Money Out of Italy Now!

Italy, on the Euro, has a currency that is 9% too high. Germany, on the Euro, has a currency that is 11% too low.

There was much discussion yesterday about the US Treasury report that determined China was not a currency manipulator.

However, there are six countries on the manipulation watch list: China, Japan, Korea, India, Germany, and Switzerland.

  • Japan, Germany, and Korea have met two of the three criteria in every Report since the April 2016 Report having material current account surpluses combined with significant bilateral trade surpluses with the United States.
  • Germany has the world’s largest current account surplus in nominal dollar terms, $329 billion over the four quarters through June 2018, which represented its highest nominal level on record. Germany also maintains a sizable bilateral goods trade surplus with the United States, at $67 billion over the four quarters through June 2018. There has been essentially no progress in reducing either the massive current account surplus or the large bilateral trade imbalance with the United States in recent years, in part because domestic demand in Germany has not been sufficiently strong to facilitate external rebalancing and because Germany’s low inflation rate has contributed to a weak real effective exchange rate.

Try Fixing This

  1. The Euro is 11% undervalued in Germany, the largest Eurozone economy.
  2. The Euro is 9% overvalued in Italy, the third largest Eurozone economy.

The normal way central banks make adjustments to fix over-valued or undervalued situation is through interest rate policy or direct currency intervention.

No matter which the ECB does, it will impact Italy and Germany in opposite directions.

Meanwhile, interest rates are on the verge of spiraling out of control in Italy.

Italy vs Germany 10-Year Bond Spread

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

Are Chinese Municipal $6 Trillion (40 Trillion Yuan) Hidden Debts Posing Titanic Risks?

Are Chinese Municipal $6 Trillion (40 Trillion Yuan) Hidden Debts Posing Titanic Risks?

The China Collapse trope is rearing its ugly head again. This time round, the spin is on China’s local government or municipal debts.

The latest narrative goes like this : local governments in China are estimated to have hidden debts of 40 trillion Yuan (or $6 trillion). Those hidden or undisclosed debts, together with outstanding municipal bonds and the Central government debts, “could have reached an alarming level of 60%”. The 60% debt to GDP ratio is hardwired in the Maastricht Treaty with a view to instilling fiscal and financial disciplines among the 28 member states of the European Union or EU 28 for short. The S&P report describes China’s hidden municipal debts as “a debt iceberg with titanic credit risks”!

Now, let’s unpack the opinion in the S&P report.

Estimates of China’s hidden municipal debts range from 8.9 trillion Yuan by Bank for International Settlements and 19.1 trillion Yuan by IMF to 23.6 trillion Yuan by Chinese Academy of Social Sciences and 47 trillion Yuan by Tsinghua University Taxation and Finance Research Institute. There are 8 different estimates by 8 different institutions, with the median value of 30 trillion Yuan. S&P didn’t explain or justify its choice of 40 trillion Yuan, which is close to the top outlier of 47 trillion Yuan.

Based on the median value of 30 trillion Yuan in undisclosed municipal debts, the total Central government (13 trillion Yuan) and municipal debts (including the disclosed portion of 16 trillion Yuan) stood at 60 trillion Yuan (about $9 trillion) at end 2017. That works out to 73 % of China’s nominal GDP of 83 trillion Yuan ($12.4 trillion) in 2017.

The 60% debt to GDP prescription in Maastricht Treaty is more honored in the breach. The average debt to GDP ratio of EU 28 by end 2017 is 81.6%. Even the EU discipline master Germany’s 64% exceeds the 60% limit! The financial situation in a handful of EU states is precarious, even parlous. Their debt to GDP ratio is not just alarming, but downright frightening :

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

Russia And China Prepare To Ditch Dollar In Bilateral Trade

In a time when many nations have gone public with their intention to ditch the dollar in part or in whole, in bilateral trade with non-US counterparts, either to prevent the US from having “veto power” of commerce courtesy of SWIFT or simply in response to Trump’s “America First” doctrine, attention has long focused on Russia and China – the two natural adversaries to the US – to see if and when they would accelerate plans for de-dollarization.

To be sure, the two nations wouldn’t be the first to reduce their reliance on the dollar, as we have discussed in recent months:

However, when it comes to symbolism and optics, no other pair of nations would have as much an impact in dumping the dollar as (quasi) superpowers China and Russia. Which is why we found it a material development when Russia’s Ministry of Economic Development said on Thursday that Moscow and Beijing are working on an inter-governmental agreement to expand the use of the ruble and yuan in mutual trade settlements.

“The document is currently being prepared, the process is not easy,” said Deputy Minister of Russia’s Economic Development Sergey Gorkov, as quoted by TASS. “Russia and China have had some experience of using national currencies in bilateral trade.”

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

Chinese Verbal Intervention In The Market Fails As Stock Rout Accelerates

This morning, when we reported that the latest flood of margin calls, resulting from $600 billion in shares pledged as collateral for loans and representing a whopping 11% of China’s market cap, sent the Shanghai Composite tumbling 3% to the lowest level since November 2014, we noted that local government efforts to shore up confidence in smaller companies had, quite obviously, failed to boost sentiment… or stem the selling.

So, as many expected, just before Beijing announced the latest batch of stagflationary economic data including retail sales, industrial production and fixed asset investment, of which the most important was Q3 GDP which printed at 6.5%, the lowest level since Q1 2009, and missing consensus expectations even as inflation has continued to creep higher…

… the central bank delivered another round of massive verbal intervention, telling investors stocks are undervalued, the economy is sound, the central bank will use prudent, neutral monetary policy and keep reasonable, stable liquidity. Additionally, according to a Q&A statement with Governor Yi Gang posted on the PBOC website:

  • the PBOC will use monetary policy tools including MLF lending to support banks’ credit expansion
  • the PBOC to push forward bond financing by private cos.
  • the PBOC says recent stock market turmoil was caused by investors’ sentiment
  • the PBOC is studying measures to ease cos.’s financing difficulties
  • the PBOC to push forward bond financing by non-state firms; calls for private equity funds to support cos. with financing difficulties

In other words, the central bank’s “got this.”

And just to make sure the “all clear” message is heard loud and clear, also this morning the China Securities Regulatory Commission (CSRC) encouraged various funds backed by local government to help ease pressure on listed companies from share-pledge risks…

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

China Crashes As Flood Of Margin Calls Sparks “Liquidity Crisis”, Panic Selling

The Treasury’s latest semiannual FX report may have spared China the designation of currency manipulator (for now… in a new twist, there was a section dedicated exclusively to China in the Executive Summary, a clear signal from the Treasury that China is the disproportionate focus of the report stating that ‘it is is clear that China is not resisting depreciation through intervention as it had in the recent past’), but the market was not as forgiving.

In the latest shock to Chinese confidence and stability, overnight Chinese shares extended the world’s worst slump as the yuan touched its weakest level in almost two years, testing the government’s ability to maintain market stability and calm as risks continued to mount for Asia’s largest economy.

Two days after we reported that concerns about pledged shares, in which major investors put up stock as collateral for personal loans – a disastrous practice when stock prices are dropping, emerged as a key pressure point for China’s market, overnight Bloomberg reported that “rising fears of widespread margin calls fueled a 3 percent tumble in the Shanghai Composite Index, which sank to a nearly four-year low as more than 13 stocks fell for each that rose.”

The concentrated selloff, sent the Shanghai Composite down 2.9%, closing at session lows of 2,486, the lowest level since November 2014, as China’s plunge-protecting “National Team” was nowhere to be seen.

Chinese stocks have dropped 30% below their January highs, as the spread between China’s market and the rest of the world grows alarmingly wide.

Meanwhile, local government efforts to shore up confidence in smaller companies failed to boost sentiment, while the yuan tumbled to 6.94, just shy of its one and a half year low of 6.9587 touched in August, after the U.S. Treasury Department stopped short of declaring China a currency manipulator, a move that some interpreted as giving Beijing breathing room to allow a weaker exchange rate.

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

China Changes Definition Of Aggregate Financing To Disguise Sharp Credit Slowdown

With investor attention increasingly focused on China’s credit pipeline to see if the recent crackdown on shadow lending has unlocked other sources of debt in a country where growth is always and only a credit phenomenon, and where both the housing and auto sectors are suddenly reeling, overnight’s latest credit data from the PBOC was closely scrutinized… and left China watchers with a very bitter taste.

What it showed was that traditional new RMB loans rose to RMB1,380bn in September, largely as expected (exp RMB1,360bn) from RMB1,280bn in August, with growth of outstanding loans unchanged at 13.2% Y/Y and up from 12.7% a year ago. New loans to the corporate sector rose to RMB677bn from RMB613bn in August, in which medium- to long-term loans rose to RMB380bn from RMB343bn in August. New loans to the household sector rose slightly to RMB754bn in September from RMB701bn in August, and the long-term loan component (mostly mortgage loans) remained largely flat at RMB431bn (August: RMB442bn). New loans to non-bank financial institutions were -RMB60bn in September versus -RMB44bn in August (average September level: RMB13bn). Also of note, M2 growth rose by 0.1% to 8.3% Y/Y in September, in line with market expectations, however as Nomura writes in a note this morning, monetary aggregate growth is no longer as important to the central bank’s policy making as it once was, and Beijing is focusing more on interbank liquidity conditions, aggregate financing and investment.

Where the data was especially interesting, however, was in the broader Total Social Financing category, which on the surface came in well stronger than expected printing at RMB2,205bn in September from RMB1,929bn in August, above the $1,550bn estimate, and the strongest month since January.

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

Forced Buy-Ins Spark “Liquidity Crisis” In China’s ‘Nasdaq’

Marking the worst year since 2008, China’s tech-heavy (Nasdaq-equivalent) Shenzhen Composite index is down a shocking 35% year-to-date, and it’s starting to become a self-feeding vicious circle…

As Bloomberg reports, the most recent slump in the teach-heavy index comes despite regulators’ efforts to rein in risks of share-backed loans following reports over the weekend that insurers are being ‘encouraged’ to invest in listed companies to reduce liquidity risks connected to such loans.

Share pledges, where company founders and other major investors put up stock as collateral, have emerged as a pressure point in China’s debt-laden economy, especially as the stock market tumbles.

There’s a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,” said Yang Hai, analyst at Kaiyuan Securities Co.

“Stocks in Shenzhen typically bear the brunt of loss of confidence in the stock market because of their higher valuations.”

Bloomberg additionally notes that this attempt to slow the impact of this crisis has been ongoing all summer…

China in June told brokerages to seek approval before selling large chunks of stock that have been pledged as collateral for loans, according to people familiar with the matter…

while the top financial regulator in August warned the industry that it’s closely watching corporate stock pledges.

And quite clearly, has failed… with two-thirds of Shenzhen Composite stocks now at 52-week lows or worse…

And it appears investors are screaming for The National Team to step in and rescue them (just like in the housing market)…

“If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk,” said Hai.

“Authorities keep saying that there is room for more polices, but where are they?

Shock, horror! What are we to do in a ‘free-market’?

Welcome to the G-20 from Hell

US Commerce Secretary Wilbur Ross, left, chats with Chinese Vice-Premier Liu He during 'trade dispute' talks in Beijing earlier this year. Some sort of agreement could be reached at the G20 summit. Photo: AFP / Andy Wong

US Commerce Secretary Wilbur Ross, left, chats with Chinese Vice-Premier Liu He during ‘trade dispute’ talks in Beijing earlier this year. Some sort of agreement could be reached at the G20 summit. Photo: AFP / Andy Wong

Welcome to the G-20 from Hell

World leaders wrestle with a maelstrom of complex, burning issues as they prepare for November 30 summit

The G-20 in Buenos Aires on November 30 could set the world on fire – perhaps literally. Let’s start with the US-China trade war. Washington won’t even start discussing trade with China at the G-20 unless Beijing comes up with a quite detailed list of potential concessions.

The word from Chinese negotiators is not at all bleak. Some sort of agreement could be reached on about a third of US demands. Debate on another third could ensue. But the last third is absolutely off-limits – due to Chinese national security imperatives, such as refusing to allow the opening of the domestic cloud computing market to foreign competition.

Beijing has appointed Vice-Premier Liu He and Vice-President Wang Qishan to supervise all negotiations with Washington. They face an uphill task: to pierce through President Donald Trump’s limited attention span.

On top of it, Beijing demands a “point person” with the authority to negotiate on behalf of Trump – considering the mixed-message traffic jam out of Washington.

Now compare this with the message coming from the research institute fabulously named Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era under the Party School of the Central Committee of the Communist Party of China (CPC): the US has started the “trade friction” essentially “to hinder China’s industrial upgrading.”

That’s the consensus at the top.

And the clash is bound to get worse. Vice President Mike Pence accused China of “meddling in American democracy,” “debt diplomacy,” “currency manipulation,” and “IP theft.” The Foreign Ministry in Beijing dismissed it all as “ridiculous.”

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

China & Japan Dump Treasuries As Dollar’s Reserve Status Slumps To 5 Year Lows

Treasury International Capital flows showed Brazil the biggest buyer of Treasurys in August (followed by Ireland and France), but it was China and ‘ally’ Japan that dumped the most Treasurys in the month…

Brazil is Steve Mnuchin’s best friend…

As China reduced their holdings of US Treasurys for the 3rd straight month…

Japan flipped to a seller again in August back to the lowest holdings since October 2011…

And while the Saudis were buying in August…

the broad trend among other majors has been selling…

All of which has driven the USDollar’s share of global central bank reserve to its lowest since 2013

And, according to economist Zach Pandl at Goldman Sachs, Washington’s aggressive policy against Moscow could be the biggest driver behind the recent fall of the dollar’s share of global central-bank reserves, who noted that Russia’s Central Bank sold some $85 billion of its $150 billion holding of the US assets from April through June after the US Treasury Department announced new sanctions on Russian businessmen, companies and government officials.

At the beginning of April, as RT reports, Washington expanded its anti-Russian sanction list, including seven Russian tycoons, 12 companies and 17 senior government officials over alleged meddling in the 2016 US presidential election, and according to Pandl, the co-head of global FX and emerging-market strategy, the US policy of unilateral tariff hikes and sanctions is putting at risk the greenback that is still dominating the global currency reserves.

“The Central Bank of Russia likely sold a large portion of its dollar-denominated assets, and perhaps all of its US Treasuries held by US custodians, and transferred them to euro-denominated and yuan-denominated bonds in the second quarter,” the economist said.

“This would account for more than half of the decline in the share of dollar reserves during the quarter.”

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

 

S&P Reveals $5.8 Trillion In “Hidden” Chinese Debt With “Titanic Credit Risks”

When it comes to estimating China’s total outstanding debt, there has long been confusion about the real number with most putting the debt/GDP at around 250%, while the IIF last year calculated China’s debt load as high as 300% of GDP.

Now, China watchers can one add another ~40% of debt/GDP to the total because according to S&P, China’s local governments have accumulated 40 trillion yuan ($5.8 trillion) – or even more – in off-balance sheet debt, suggesting the already record surge in defaults is set to accelerate further.

“The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts wrote in a report Tuesday, Bloomberg reported, with much of the build-up related to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves.

LGFV debt has emerged as a growing risk for China’s economy, because with the national economy slowing, and as a result of a crackdown on shadow lending and a Beijing quota for issuance of local-government bonds not enough to fund infrastructure projects to support regional growth, authorities across the country have resorted to LGFVs to raise financing, according to S&P.

That’s left LGFVs “walking a tightrope” between deleveraging and transforming their businesses into more typical state-owned enterprises, S&P warned.

Meanwhile, debt vulnerabilities continue to rise as a result of the previously reported record surge in Chinese corporate defaults this year, as Beijing seeks to roll back a decades-old practice of implicit guarantees for debt.

And while so far LGFV debt has avoided an event of default, several issues have come close, with local government bailouts taking place only in the last minute, adding to concerns about LGFVs vulnerabilities. Meanwhile, according to S&P the riskiest LGFVs include the following:

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

Lies, Damn Lies & Statistics: How the US Weaponizes Them to Accuse  China of Debt Trap Diplomacy

Lies, Damn Lies & Statistics: How the US Weaponizes Them to Accuse  China of Debt Trap Diplomacy

With China and Russia named as the two greatest threats to continuing American hegemony end of last year, the velvet gloves have come off the Washington establishment, baring their knuckles against the Middle Kingdom in plain view of the entire world. In recent weeks, anti-China rhetorics and vitriol emanating from the Oval Office and Capitol Hill have reached feverish, even hysterical, proportions.

The total warfare on all fronts is being waged against Beijing, assisted and amplified by the corporate media. The empire’s propaganda machine is in overdrive, churning out fake news and lies on a 24/7 basis to smear and demonize China. One of such lies is the alleged neo-colonization of developing countries through debt traps sprung by China.

This article puts together all the numbers in four countries – Sri Lanka, Pakistan, Maldives and Malaysia – which are misrepresented by the western press as victims of China’s “debt trap diplomacy”.

SRI LANKA

Lie : Western media have spun tall tales that Sri Lanka, with Chinese loans up to its eyeballs, used 90% of government revenue to service Chinese debts and was forced to “cough up a port” to Beijing.

Fact : China accounted for only ONE-EIGHTH of Sri Lanka’s $65 billion debts. Beijing didn’t demand immediate payment of loans falling due from Colombo. Instead, China acceded to Sri Lanka’s request to restructure the loans. Colombo OFFERED to settle the loans past due by giving a 70% equity in the LOSS-MAKING Hambantota port to a Chinese company. To bring the port up to the operational level, the Chinese company has to spend another $700 million. No competing offer from other parties to take over the port was received before and after the restructuring proposal was completed.

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

Violence, Public Anger Erupts In China As Home Prices Slide

Last March, we discussed why few things are as important for China’s wealth effect and economy, as its housing bubble market. Specifically, as Deutsche Bank calculated at the time, “in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice their total disposable income of RMB12.9 trillion.” The German lender added that this (rather fleeting) wealth effect “may be helping to sustain consumption in China despite slowing income growth” warning that “a decline of property price would obviously have a large negative impact.”

Naturally, as long as the housing bubble keeps inflating and prices keep rising, there is nothing to worry about as the population will keep spending money buoyed by illusory wealth appreciation. It is when housing starts to drop that Beijing begins to panic.

Fast forward to today, when Beijing may be starting to sweat because whereas Chinese property developers usually count on September and October to be their “gold and silver” months for sales, this year has turned out to be different. As the SCMP reports, not only were sales figures grim for September, but the seven-day national holiday last week also brought at least two “fangnao” incidents – when angry, and often violent, homeowners protest against price cuts offered by developers to new buyers.

These protests are often directed at sales offices, with varying levels of intensity – from throwing rocks to holding banners and putting up funeral wreaths. The risk, of course, is that as what has gone up (wealth effect) will come down, and as home ownership has remained the most important channel of investment for urban households in China in the past decade, price cuts have become increasingly unacceptable and a cause for social unrest.

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

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