China’s Big Ball of Money Isn’t Going Anywhere Near Stocks

This year is seen going down as the worst since 2011 for China’s stock investors as the memory of last summer’s rout lingers and speculative buying switches to the housing market.
The Shanghai Composite Index will end the year at 3,075, according to the median forecast in a Bloomberg poll of 10 strategists and fund managers. That implies a 13 percent drop over the 12-month period, the steepest in five years, and a gain of 2.9 percent from Wednesday’s close. Fading prospects for monetary easing, a slowing economy and the risk of higher U. S. borrowing costs spurring yuan weakness were among factors weighing on the nation’s shares, the survey showed.
Turnover on the world’s second-largest stock market has collapsed to a two-year low as China’s army of investors, unnerved by 2015′s plunge in equity values, charged into other assets. After a frenzied bet on commodities futures soured, they have set their sights on a bigger target – property. With new home prices now jumping the most in six years, analysts are scaling back projections for interest-rate cuts.
‘The property market and the stock market are like a seesaw,’ said Li Lifeng, a strategist at Sinolink Securities Co. in Shanghai. ‘If the ‘fever’ in the property market doesn’t cool down, funds will flow from equities into real estate.’
Small-cap technology stocks are the least preferred by analysts in the survey because of stretched valuations, while building companies are favored thanks to government efforts to boost infrastructure investment.

This post was published at David Stockmans Contra Corner on September 29, 2016.

Contagion Risks Rise as China Banks Fund Each Others’ Loans

China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis.
Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent.
Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half.
‘Contagion risks are definitely rising,’ said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. ‘The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.’

This post was published at David Stockmans Contra Corner on September 26, 2016.

China’s Housing Bubble Goes Hyperbolic – Shanghai Up 31% Y/Y

China’s attempts to slow runaway home-price growth in major cities are showing little sign of success, stoking the threat of a housing bubble that could destabilize the economy.
New home prices rose the most in six years in August, jumping 1.2 percent from July, according to Bloomberg calculations based on government data. Home prices rose in 64 of 70 cities tracked by the government, up from 51 the previous month. Shanghai prices surged a record 4.4 percent for a year-on-year gain of 31 percent, while Beijing’s climbed 24 percent from a year earlier.
The gains suggest moves by city governments to cool surging home prices over the past six months are doing little to damp demand from investors looking for alternatives to stocks and overseas property. That may prove to be a challenge for central government policy makers on how to respond without choking off growth in the world’s second-largest economy by squeezing credit.
‘The more immediate risk of a sudden and steep downturn in the economy comes from the threatened bursting of the property market bubble,’ Pauline Loong, managing director at research firm Asia-analytica in Hong Kong, wrote in a Sept. 14 report. ‘And bubble it is. The real question for investors is when and what will pop the bubble?’

This post was published at David Stockmans Contra Corner on September 20, 2016.

Tulip Fever In China’s Housing Markets

Housing in major cities in China has seen price hikes over the last year that resemble the famous Dutch ‘Tulip Fever’ bubble of 1637, according to new research by economic consultancy firm Longview Economics.
‘I think what’s going on in China is troubling … some of the valuations there are really quite extraordinary,’ Chris Watling, the CEO of Longview Economics, told CNBC Thursday. ‘We’ve double checked these numbers about seven times, because I found them quite hard to believe.’ The firm’s research found that only San Jose in the Silicon Valley is more expensive than Shenzhen. The Chinese city has seen prices rise 76 percent since the start of 2015, with the acceleration beginning in April 2015 as the country’s stock market was nearing its peak. The situation in Beijing and Shanghai is similar, albeit less extreme, the company states.

This post was published at David Stockmans Contra Corner By Matt Clinch, CNBC ‘ September 19, 2016.

China’s Runaway M&A Trains

Prudence dictates that a compulsive shopper who runs up a hazardous amount of debt should think about cutting the credit card in half and staying home for a while. Try telling that to China’s acquisition-hungry companies.
Two prime examples were on show this week when China Evergrande Group, one of the nation’s biggest developers, and Fosun International, an expanding Shanghai-based conglomerate, reported first-half earnings. The results show just how hard it is to kick the buying habit in an environment where compliant lenders stand ready to advance seemingly unlimited sums.

This post was published at David Stockmans Contra Corner By Nisha Gopalan, Bloomberg Business ‘ September 1, 2016.

Swelling Pile of Iron Ore Casts ‘Dark Cloud’ Over Prices

Iron ore holdings at China’s ports just posted the longest run of gains this year, expanding for five straight weeks to 105.4 million metric tons, according to Shanghai Steelhome Information Technology Co. The swelling pile signals robust supplies, and banks including Macquarie Group Ltd. warned this month that prices may be set to weaken after rallying 34 percent in 2016. ‘The rising port inventory is definitely a dark cloud looming over prices,’ said Zhao Chaoyue, an analyst at China Merchants Futures Co.

This post was published at David Stockmans Contra Corner By Jasmine Ng and Ranjeetha Pakiam via Bloomberg Business ‘ July 19, 2016.

Mind The Red Ponzi – – Yuan Near 6-Year Low, Imports Plunging

China’s yuan traded near the weakest level in almost six years as a plunge in imports signaled declining demand in an economy growing at the slowest quarterly pace since 2009.
The nation’s inbound shipments shrank more than estimated in June and exports dropped for a third month, according to data released Wednesday, while figures due Friday are projected to show a 6.6 percent expansion in April-June gross domestic product. Any disappointments could prompt analysts to bring forward forecasts for interest-rate cuts, Tim Condon, head of Asian research at ING Groep NV, wrote in a note Thursday.
The yuan was little changed at 6.6878 a dollar as of 4:48 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. That’s about 0.2 percent away from a level it reached in November 2010. The currency traded in Hong Kong dropped 0.09 percent to 6.6962. A Bloomberg replica of the CFETS RMB Index tracked by the People’s Bank of China fell for the first time in three days to 94.4.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ July 14, 2016.

Red Ponzi Update – – Heading For 1929-Style Depression

Andy Xie isn’t known for tepid opinions.
The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy.
Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U. S. financial meltdown of 2008.
In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.
China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market – indicating that conditions are ripe for a correction.
‘The government is allowing speculation by providing cheap financing,’ Xie told MarketWatch. China ‘is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.’

This post was published at David Stockmans Contra Corner on June 30, 2016.

China Land Prices Up Nearly 4X Since 2009 – – But Developers Can’t Stop Buying

If the cost of flour is higher than the price of bread, what should a baker do? Chinese property developers are choosing to buy more flour.
Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from the same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.
State-owned developer Poly Real Estate, for instance, bought a piece of land in a Shanghai suburb for 5.5 billion yuan ($835.5 million) last month. This translates to roughly 44,000 yuan per square meter of buildable space. Houses in the region meanwhile go for around 40,000 yuan per square meter. After taking into account construction costs, taxes and other expenses, property prices would have to nearly double for the developer to make money.

This post was published at David Stockmans Contra Corner on June 24, 2016.

Inside China’s $8.1 Trillion Shadowy Banking System – -Even Beijing Worried

China’s central bank is expanding the fight to monitor and control risks emerging in the burgeoning market for loosely-regulated shadow lending.
The People’s Bank of China has started collecting data from the murky world of online financing, in which firms make loans for everything from weddings to mining projects. It’s a growing part of a shadow banking market that ballooned 30 percent last year to 53 trillion yuan ($8.1 trillion), or four-fifths the size of the economy, Moody’s Investors Service data show. The PBOC also wants to make trading in some commercial loans transparent by building an exchange for transactions, according to local media reports.
The PBOC has switched gears from stimulating growth in an easing cycle that started late 2014 to clamping down on the financial and debt risks that threaten to derail a tenuous stabilization in the world’s second-largest economy. The monetary authority is taking on an expanded role among watchdogs as top leaders plan an overhaul of the nation’s regulatory structure.
‘The central bank feels the urgency to improve oversight,’ said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. ‘Online financing remains in the shadows, but an increasing number of the public who are more vulnerable to defaults than institutional investors are joining for the sake of high returns.’

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ June 2, 2016.

Mind The Chinese Yuan – – Nearing 5-Year Low

The yuan drew close to eclipsing the lows reached during January’s turmoil as factory data failed to damp concern about the economic outlook and speculation mounted that the Federal Reserve is preparing to raise interest rates.
The Chinese currency fell 0.05 percent to 6.5815 a dollar as of 5:11 p.m. in Shanghai, about 0.2 percent away from its five-year low in January. The exchange rate dropped as much as 0.25 percent on Wednesday, but pulled back amid talk of state support as well as a surge in the euro.
Manufacturing gauges released Wednesday showed activity remained subdued in May, after April economic data trailed estimates. Investors are now predicting a 53 percent chance the Fed will raise interest rates at its July meeting, up from 26 percent a month ago. The U. S. and China will hold their annual economic meeting next week.
‘Today’s PMI reports and the recent dollar strength both point to further weakening pressure on the yuan,’ said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. ‘The People’s Bank of China may also want to let the currency follow market forces to weaken ahead of the U. S.-China economic dialogue later this month.’

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ June 2, 2016.

China’s Thin Red Line Of Liquidity – – Behind Its 1-Minute Flash Crash

An investor who used Chinese stock-index futures for hedging triggered a flash crash Tuesday, the China Financial Futures Exchange said.
Contracts on the CSI 300 Index due in June dropped by the 10 percent daily limit at 10:42 a.m. local time before recovering almost all of their losses in the same minute. The sudden drop was triggered by the unidentified trader’s order for 398 contracts at current market prices. They were filled consecutively, which prompted the broader selloff, the futures exchange said in a statement.
The slump follows a similar drop in Hang Seng China Enterprises Index futures on May 16 in Hong Kong, a move that heightened anxiety among investors facing slower Chinese economic growth and a weakening yuan. Volume in China’s stock-index futures market, which was the world’s most active as recently as July, has all but dried up after authorities clamped down on speculative trading during the nation’s $5 trillion equity crash last summer. Tuesday’s volatility had little impact on the underlying CSI 300, which rose 3.4 percent.
‘Liquidity in the market is really thin at the moment,’ Fang Shisheng, Shanghai-based vice general manager at Orient Securities Futures Co., said by phone. ‘So the market will very likely see big swings if a big order comes in.’

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ June 1, 2016.

Default Chain Reaction Looms Over China’s $3.6 Trillion WMP Market

The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China.
WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month.
The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets. In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable – a key source of panic in 2008 when soured U. S. mortgage securities triggered a global financial crisis.
Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20 percent and China’s economy showed few signs of recovery from the weakest expansion in a quarter century.
‘There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,’ said Harrison Hu, the chief Greater China economist at Royal Bank of Scotland Plc in Singapore. ‘All the risks are accumulating in an overcrowded financial system.’

This post was published at David Stockmans Contra Corner on May 30, 2016.

China Weakens Yuan Fixing to Lowest Since 2011 – -No Currency Dumping Here!

China’s central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened.
The reference rate was set 0.3 percent weaker at 6.5693 per dollar. A gauge of the greenback’s strength rose to a two-month high Tuesday as traders boosted wagers that U. S. interest rates will rise. The yuan declined 0.06 percent to 6.5631 a dollar as of 5:10 p.m. in Shanghai.
A resurgent greenback is shaking up a strategy that the People’s Bank of China pursued over the past three months – a steady rate against the dollar, combined with depreciation against other major currencies. Traders are now pricing in a better-than-even chance of the Federal Reserve boosting borrowing costs by its July meeting, with officials lining up to indicate their willingness to support such a move, should the current strength in the economy be sustained.

This post was published at David Stockmans Contra Corner by Danielle DiMartino Booth ‘ May 25, 2016.

China’s Steel Dumping Soars In April – -Exports Up 8.8% Y/Y, Domestic Demand Down 7%

To the extent that China’s industrial recovery explains why iron ore and steel prices have jumped this year, China’s latest trade data served as a reminder of how brittle this reason is.
China’s steel net exports rose 8.8% in April from a year before and 9.4% between January and April from a year ago. That raises the question: Why are mills exporting more steel when Shanghai front-month futures prices for rebar steel rocketed 48% between January and April, and signaled a potential rise in demand? Shouldn’t mills be selling more of what they make at home? And steel production is weak, so it isn’t as if producers are churning out more steel available for exports.

This post was published at David Stockmans Contra Corner on May 9, 2016.

Commodities become China’s Hottest New Casino

China’s market regulator may have succeeded in taking much of the froth off the country’s surging commodities markets last week, but the message is not filtering down to many dedicated retail traders.
As Chinese markets reopened on Tuesday after the May Day holiday, a few dozen young traders in Shanghai crowded into a small room provided by a local brokerage. The mostly 20-something male traders, dressed in jeans and T-shirts, were looking forward to another week of fevered risk-taking in China’s hottest new casino. ‘It’s better for futures traders to be young because they can learn faster,’ said Zhang Jun, 26, who has been trading commodities on the Shanghai Futures Exchange for three years but has only recently begun to make any money. ‘This is not relevant to anything you study before you get here. I don’t know anyone who studied a relevant major,’ said Mr Zhang, a mechanical engineer by training.
On April 29, the China Securities Regulatory Commission ordered the country’s three commodities futures exchanges to curb speculation. The exchanges had already taken steps in that direction, by increasing margin requirements and transaction fees while reducing trading hours.

This post was published at David Stockmans Contra Corner on May 4, 2016.

Two Largest Asia Stock Markets Swoon For Want Of ‘Stimulus’

Asia’s two biggest stock markets are jostling for an ignominious prize.
Japan’s Topix index and China’s Shanghai Composite Index have tumbled more than 13 percent in 2016 to rank along Nigerian and Mongolian shares as the world’s worst performers. In the two years through the end of December, the Asian gauges outperformed MSCI’s global measure by at least 20 percentage points. The Bank of Japan stood pat on monetary policy Thursday, sending Tokyo stocks tumbling, while the Shanghai measure fell to a one-month low.
The benchmark gauges in two of the world’s largest stock markets, which have a combined value of almost $11 trillion, are declining as investors detect a reduced appetite from policy makers to boost monetary stimulus. Thursday’s BOJ decision was the first under Governor Haruhiko Kuroda where a majority of economists expected easing that didn’t materialize, while strategists now see China’s central bank keeping its main interest rate on hold until the fourth quarter.
‘Neither China nor Japan have a solid plan on dealing with their slowing economies,’ said Tomomi Yamashita, a fund manager at Shinkin Asset Management Co. ‘There is still scope for easing, and as for Japan there are fiscal policies they can carry out. There’s still hope. But today there was just too much hope on the BOJ.’

This post was published at David Stockmans Contra Corner on May 2, 2016.

Whack-A-Mole Bubbles In The Red Ponzi

Wondering what will blow up in China next? For all the concern about excessive debt, bubbles are likely to keep inflating for a while. The latest exhibit: commodity futures.
Iron-ore contracts traded in the northeastern city of Dalian are starting to look eerily like Chinese stock market indexes did in early 2015, on their run-up to a midyear peak that then turned to bust.
Anyone tempted to believe that the gains are driven by fundamentals should look at what happened this week. China’s iron-ore futures contract dropped by the daily limit to 450.5 yuan ($69) on Tuesday after the Dalian exchange almost doubled trading fees, the latest of a raft of measures to curb speculation. It plunged further to close at 434.5 yuan on Wednesday, still up about 40 percent for the year.
Fueling the rally are a sudden interest by Chinese investors in commodities after their best two-month run since 2012, and the availability of margin finance.
The events mirror almost step by step the rise and fall of the local stock markets last year. The Shanghai and Shenzhen stock exchanges also began to raise trading fees while the bull market was still raging but it wasn’t until regulators clamped down on margin trading that the bubble popped.

This post was published at David Stockmans Contra Corner on April 29, 2016.

China’s Leveraged Bond Traders Heading For The Exits

China’s bond traders are getting a painful lesson on the dangers of leverage.
After years of racking up profits by borrowing cheaply and plowing the proceeds into higher-yielding debt, investors are now rushing to unwind those wagers amid the deepest selloff in 13 months. The bets are getting squeezed from both sides as bond prices sink and borrowing costs rise to one-year highs in the 8 trillion yuan ($1.2 trillion) market for repurchase agreements, used by traders to amplify their buying power.
While a reduction in leveraged wagers is arguably good for China’s long-term financial stability, it risks fueling a downward spiral in a market that Pacific Investment Management Co. says already shows signs of panic amid mounting default concerns. The pullback challenges government efforts to revive economic growth with cheap credit and could hardly come at a worse time for Chinese companies on the hook for a record 547 billion yuan of maturing onshore notes in May.
‘It looks like everybody is cutting their leverage, passively or pro-actively, as pessimistic sentiment continues to brew,’ said Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees 15 billion yuan of fixed-income securities. ‘Carry trades have become riskier.’

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ April 28, 2016.

What Global Growth Rebound? Ports Quiet, Containerships Losing Steam

At a logistics park bordering Shanghai’s port last month, the only goods stored in a three-story warehouse were high-end jeans, T-shirts and jackets imported from the U. K. and Hong Kong, most of which had sat there for nearly two years.
Business at the 108,000-square-foot floor warehouse dwindled at the end of 2015 after several Chinese wine importers pulled out, said Yang Ying, the warehouse keeper, leaving lots of empty space. The final blow came after a merchant turned away a shipment in December at the dock.
‘The client told the ship hands, just take the wine back to France,’ Ms. Yang said. ‘Nobody wants it.’
Pain is increasing among the world’s biggest ports – from Shanghai to Hamburg – amid weaker growth in global trade and a calamitous end to a global commodities boom. Overall trade rose just 2.8% in 2015, according to the World Trade Organization, the fourth consecutive year below 3% growth and historically weak compared with global economic expansion.
The ancient business of ship-borne trade has been whipsawed, first by a boom that demanded more and bigger vessels, and more recently by an abrupt slowing. That turnabout has roiled the container-shipping industry, which transports more than 95% of the world’s goods, from clothes and shoes to car parts, electronic and handbags. It has set off a frenzy of consolidation and costs cutting across the world’s fleets.

This post was published at David Stockmans Contra Corner on April 27, 2016.