James V

China Isn’t Losing Its Competitive Edge

The problem is the way the Yuan is calculated due to the balance of the basket of different currencies. Bascially if the Dollar strengthens against Euro and Sterling for example, and the Yuan remains roughly at the same level against the USD. Then the Yuan will strengthen almost exactly the same % against sterling/Euro as the Dollar has. This is because of the dynamic dollar peg the Yuan has.

The Yuan has fallen from 16 Yuan to 1 British Pound, to 10 Yuan to 1 British pound. Thats a strengthening of 37.5%.

The Yuan has strengthed from 11.2 Yuan to 1 Euro to 8.6 Yuan to 1 Euro. Thats a strengthening of 23.2%.

The Yuan has strenghtned from 6.9 Yuan to 1 Australian Dollar to 4.4 Yuan to 1 Australian dollar. Thats a strengthening of 36%.

Because export are priced in USD, bascially almost every country in the world now pay between 15-25% more to buy Chinese goods in their own currency. These are the currency rates to watch, not only the USD-Yuan.

A lot of Chinese Exports to Europe/UK and Asia are now not competitive.
Due to the deflationary situation and excess inventory that importers have not sold and demand destruction due to local recessions, consumers inability to borrow and the general lack of confidence to consume. Chinese Goods can not be absorbed at these new price levels.

An Importer will generally try and make 20% on importing and selling goods. But final prices are done across the board sometimes by that amount. And the cost of buying the goods from China is up 15-25% in currency terms. The maths talk for themselves. This is a big problem and a lot of importers are going bust now. I have a company that imports machinery into Europe/UK my net margins are down from 25% to 5%. And I am told I'm doing well!!!

The factories I talk to (who mainly export to UK/Europe) are crying their eyes out. This adjustment has been far to quick and could have been more gradual had the currency been reformed instead of the pretend reform we have seen.

This situation will only get worse as the dollar strengthens against other currencies. And I get the sense that Hu will make some steps to stem this.

The currency regime cretainly needs to be liberalised.
Imbalances are very easily created due to the dynamic dollar peg.

The solution is not to depreciate the currency against the USD to stimulate export demand. If they have to stimulate export demand then they need to have enough flexibility to depreciate the currency against Euro if this continues and allow Factories to take Euros and hold Euros.
Of course this will only effect the price side of the equation not the demand problem.

If I was involved in this secret trade war against Europe/USA.
I would start selling their USD reserves, move them into Euros. Take the currency down against the Euro, up against the USD. And then accumulate as many cheap USD assets as possible. Whilst at the same time stockpiling oil/usd denominated commodities.Bernanke is going to start buying Treasuries, maybe China should sell them to him!!

Fighting wars using weapons certainly is easier to predict than countries fighting wars using the their FX rate.

China: Will the Rate Cut by the PBoC Make Things Better?

The amount of factory closures I am hearing about is huge. Even bigger is the % that have gone bust after borrowing from the underground banking system. I am told that black market lenders are seizing finished goods that have been paid for by foreign clients. Some pretty famous factories have gone as well, even factories that have the 'china top brand award'.

I get the sense that very few businesses will be expanding production at a time like this. I also can not imagine the banks being stupid enough to lend money for new factories to be built when there is such a clear imbalance of production and inventory levels are rising substantially.

It is also so difficult still to borrow any money due to the maturity of the consumer borrowing sector. You can not borrow money against collateral of your house. Personal unsecured loans dont exist as they have been wiped out by the government. There is no real unsecured car finance schemes. The only way of borrowing is through credit cards. Interest at those levels are not going to tempt people who are use to getting 2-4% interest in saving rates.

Maybe it is time for the government to cut some of its rediculous hidden consumption taxes, bring import duties to decent levels. Allow some competition in the market and reduce the 'opportunity costs'for foreign companie doing business in China. The Chinese dont buy because they are too insecure and know they are getting raw deal. Labour is cheap, rent is cheap, restaurants are cheap, taxis are cheap. Everything else is so rediculously expensive its untrue. I have just visited my home in London and can not believe how much cheaper it is to consume in the UK comapred to China. It is actually cheaper for me to live in suburbs in London than down-town in Shanghai.

The real winners in the government race to get rates down to 4% are the banks who are able to generate yield differential on saver's money. As well as the property developers who will be able to shift inventory off their books as credit becomes cheaper. The bamks will be told to lend for those that want to buy properties.

If the government wants to generate anything more than this, they better come up with some structural changes first. Like developing a decent sized middle class. Pay lower classes more so they can consume. The only problem is this has a direct conflict with their 'social control objectives' as well as makes their main cash-cow manufacturing sector less economically viable.

I see rates at 4% as the year of the ox starts, it is a earth-earth ox year. So real estate should do well. Real Estate is an earth industry in the Chinese 5 elements system. The OX is also said to bring peace.

Now there's something the world needs....

China: Will Rising Unemployment Cause Policy Missteps?

The reason why there is not adequate domestic demand is because of the governments refusal to allow a decent size middle class to develop for reasons of social control and for reasons of the need it would create for re-structuring the economic framework.

The second reason why there is not adequate domestic demand is because the tax structure is heavily geared towards taxing consumption leading to outrageously high prices for goods. (import taxes etc).
Then of course there is the currency issue, having an undervalued Yuan makes imports more expensive and internal monetary inflation high (creating devaluing of the currency domestically). Which can not be absorbed because of the wage differential present on a mass scale in china.

The third reason for the lack of domestic demand is the insecurity of the chinese due to the lack of proper social systems like schooling and hospitals. So everyone saves.

The government is not willing on any level to adjust these factors, so there only way to stimulate the economy is to keep exports high and spend money on infrastructure (which is financed by them dumping goods on the rest of the world). Which will work for maybe a couple of years.

Because they are financing the US deficit, they have a weapon to avoid trade barriers, trade wars. What they dont realise of course is that the USA is trying to create a multi-national economic superstate involving Europe, Canada, Mexico, UK. Whereby currencies are driven to parity, interest rates are driven to parity. Creating integration without the need for it to be formally recognised. The USA will be the banker (and to less extent producer), Europe/Mexico will be the producers and Canada will be the supplier of the energy.

At the same time trade will remain in USD so the USA will remain the printer of the world currency and can run whatever deficits it wants.

The Economic war is entering new stages....
I get the sense that this time the USA is one step ahead.

Inflation, Deflation and the U.S.-China Relationship

I think there are some valid points in this article.
But lets not be under any illusion, the USA is not falling behind on payments. How can they, when all they need to do is print more USD.

China has no choice but to carry on business as usual.
The question is not whther the USA will pay them back, but what the dollar will be worth when they pay them back. Something that they hold full responsibility for as a result of their currency regime. These were the terms of the agreement.

In terms of consumption, impossible....
The Chinese will take 20-30 years to reach a high level of consumption and they won't be buying chinese made goods. Ask any Chinese person if it easier to sell to foreigners or Chinese and see what there answer is. The next generation maybe...not this one.

Also the consumption trends of the past will stay in the past.
People are hitting the harsh reality that wasting money daily buying stuff they dont need is the wrong thing to do.

In short the golden age of easy Chinese growth is finished, now every penny of GDP that China generates will be far far harder than it has ever been. Large economies take a long time to mature. China has certaintly got to second base, but very far away from home run status.

I also have a thought for everyone.....

What is structually different from what the USA has done over the past 10-20 years when compared to Europe, parts of Asia, UK etc.
Everyone seems to believe that the US caused the contagion. When the reality is their system was just the first to blow up.

Every aspect of society is leveraged up very seriously. Not just the banks. Most people's personal balance sheets are highly leveraged.
This delevarging of business/personal finances has just changed the rules.

Business as we know it has just changed dramatically. It will a few years for people to realise.

Bailout Bill Passes; What Happens Now?

Come on everyone, see the Bailout for what it is is.
The USA has just convinced China to buy another 700 million USD of useless assets.

Wasting taxpayers money - sorry guys....the government runs a deficit.
That money has already been wasted.

As long as USA has the most power, there will not be deflation. The amount of inflation depends on how much foreign owned USD can be wasted saving the system in relation to how much USD needs to be printed to save the system.

As things stand the 700 million USD is just be repatriated back to the US in return for an IOU paying interest below the real level of fiat money devaluation. Makes sense to me.

Anyone play Monopoly....

America is the fat kid that is always the banker, everytime he runs low on money he puts his hand in the pot. Now back that fat kid up with the most powerful military in the world and a printing price.

Bobs your uncle, thats Uncle Sam.


Actually the Chinese are the ones getting shafted here.
Anyone that can not see that does not get the USA masterplan.
Yes Gold is a good investment

China: Holiday Thoughts on Misunderstanding Data

The source of the angry ultranationalist youth is actually a reflection of the pain, suffering and discontent felt by the Chinese people towards the CCP. The CCP over the past 59 years has tried to deflect this agression against the establishment and reflect it towards foreign nations/people. This is of course a very common aspect of 'pseudo communism'. I say pseudo because I don't believe there are any modern day versions of 'native american type' communism and village community dynamics alive today. Communism source should be based on Love for all, fairness for all, support for all and justice for all. Not control of the weak/poor by the establishment..

This agression has been deflected away from the establishment by erasing the line between the CCP and the Chinese culture. A lot of the Chinese believe that they are betraying their culture in speaking out against the CCP because in effect they have been taught that they are shunning their culture and inate origin. This is a very effective strategy because of the cultural feature of group psychology the Chinese have so deep inside their being. The Chinese see the red flag and believe it is the connecting symbol of their Culture. The CCP is synominous with this red flag. If you say anything against the red flag/CCP you say something against the Chinese Culture.

Anyone that knows the history of how the CCP got its deep influence in the mainland chinese thinking process understands the deliberate and well thought out strategies and actions that induced the line being erased between the CCP and the Chinese Culture.

The problem is the foreign governments/media don't understand this and flame the hatred by making comments on the Chinese people as a whole rather than the policies of the CCP. This even had an effect this summer during the protests of angering the oversees Chinese. The mis-communicated views punctured a very painful aspect in a lot of Chinese people and as result the outpouring of nationalism was very easy for the CCP to orchestrate. Of course most of the ultranationalist youth in the Olympic stadiums watching the olympics were hand picked by the CCP anyway. Also all the demonstrations were organised centrally by the CCP through the oversees networks.

I think Micheal the people you come in contact with are a 'special calibre' Free-thinking people who have decided they wish to accumulate knowledge. It is only natural that you attract people of this calibre because of your path in life. The earthquake in Sichuan/ Dairy Scandal/Olympic Games have certainly had a very strong effect on how the Chinese see the CCP, themselves and foreign nations/people. And things are heading in the right direction, but we have a very long way to go. And my fear is that we will never get there because of politics.

China: A Run on the Bank of East Asia

The reason why the CCP have introduced margin trading and short selling is because there are trying to 'mature' their financial markets.

They are all very very angry that the Domestic Banks/Government/Insur... companies have taken such a hit investing in international markets. They know this has been borm out of the fact they have no markets themself to do so, so are forced to recycle all their inflows through other markets. They also hope to drive the next level of growth through developing their markets as they can see they have saturated their export growth and that domestic spending growth will be very hard to enginner because of the fear of the people in China.

So the CPP figure, we need to improve and mature our markets.
So we can avoid sending our money to other markets.
And make money ourselves in the process.
So what do you they do, introduce short selling/margin trading???!!!!
This is the worst thing they could ever have done, they dont seem to understand that their financial sector is not developed because they refuse to give a piece of the pie to the foreigners. Even cirumventing their WTO policies by endless delaying etc. These protectionist policies are very much getting in the way of reform/development.

They also dont seem to understand that there are no 'mature' market participants.
The fund managers/stock buyers are just pure gamblers. The corporations/state owned companies are also just gambling/soliciting their power/influence for their own ends in stock manipulation/pyramid stock scams. There is no such thing as capital allocation and 'long term investment' in the Chinese markets. But the authorities can not see that because of their unbelievable nationalistic/pro-chin... views.
They anaylse everything one dimensionally and as a result, you get policies like this.

Their protectionsit policies do nothing but protect their close business contacts and put the poor everyday Chinese people at risk. The Chinese should be able to invest in Mutual Funds/Pension Plans without the worry that the market is going to shoot up/down 5% most days of the week. The Chinese should be able to be confident that they can keep their money somewhere long term and get a decent return without having to worry that some high level corruption/fraud will take away their savings. This is also a reason why the Chinese like to get in and out quickly. They are afraid their money is going to be taken from them. And rightly so, having spent a number of years in China among the Chinese people. I can not tell you how unfair the social fabric is.

The chinese really get bad effects from the protectionist policies of China. Simple example, if Import taxes were in line with those of the west. Better quality foriegn food could be imported into China and made available to the Chinese people at a cheaper price than domestically made food. Already it is cheaper to buy 'proper' milk from New Zealand (Anchor) then the higher grade brands from China.
The Chinese could buy foriegn cars at the same price of danagerous domestically made cars.

The markets in China can only mature if they are opened up, if Hong Kong/English/Singapore... fund managers come and live in Shanghai/Shenzhen and run a great deal of the funds. If they come in and help to properly mature the markets/train the market participants.The markets in China can only mature if the industry is truly opened up.

The financial district in Shanghai is just lots of big buildings right now.
With very little added value to the financial services industry.
The short selling/margin policies will send the market soaring short/medium term. Its like giving the Chinese a tab to gamble with. But at some point the tide will turn again and I see us going even lower. This very well could cause a lot of problems. Property/Banks/Social Order... everything.

There is a very real possibility, that this new margin could send the markets up, stimulate fake growth and pull even more inflows in. And we are all know what that sets everything up for.

I am very confident that a very prosperous mirage is about to appear.
And that it will send everything up..but thats all it will be a mirage.
I

Investing in China Is Still the Best Long Term Play

we are not seeing huge drops in property prices in good areas. In fact the best locations are holding their value. The new property is taking a hit in more outer locations, but it was overpriced anyway. So once again just a normal adjustment. Obviously there are some more serious issues with developers not being adequatly capitalised, but this will only mean going forward that the smaller developers will go bust. And projects will be eaten up by the bigger guys if it is worth buying. If it isnt then the property wont get built. Once again a normal adjustment to the oversupply of new property being built because of the boom times of 2007.

I understand a lot of peoples concerns that the banks have a lot of real estate on their books. But anyone who has purchased over the last 3 years has put at least 20-30% down due to government rules. Very different from USA/UK situation. There have been no fancy payment terms offered. In china you either get fixed (very rare) or floating exchange rate. So there are no resets etc to shock the market.

Because of the large down payments, there will not be the negative equity spiral which is what causes extreme price falls due to it being financially more rewarding to walk away then pay the mortgage. On this basis I expect good property to rise in good locations (in tier 1 cities) by around 10-12% by this time next year. Wild speculators have already been driven out of the market and I expect investors/banks that hold a lot of property on their books (banks through the use of fake client mortgages) to slowly de-leverage themselves by selling to people who want to buy property as homes. Good property in Tier 1 cities will be ok. But presents very little if any investment opportuniy because of the taxes/transaction/sell... costs.

I

Investing in China Is Still the Best Long Term Play

What interests me is that everyone seems to have 'an all or nothing' account of what's is going to occur to China going forward. The truth is there are such imbalances present that there will be both very good and very bad things occuring.

In terms of infrastructure/water/c... energy/ecological/food safety industry and higher technology development. We will without doubt see unbelievable growth.

In terms of Industrial growth, exports will be down. However lets be honest they are declining from a very high level. We all knew this would not continue forever. But of course the downside is limited because as things stand consumers in the west are shifting to buyer cheaper products. And we all know where cheaper products are made.
Any decrease in exports will have a very serious effect on factories going under because of the huge overcapacity present in China. There will be a lot of bankcrupticies without doubt and of course this is negative for some of the domestic banks balance sheets. But because of the huge foreign investment in factories, we will see a lot of foreign factories going under. So the banking system will not have to take such a huge hit.

There will then be a lot of service businesses going under as well, because of the sheer overcapacity in the service industry. Anyone who has spent any amount of time in Shanghai knows that there is huge oversupply in restaurants/coffee shops/estate agents etc. As the chinese cut back their spending (which they will do going forward) a lot of businesses will go under. But this is a normal adjustment going into the end of the business cycle.

Real Estate has certainly slowed, but you know as yet in Shanghai and other big cities prime property is only a little soft.

China: Markets Surge, But Little Has Changed

Amazing article Michael, I hope you projections are a couple of years early. Because I am quite scared of the social consequences of any financial stress in the system.

In terms of the Milk powder I think it is a combination of the price controls but also the opportunity reward of doing such a thing to the 'milk gangsters' as a result of inflation.

No Rest for the Chinese Stock Market

globalHOBBIT lets just hope it won't be like the Chinese Satellite Rockets.

I think the only question remains:

Is the fact that everyone is so bearish actually a reason to start becoming bullish.

or...

Is everyone bearish because we all sense that a mutli-year depression is coming.

Shanghai Should Continue to Sell Off

OH MY GOD!!!

Shanghai stockmarket to 1000!

Come on, this is not a true reflection of the reality of where things are going. We all know that there are a multitude of problems in almost every aspect of the Chinese Economy, Chinese Legal structure, Human Rights and the Chinese Business culture.

But the fact reamins China is the creditor of the West.
Has more than 2 Trillion USD of reserves.
Has enough money, enough political will and enough power to bail out the entire system at least once. Also they know exactly how to do it, having effectively helped the US government in bailing out its financial companies by writitng a blank loan cheque to save its investments.

Property is not as weak as everyone says it is.
The stockmarket is falling because it was bubble overvalued in the first place because of the pyrmaid selling scheme set up by the corporates/local and central govt. And set a light by typical gambling psychology of the Chinese.

The insurance companies are arbitraging dual listed Hong Kong and Shanghai listed stocks. As soon as Share Values are the same over both exchanges, then the selling will stop. Currently there are still a lot of stock that are 30-50% more expensive to buy in Shanghai exchange than the Hong Kong exchange. Once this is removed and the big 2005/2006 IPO stocks (Ping an etc) is priced the same in Shanghai as Hong Kong, we will see normalisation of market.

Shanghai stocks are not cheap, they are certainly not expensive and they have not hit their lows yet. But they are not going to 1000, maybe 1800.

Property is still very cheap compared to International standards.
Shanghai property is 350-400% cheaper (like for like) than Hong Kong, Tokyo and Singapore property.
Shanghai property is 300% cheaper than Mumbai property.
Shanghai property is 450-475% cheaper than London/Moscow/New York property.

So unless the entire worlds property market gets hit very hard (I am not saying this wont happen), then Shanghai property will at the very least stabilise where it is. Infact if the worlds property market crashed I would still rather own Shanghai property than other countires.

Please also note that currently only new property is getting hit in Shanghai, second hand property in central location has not moved. There is no new properties coming on the market in Shanghai in downtown locations. The new proprty that is getting hit was drastically over priced, in second rate locations and was bound to correct.

Short and medium term 'doomsday' predictions are not warranted.
I see another 3-4 years of prosperity.
Long Term we could see a phase of political fallout and a whole host of problems that China has experienced many times in the past, but as yet we are not there.

Hu and Wen I am sure will keep things smooth until they leave in 2012. After that then it is a totally different ball game.

China: CPI Surprisingly Low, Trade Surplus High

The Chinese numbers differ in that they are manipulated at a lot of different levels.

Firstly at ground level, incorrect numbers are given for the obvious reason that there are price controls, so sellers have to under estimate the figures somewhat.

Then they are manipulated using the basket weight, as well as a final 'audit' on the numbers by the statistics bureau. If the pro-growth camp currently holds influence over the stats bureau then they will be played with to represent their aims. However at the moment I believe the manipulation is coming from a lot lot higher in an attempt to:

a) give positive messages to market.
b) give positive message to foreign investors to control capital outflows.
c) stem inflation expectations so there are no 3rd round effects. (we have already had second round effects)

I must say that vegetable oil has come down a rediculous amount recently. And so fast. Of course oil has fallen, but it usually takes a lot longer to see the prices come into the actual market place (ie supermarket). Also the price has fallen a lot more than it should. It as if they have passed on the savings (plus some) instantly. Looks pretty obvious to me that the prices have been driven down (with implicit instruction from the government ) . This would effect the CPI to create positive number, But far far more importantly it is an attempt to communicate to the public prices are coming down to displace price fears/expectations (the Chinese are very sensitive to issues like this, more than the westerners). By displacing price fears they are hoping to give consumer spending a boost and improve the gloomy sentiment that a lot of people are feeling. Reducing the price of cooking oil (and of course pork) is a very effective to communicate price reductions. The Chinese watch very closely the price of cooking oil, it is a product that everyone buys and the Chinese attach a huge huge amount of significance to cooking oil. In old times, cooking with oil was a symbol of wealth. Having oil on your clothes signified that you ate good food.
So going into Mid Autumn festival, the appearance of reduced cooking oil and pork is quite a good way to show inflation is under control. It has been very effective, people are already talking about it.

The price controls have contributed to the widening cpi/ppi differential. But to a large extent the differential is due to the factories not feeling they are able to pass on the increase in costs to consumers. On a great deal of products they have planned many many times over the last 4-5 months to increase their prices, at the last stage deciding not to on the basis that everyone is reining in their spending. Things are now quite tight here. If bargins is not to be had, people as a whole just won't buy. My personal experience is that it is far easier to negotiate a far lower price than it has been for at least a year and a half. Of course they are also handcuffed because of the huge overcapacity that is present in China. There are so many factories supplying similar products that there is no scope to raise prices because of the choice consumers have (non-food,non-energy). There will always be a factory that doesn't increase their prices and as a result they will gain amrket share. Businesses are in survival mode, revenue and cashflow is trumping margins. Theoretically if international markets slow then there will also be an inventory build up that the factories will then try and channel to the domestic market. Making price increases impossible regardless of PPI inflation.

In fact I think it is fair to say that China runs the risk on certain components of the economy of deflation. We have seen huge stock market deflation already, the first hand property market is under stress in most cities and has fallen in some cities. Now it could be funneling into consumer goods. I question whether we have reached such an extreme of investment that any tail off in monetary growth (however small) may lead us into a temporary cycle of deflation.

Frannie CDS Triggered

What does this mean for the equity markets?

An Often Unmentioned Factor About Chinese Stocks

Please be aware however that the Chinese Government and large companies like Ping An have got the ability to arbitrage between the Shanghai and Hong Kong markets. And are doing so.