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Daily Archives: October 5, 2022

Charts: China Imports of Oil and LNG from Russia

Chart: U.S. Mortgage Applications Decreased 14.2 percent from One Week Earlier

Total spending on all types of construction, had fallen for the second consecutive month in August

Source : Bloomberg

U.S. Existing Home Sales Down in August 2022

Source : Bloomberg

Humour: News in Cartoon

Video: Optimus Robot Revealed at Tesla AI Day

At 2022 Tesla AI Day, Elon Musk gave the public its first look at his company’s humanoid robot nicknamed Optimus. He expects the production model to cost less than $20,000.

Watch video at You Tube (6:49 minutes) . . . .

China’s Problem Is It’s Turning Japanese

William Pesek wrote . . . . . . . . .

Xi Jinping has a growing list of things to worry about: Covid-19, crashing property values, inflation, Nancy Pelosi, you name it. But the Chinese president’s biggest problem might be in Tokyo.

Something strange is going on amongst Chinese banks: a whole lot of lending from institution to institution. Last Friday, bank-to-bank dealing in the overnight repurchase agreement market hit a record of more than $900 billion. This is what happens when you run out of productive things to do with the tidal waves of capital the central bank churns into the financial system.

It’s precisely the sort of “liquidity trap” about which John Maynard Keynes warned decades ago. It’s how credit-creation mechanisms freeze up. Students of Japan’s 2000s know the drill. They also know this is very much not where Xi wanted the People’s Bank of China—or his economy—to be in 2022.

As economist Ming Ming at Citic Securities tells Bloomberg, “excess cash is piling up in the financial system instead of being funneled to the real economy.” Despite so much PBOC-created cash sloshing around, China’s banks are resorting to the financial equivalent of talk amongst themselves.

For years now, economists like Nobel laureate Paul Krugman worried China might fall into a Japan-like funk. That was after the 2008 Lehman Brothers crisis, when the globe followed the Bank of Japan down the quantitative easing path.

The details of China’s quandary are different than what the Krugman’s of the world expected. Descending into deflation doesn’t seem to be Beijing’s challenge. Not with Russia’s Ukraine war sending prices of oil and other commodities skyward.

Yet the “pushing on a string” problem China faces is arguably the last thing Xi needs as growth flatlines at the worst possible moment given his political objectives.

Later this year, Xi plans to fulfill his longtime dream: securing a norm-breaking third term as Communist Party leader. Odds are high that will still happen, yet Xi’s self-imposed economic troubles risk spoiling the party.

A major reason China faces recession chatter is his “zero Covid” policy and the massive lockdowns it requires. Draconian shutdowns of entire metropolises worked in 2020. It’s futile, though, amid more transmissible variants. Today, containment is virtually impossible, even if Xi missed the memo.

Several times since January, Beijing signaled a pivot to a nimbler “dynamic zero Covid” strategy, whatever that means. Yet investors still expect lockdowns to be Beijing’s default reaction to new infection waves.

Lu Ting, economist at Nomura Holdings, thinks China is now trapped in a “Covid business cycle.” The risk is that China’s GDP will gyrate indefinitely with spikes and plunges in infection rates.

It’s high time Xi recalibrated China’s Covid response. The priority should be better vaccines and mass testing. Doing so might get China closer to this year’s 5.5% GDP target. It almost might slow the worst capital flight China has experienced since 2014.

Xi can no longer rely on the PBOC to save the day. Nor can his government safely open the fiscal floodgates given Beijing’s crushing debt load. In the first quarter alone, China’s gross debt rose $2.5 trillion, far outpacing Washington’s $1.5 trillion increase, according to the Institute of International Finance.

Hence the logic behind Xi recalibrating his Covid policy in place of conventional stimulus. Granted, Xi has a lot on his plate at the moment, including House Speaker Pelosi’s Taiwan visit. Frankly, it’s drawn an over-the-top reaction from a Chinese government you’d think has bigger challenges on its mind than ordering up military drills.

Economist Michael Pettis at Peking University says China should be studying the lessons from Japan’s lost decades—and heeding them.

“The reason for comparing China today with Japan is that they both had, among other things, serious income imbalances, years of non-productive investment, heavily administered banks underpinned by government guarantees, vastly overvalued real restate and soaring debt,” Pettis says.

These imbalances led to the bubble troubles with which Japan is still grappling decades later. Japan, Pettis says, faced a “difficult adjustment after a forty-year investment-driven growth miracle. These were also the same conditions in every other country that followed a similar growth path, and they all had brutally difficult adjustments.”

This includes China. The PBOC losing monetary traction, like the BOJ decades before it, is an ominous sign.

The bottom line: if Beijing wants to avoid Japan’s fate, Pettis says, “it must understand what actually caused it and why it is so difficult to rebalance income, and it must take specific steps Tokyo didn’t or couldn’t. Otherwise pretending it can’t happen in China almost guarantees that it will.”


Source : Forbes

A Ponzi Scheme by Any Other Name: The Bursting of China’s Property Bubble

Martin Farrer wrote . . . . . . . . .

A little more than a year ago, a Chinese property developer largely unknown to the outside world said its cashflow was under “tremendous pressure” and it might not be able to pay back some of its eye-watering debts of $300bn (£275bn).

Today, that company, China Evergrande Group, is all too well known as the poster child of the country’s economic woes. House prices in China have fallen in each of the 12 months since Evergrande’s now prophetic warning, with Xi Jinping’s government now preparing to throw billions of dollars at a property market that experts say increasingly resembles a giant Ponzi scheme.

Prices for new homes in 70 Chinese cities fell by a worse-than-expected 1.3% year on year in August, according to official figures, reflecting a turbulent 12 months in which China’s housing sector has gone from an unstoppable driver of growth and prosperity to being the chief threat to the world’s powerhouse economy.

Nearly a third of all property loans are now classed as bad debts – 29.1%, up from 24.3% at the end of last year, according to research by Citigroup this week – with once safe state-owned property developers driving the increase.

The crisis at Evergrande, then China’s second biggest property developer, has spread through the industry to the point where the government’s pledge this week of 200bn yuan (£26bn) to kickstart investment was judged by analysts to be well short of what was needed.

The rating agency S&P said at least 800bn yuan would be needed – or even 10 times that much in the worst-case scenario – to rescue a property market in which prices have fallen, sales have slid, developers have gone bust and buyers have staged an unprecedented and widening mortgage boycott in protest at having paid largely upfront for homes that have not been finished.

The market is experiencing a total collapse in confidence, analysts say, and only government intervention can save the day.

About 2m off-plan homes remain unfinished across China, according to a rough estimate by S&P. That figure will grow if sales continue to fall and developers continue to run out of money to complete projects.

“China’s property downturn has turned into a crisis of confidence that only the government can fix,” S&P said. “If falling sales tip more developers into distressed territory, things will get worse. The distressed firms will halt construction on more pre-sold homes, hitting buyers’ confidence further. Our rough estimate is that about 2m unfinished homes presold by Chinese developers are now in limbo. This has shattered confidence in this market.”

For years, preselling homes – mainly apartments in large blocks and newly styled urban villages – kept the developers flush with cash and, along with borrowing on an epic scale, meant they could buy more land and keep building. In 2021, about 90% of homes were sold off plan in China.

But Xi’s decision two years ago to crack down on “reckless” lending starved developers of their funding and, when the music stopped, it emerged they could not finish homes they had already taken money for because they had spent it on buying the next parcel of land or project.

In short, it resembles a Ponzi scheme where money taken from new investors is used to pay off existing clients in an ever-decreasing spiral to collapse. It is even how the sober pages of the Economist sees it.

George Magnus, an associate at the China Centre at the University of Oxford, said the Chinese market was not quite a classic Ponzi scheme in the style of Bernie Madoff’s notorious scam that was exposed after the global financial crisis, but it was very similar.

“Developers raise huge amounts money from customers to basically fund the purchase of the next construction projects. This continues on and on before it has got to the size it has,” Magnus said. “It’s not strictly a Ponzi in the asset management sense, the Madoff style, but they’re essentially using clients’ money to fund the next project, so yes, it’s the standard definition of what that means.”

The property market accounts for anywhere between 20% and 30% of China’s gross domestic product. This is a huge proportion compared with other large economies, and is thanks partly to the country’s investment-led economic model that has prioritised construction. As a result it has bred a hitherto blind faith in the property values, which have risen more or less uniformly for the past two decades or more.

But with repeated lockdowns also depressing the market, the longstanding belief that prices can only ever go up is starting to wane. This could lead to Chinese households moving 127tn yuan out of property in the next nine years and into other investments such as equities, bonds and wealth management products, according to the brokerage and investment group CLSA, Bloomberg reported last week.

“People are losing confidence in the presale model,” said Magnus. “It’s a reboot of the Chinese mortgage market … the hallowed asset of property. The fabled rising middle class of China are not in great shape along with lockdowns as well.”

The situation presents a major challenge for the Xi government, especially with the all-important party congress coming up in October when the president will seek to become ruler for as long as he wants.

But although his government is pushing for the restructuring of failing developers such as Evergrande and hoping to spread the debt burden across state-owned enterprises, banks and local governments, the pain is likely to fall on ordinary Chinese – just as it does on ordinary investors when a Ponzi scheme eventually collapses.

Anne Stevenson Yang, a co-founder of the US-based J Capital Research and a China expert, said the regime in Beijing was more interested in protecting the state-owned enterprises, institutions and billionaire owners of companies than homeowners – and that would inform its response to the crisis.

“There’s what they can do and there’s what they will do,” she said. “What they can do is to transfer money to households such as by gifting apartments, allowing people to live in places where mortgages are unpaid, and boosting pensions so people have confidence and spend again.

“But that’s not of course what is going to happen. The Chinese political system is not built around individuals, it’s built around companies, they are the constituents. The political system operates through them.

“The property market was not designed to be a Ponzi scheme – a Ponzi scheme needs to be designed. But it is an investment bubble. And the bubble has ended.”


Source : The Guardian

Yuan at the Mercy of Overseas Traders Puts China on Alert

The onshore yuan is on track for a seventh month of losses, and things could get even worse for its less-regulated offshore exchange rate as China goes on a one-week holiday.

The currency traded in Shanghai is matching a record run of monthly losses set during the height of the US-China trade war four years ago. Its realized volatility this week spiked to a level unseen since 2020 as the exchange rate was buffeted by the dollar’s surge and Beijing’s steps to resist yuan weakness.

Next week, the offshore yuan — which is subject to less control by the central bank — loses an important anchor. With mainland markets closed for the Golden Week holidays starting next week, Beijing won’t be able to guide investor expectations with its daily reference rate, which is set each morning by the central bank and limits onshore yuan moves to 2% on either side. That would make the overseas yuan even more vulnerable to the dollar’s surge.

China’s central bank appears to be girding itself for any disorderly trading next week. The People’s Bank of China set the fixing at a stronger-than-expected level for the 27th day, the longest run of stronger fixings on record since Bloomberg started the survey in 2018. It also asked major state-owned banks to be ready to sell dollars to prop up the yuan overseas, Reuters reported Thursday citing people with knowledge of the matter. That’s after issuing strongly-worded statement on Wednesday to deter currency speculators.

That’s because some of the largest deviations between the onshore yuan’s closing price and the offshore unit have occurred when Chinese markets were closed for a holiday. The offshore yuan traded 890 pips weaker than its onshore counterpart on the May 3 Labor Day holiday, the largest gap this year. Trading during the mid-Autumn festival holiday in September 2015 was particularly volatile as the currency deviation exceeded 1000 pips.

“The PBOC is trying to bring some stability to the market, but the problem is that the dollar is too strong,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “If the US data remains strong, there’s not much central banks can do to stop the dollar rally.”

The central bank’s measures so far have only slowed yuan losses. That’s because China’s monetary policy is diverging further from the US, driving outflows. While the Federal Reserve retains a hawkish stance in its efforts to curb US inflation, Beijing is keeping an accommodative policy amid signs the Asian economy is cooling due to Covid lockdowns and a housing-market crisis.

Earlier this week the PBOC imposed a risk reserve requirement of 20% on currency forward sales by banks to make it more expensive to short the yuan. That’s after a move to reduce the foreign-currency reserve requirements for banks.

While the PBOC has other tools at its disposal to stem yuan losses it may be holding back from doing so for now as may be focusing on slowing the pace of the depreciation rather than defending a specific level. The yuan is also holding relatively steady against currencies of its 24 major trading partners, data from a Bloomberg real-time tracker of the CFETS RMB Index show. A weaker yuan isn’t necessarily bad for China as it could make the nation’s exports more competitive and aid in boosting the economy.

Bearishness prevails in the derivatives market. Traders added the most short yuan options this month so far this year, with the nominal value of bearish wagers standing at about four times the size of bullish bets, Bloomberg-compiled data show. Three-month risk reversals, which measure the cost of hedging against offshore yuan losses, jumped to the highest since May this week.

The offshore yuan will remain at the mercy of the dollar in the coming week, said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. The currency that trades in Shanghai may retest 7.25 per dollar into next year.

“It is not really the yuan’s fault,” he said. “The dollar is simply too strong.”


Source : BNN Bloomberg