Archive for the 'China' Category

China speculators moving into commodities, Soros commentary

Saturday, April 23rd, 2016

Bloomberg:

Chinese speculators have a new obsession: the commodities market. Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.

“The great ball of China money is moving away from bonds and stocks to commodities,” said Zhang Guoyu, a Shanghai-based analyst at Tebon Securities Co. “We’ve seen a lot of people opening accounts for commodities futures recently.” The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea. China’s army of investors is honing in on raw materials amid signs of a pickup in demand.

Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, says the improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders. “These guys are going nuts,” Hong said. “Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015.”

The gain in steel prices isn’t just on the futures market, with spot prices for the physical product also rallying amid a sudden shortage as construction activity accelerates. Rebar prices have risen 57 percent this year on average across China, according to Beijing Antaike Information Development Co., a state-owned consultancy. Even after output of steel increased to the highest monthly volume on record in March, rebar inventory is still falling, signaling a supply deficit.

Bloomberg:

George Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession. China’s March credit-growth figures should be viewed as a warning sign, Soros said at an Asia Society event in New York on Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signaling the government is prioritizing growth over reining in debt.

What’s happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth,” Soros said. “Most of the money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”

Soros said at the World Economic Forum in Davos in January that he’s been betting against Asian currencies because a hard landing in China is “practically unavoidable.” China’s state-run Xinhua news agency rebutted his assertion in an editorial, saying that he has made the same prediction several times in the past.

Soros said China’s banking system has more loans than deposits and has “troubles on the assets side but also increasingly troubles on the liabilities side.” “Other banks have to lend to each other and that’s an additional source of uncertainty and instability,” he said. “The problem has been deferred and it can be deferred for another year or two but it’s growing, and growing at an exponential rate.”

China’s economy gathered pace in March as the surge in new credit helped the property sector rebound. Housing values in first-tier cities have soared, with new-home prices in Shenzhen rising 62 percent in a year. While China’s real estate is in a bubble, it may be able to “feed itself for some time,” similar to the U.S. in 2005 and 2006, Soros said. “It can reach a turning point later than everyone expects,” he said. “Most of the damage occurred in later years. It’s a parabolic cycle.”

We never saw 2008 coming. We didn’t understand the August 2007 Bear Stearns conference call. Driving to work in 2006 and 2007, we had no idea what the radio ads meant when they said “no income verification” for getting a mortgage — meanwhile the guys on the shop floor were flipping expensive condos on Collins Ave in Miami. Back then our classmate figured it all out, and now he has a school named for him at Harvard.

Soros is right, as are others, about the over 3x GDP and accelerating debt. He’s also right: “It can reach a turning point later than everyone expects. It’s a parabolic cycle.” Barton Biggs was right about Japan’s crash, just 3 years too early. In a way it’s funny that the latest Chinese investment craze is commodities, since the country is so overflowing with crazy debt-fueled infrastructure capacity that there is only one way things can go, eventually. (The country was building empty cities 6 years ago and there’s only so long that can go on.)

One difference between 2008 and now is that back then private shareholders took big hits when sub-prime exploded, but in this case China controls the banks that own the bad debt, and they lend to each other to put off recognizing the bad debts and zombie companies. This would appear to be very bearish both for commodities prices and the renminbi and other Asian currencies, as well as — eventually — for any publicly traded securities of those banks. It remains to be seen whether there are hidden risks like the CDS’s of 2008.

New Silk Road

Friday, July 24th, 2015

CFR:

More than two thousand years ago, China’s Han Dynasty launched the Silk Road, a sprawling network of commerce that linked South and Central Asia with the Middle East and Europe. Today, the idea of a “New Silk Road,” an intertwined set of economic integration initiatives seeking to link East and Central Asia, has taken hold. By 2013, Chinese President Xi Jinping was assertively articulating his own vision for a China-led Silk Road that would streamline foreign trade, ensure stable energy supplies, promote Asian infrastructure development, and consolidate Beijing’s regional influence.

The original Silk Road came into being during the westward expansion of China’s Han Dynasty (206 BC–220 AD), which forged trade networks throughout what are today the Central Asian countries of Kyrgyzstan, Tajikistan, Kazakhstan, Uzbekistan, Turkmenistan, and Afghanistan, as well as modern-day Pakistan and India to the south. Those routes eventually extended over four thousand miles to Europe.

Central Asia was thus the epicenter of one of the first waves of globalization, connecting eastern and western markets, spurring immense wealth, and intermixing cultural and religious traditions. Valuable Chinese silk, spices, jade, and other goods moved west while China received gold and other precious metals, ivory, and glass products. The route peaked during the first millennium, under the leadership of first the Roman and then Byzantine Empires, and the Tang dynasty (618–907) in China.

But the Crusades, as well as advances by the Mongols in Central Asia, dampened trade. By the sixteenth century, Asian commerce with Europe had largely shifted to maritime trade routes, which were cheaper and faster. Today, Central Asian countries are economically isolated, with intra-regional trade making up just 6.2 percent of all cross-border commerce. They are also heavily dependent on Russia.

China has multiple reasons for pursuing the New Silk Road. Xi has promoted a vision of a more assertive China, while the “new normal” of slowing growth puts pressure on the country’s leadership to open new markets for its consumer goods and excess industrial capacity. Promoting economic development in the troubled western province of Xinjiang, where separatist violence has been on the upswing, is another major concern, as is securing long-term energy supplies.

China’s strategy is conceived as a two-pronged effort. The first focuses on overland infrastructure development through Central Asia—the “Silk Road Economic Belt”—while the second foresees the expansion of maritime shipping routes through the Indian Ocean and the Persian Gulf—the “Maritime Silk Road.”

In 2013, Xi told an audience in Kazakhstan that he wants to create a vast network of railways, energy pipelines, highways, and streamlined border crossings, both westward—through the mountainous former Soviet republics—and southward, toward Pakistan, India, and the rest of Southeast Asia. Such a network would also expand the international use of Chinese currency, the renminbi, in transactions throughout the region, while new infrastructure could “break the bottleneck in Asian connectivity,” according to Xi. The Asian Development Bank, highlighting the need for more such investments, estimates that the region faces a yearly infrastructure financing shortfall of nearly $800 billion. Xi subsequently announced plans for the maritime silk road

The New Silk Road Strategy should be expanded to include aviation and other supply chain innovations as well. BTW, here’s Thomas Sowell: “Freeman Dyson has called the 1433 decision of the emperor of China to discontinue his country’s exploration of the outside world the ‘worst political blunder in the history of civilization.’ The United States seems at this moment about to break the record for the worst political blunder of all time: Iran.” China is fixing its problems while the USA is making its own problems much worse, and completely unnecessarily.

May you live in interesting times

Wednesday, July 8th, 2015

Or: Better to be a dog in a peaceful time, than to be a man in a chaotic period. Bloomberg: “1,323 companies have halted trading on mainland Chinese exchanges, locking up $2.6 trillion of shares, or about 40 percent of the market’s capitalization.” We’re leaving for China in an hour. We’ll let you know what we learn.

Thoughts on Shanghai 2000 and 6000

Tuesday, July 7th, 2015

Stratfor:

The Shanghai Composite Index fell 6 percent on July 3, rounding out a 28 percent decline since June 12, when the country’s stock markets peaked. The deterioration occurred despite intensive government efforts to stabilize prices and revive investor sentiment. Overt attempts by Beijing included cutting benchmark interest rates and reserve requirement ratios and loosening restrictions on investor access to margin loans, in addition to less overt moves, such as direct interventions to prop up the market with government-backed purchases of blue chip stocks. On Friday, in a clear bid to win investor confidence in its oversight abilities, the securities regulator announced it would investigate signs of potential market manipulation. Yet so far, Beijing’s efforts have failed to achieve the desired effect of stimulating, or at least stabilizing, China’s leading stock markets.

In the days and weeks ahead, Beijing will not meekly accept the natural winding down of the past year’s stock boom turned bubble. Rather, it will continue to work, both overtly and covertly, to prevent prices from collapsing outright — all while seeking to reshape investor sentiment and expectations through investigations, like those recently announced. The question of why Beijing feels compelled to take action remains, especially when any intervention risks exacerbating whatever financial and political fallout may come from an eventual market decline or crash. The answer to this question lies in understanding the role of stock markets in China’s economy and Beijing’s broader policy priorities, as well as evaluating the potential effects of a stock market crash on both.

The Chinese government’s core policy goal — the crux of its entire economic reform and rebalancing program — is to cultivate a domestic consumer base capable of supporting nationwide growth that is stable, sustainable and less exposed to fluctuations in external demand. To do this requires a boost in average incomes to a level where non-essential purchases become feasible for ordinary people. Additionally, China needs to instill in its citizens a sense of financial security adequate enough to convince them to spend — rather than save — their disposable income.

China has struggled on both fronts over the past two decades. Until recently, China was a country of near-universal poverty. Its post-1978 economic growth model, grounded as it was in low-cost exports and state-led investment into infrastructure construction, necessitated two policies: the systematic repression of manufacturing wages to maintain the competitiveness of exports and the suppression of interest rates on savings deposits. Keeping interest rates low ensured cheap financing for China’s state-owned sector, which was responsible for the vast majority of infrastructure development and which survived on credit from state-controlled banks. These factors, more than any supposed cultural inclination to save, explain China’s extraordinarily low levels of private household consumption relative to other parts of its economy — and compared to consumption levels in other countries.

For China’s leaders, a key question over the past two decades has been how to cultivate greater household consumption without undermining the low-cost export and government investment-led economic growth model. Doing so required creating investment avenues by which ordinary Chinese citizens could achieve returns on their savings that outpaced inflation, but which did not direct those savings away from domestic export and construction industries. Allowing ordinary Chinese to invest their savings overseas was clearly not an option — not only would it direct those savings away from the domestic economy, but the free flow of capital in and out of China would constrain the government’s ability to manage the yuan’s value. Bearing this in mind, China’s leaders in the early 1990s settled on two approaches: commercial real estate markets and stock markets. Both would give ordinary Chinese new opportunities to invest their savings and reap the rewards while simultaneously directing those savings into key industries and sectors, including housing and infrastructure construction and the state-owned sector, which enjoys disproportionately higher representation on China’s largest stock exchange.

For most of the past 20 years, commercial real estate was by far the dominant avenue for ordinary Chinese to invest their savings, with stock markets playing a minor and unsteady second fiddle. Real estate and related industries formed the single largest component of China’s economy. As long as home sales and prices rose, as they did with extraordinary consistency for two decades, real estate provided an unrivaled investment opportunity, one firmly backed by the Chinese government. This was especially true after the 2008-2009 global financial crisis decimated China’s low-cost export sector, amplifying the importance of construction-related industries for employment and social and political stability. In comparison, China’s stock markets, bedeviled by opacity and poor regulations, floundered. By 2009, most ordinary Chinese viewed investing in stocks as akin to playing the lottery.

To the extent that real estate was the primary means for ordinary citizens to increase their wealth, it also became critical to Beijing’s efforts to stimulate domestic consumption. This in part explains the government’s hesitancy to implement the kinds of policies that in the long run would contribute to cultivating domestic consumption. In the near term, however, bringing in policies such as deposit rate liberalization would raise costs for the state-owned companies largely responsible for real estate-related construction.

Yet now, after peaking, China’s housing has entered a period of protracted decline. With real estate-related investments no longer promising the returns they once did, and with China’s economy slowing, Beijing must find new tools for supporting domestic consumption. This is especially critical given that China is no longer able to rely on low-cost exports or the housing sector. Beijing must now look to private household consumption and consumption-driven industries as the primary drivers of national economic growth.

This is the backdrop against which the sharp, government-supported surge in China’s stock markets over the past 12 months should be understood. It also helps explain why the government continues to support the stock market even as it becomes clear that the market is a bubble, and even as investor leverage rises, alongside the financial risks of a market collapse. In short, a collapse in the stock market, in a climate of stagnant-to-negative growth in real estate, would almost certainly lead to a drop in household consumption and thus in consumption-driven industries. This is exacerbated by an environment that lacks substantial alternative investment avenues, in a period of slowing economic growth, slowing wage increases and rising unemployment.

Private consumption is increasingly critical, not only to Beijing’s long-term reform goals but also to maintaining economic growth, employment, and social and political stability in the near term. Beijing seeks to avoid, as long as it must, any actions that infringe on private consumption. If stock markets collapsed tomorrow, the most immediate effect — beyond widespread but containable ire over lost savings and a significant hit on business cash flows — would be a surge in state-backed bank deposits as ordinary investors move their capital to the only place offering safe, if modest, returns.

This is not necessarily a bad thing for Beijing. After all, China’s state-controlled banking sector would be flush with capital and in a stronger position to pump credit into the economy as needed. At the same time, it would likely cut against the underlying thrust of China’s reform and rebalancing program — specifically, the need to curb wasteful state-led investment, reduce the state-sector’s reliance on artificially cheap financing and improve the ability of banks to price risk. All of this could ultimately combat the widespread capital misallocation that has characterized every prior instance of massive state-backed credit expansion in China. Over the past year, banks have become an increasingly important source of corporate financing. Amid a collapse in the stock market, a rapid surge of deposits into banks would force Beijing to turn once again to the financial sector to support the economy. In all likelihood, this would lead to a repeat of the same speculative bubbles that attended the post-2008 stimulus drive.

Alternatively, Beijing could try to compel banks to hang onto the surge in savings rather than expanding lending. This would realistically be done by raising deposit interest rates. Such a move would almost certainly trigger an economy-wide crisis as the state-owned sector, already suffering falling profits and hefty debt repayment costs, collapses. It would also be an enormous boon to ordinary Chinese citizens, who continue to park the vast majority of their funds in savings deposits. By forcing a broad restructuring of Chinese industry, this would substantially accelerate the central government’s long-term reform plans. It remains doubtful that the Communist Party government could survive such a crisis intact. At any rate, it is highly improbable that Beijing would raise interest rates, a policy that stands a strong chance of undermining state security in the immediate term.

This is the basic conundrum China’s leaders face in determining whether and for how long to sustain the current stock market boom. Barring a radical lifting of restrictions on overseas investment or a sharp increase in deposit rates, China effectively lacks channels for ordinary citizens to generate wealth beyond investment in real estate and stocks. Real estate is slowing, weighed down by years of accumulated oversupply. It no longer promises the returns it once did. If stocks decline, it is unclear what else ordinary people can rely upon to generate returns. The impact of a stock market decline on private consumption growth would only compound its effects on corporate balance sheets and investment, and thus on employment and economic growth.

We noted it at the time a month ago when Shanghai was back at levels not seen since 2007, and it didn’t seem vastly overvalued compared to then. We also noted the swift drop a couple of weeks ago. However, we were unaware of the interesting political element in all of this. Markets can be very helpful to governments, but when it’s markets versus governments, who wins?

Update: both the WSJ and Bloomberg have very interesting pieces on this. It turns out our question in the preceding paragraph was apt.

Fast, slow, stop

Monday, May 18th, 2015

It took 14 months to build the Empire State Building, back when America knew how to do things. 26 months for the WTC to become the tallest building around. We were in Xiamen recently and we told that the airport is to be completely torn down and a much larger one built in 4 years. Question: given what you know about California’s $68+ billion high speed rail fantasy, how long might it take to replace tiny Santa Monica airport?

Good TV

Monday, May 11th, 2015

If you’re tired of watching reruns of L&O or My Friend Flicka, we recommend CNBC Asia. It’s tomorrow’s news today! Also particularly good on Sunday since it’s Monday morning in the PDT afternoon. Bernie Lo is excellent, as are many of his associates. Indeed, CNBC Asia is superior in many ways to the US broadcasts. On Sunday PDT they had Marc Faber as co-host, and he was well informed and periodically funny. He interviewed the head of BOC aircraft leasing (a subject near and dear to our heart), and we learned a lot. When was the last time you could say that about US TV?

Hard to top 37 years of uninterrupted growth

Wednesday, April 22nd, 2015

SCMP: “Measuring from December 1978, when the Chinese Communist Party ‘shifted its centre of gravity from propagandising class struggle and organising political campaigns to economic construction’, China is now in its 37th year of economic expansion.” BTW, this morning we saw up close and personal something resembling this. On balance we think they have a good shot at getting past the current problems, but it’s a drama such that no one can predict Act V with any certainty. A decade ago, we saw the past with some clarity, but didn’t know that within a few years billions of people would be walking around with tiny supercomputers. Live and (hopefully) learn.

Cryptic

Friday, April 17th, 2015

Stratfor:

On March 9, Liu Jian, a former military officer and grandson of Zhu De, one of China’s most revered revolutionary-era generals, told a state-affiliated news website that Guo Boxiong, former vice chairman of the central military commission, was responsible for the sins of his son, Guo Zhenggang. Guo Zhenggang, also a general, has come under investigations for corruption. His father had held a senior post in the People’s Liberation Army under the Hu Jintao government and was appointed by Jiang Zemin, Hu’s predecessor. Guo Boxiong’s colleague Xu Caihou was brought down in the first wave of purges against the military late last year. Liu’s comments about Guo Boxiong were widely publicized and republished in the South China Morning Post.

Arrests for corruption have been going on in China for more than a year. Given the endemic nature of corruption in the Chinese system, with its interlocking political and business relations, it is likely that corruption charges could be brought against an enormous number of officials; they have already been brought against hundreds of thousands of people since mid-2013, and that is likely just a fraction of the number of officials who could be charged. Therefore, from our point of view, the corruption campaign is as much a purge as a cleanup. A purge differs in that it takes place for political reasons — to weaken the opposition, strengthen the position of the government or, most likely, both. That raises the interesting question of who Chinese President Xi Jinping sees as his enemy, and why he is worried enough about them to purge them.

In this context, Liu’s statement is interesting. A person whose primary claim to fame is descent from a national hero has been showcased saying that in a particular corruption case, the father must be held responsible for what the son did. Put differently, Liu, whose grandfather is by definition beyond reproach, is saying that in at least this case, the son’s corruption is the father’s responsibility. The Chinese government has chosen to showcase this statement, and it must therefore be taken seriously and its meaning unraveled.

That is not easy. China has become increasingly opaque, recalling the time when Mao Zedong’s whims would be revealed in poems on wall posters for the world to scratch its heads over. We will assume that this statement is not simply directed at Guo Boxiong, but is stated as a principle of the anti-corruption drive. Otherwise Guo could simply have been arrested without this fanfare. So our best guess is that a generalizable statement is being made, and that statement is not simply about fathers and sons but the older generation of leaders and the younger.

Xi’s anti-corruption campaign is both a genuine attempt to deal with corruption and an attempt to strengthen his position, the position of the Party throughout China, and Beijing’s position as the center of China. The charge could be made that prior presidents had been lax in this. Excessively interested in economic growth and prosperity, they had let the instruments of state control atrophy and, as one outcome, permitted corruption to flourish. More important, the weakening of state control has made managing China during its economic downturn singularly difficult. It is not only an economic problem, but also a social and political problem. Xi has been put in the difficult position of managing political and social forces with weakened and corrupted instruments. Hence, the anti-corruption movement is aligned with a purge.

But obviously, corruption is systemic, and so is the weakness of state power. From Xi’s point of view, it is necessary to address these issues but also to assign blame. That blame would rest with prior Chinese administrations. In laying the blame at their feet — at the feet of the elders — Xi both weakens their residual power and strengthens his own. Jiang, who preceded Hu as president, retains substantial power, as prior presidents in China frequently do. He also presided over China’s major post-1989 economic surge, making it his primary goal. He was the dominant political figure in China during the 1990s and early 2000s and retains significant influence. He is also, according to Forbes, worth $1.7 billion. He oversaw the period of economic climax and intensifying corruption. His own wealth, if Forbes is right, likely had complex origins.

The Chinese public seems enamored with Xi and his fight to try to purify China. In an economic downturn, targeting those who became wealthy, particularly politicians, is a logical process. Xi is obviously locking horns with Jiang over these campaigns that are taking down the former president’s supporters at an accelerating pace. If this campaign were to reach its logical conclusion, then Jiang also would be a likely target.

In retrospect. the past was simple. Build factories for export, take advantage of the very low incomes in the countryside, and grow 10-15% a year. Highly successful for a long time. But that no longer works. What’s next? It’s not at all simple, and so you have dramas such as the above. Five years ago we looked at a number of the issues involved in China’s coming transitions, and the answers are no clearer today. Here’s a couple of amazing statistics for you, while we’re talking about transitions. 100 years ago, 42% of Americans lived on farms; now it’s negligible. China today is about where America was 100 years ago with over 40% on farms; what will the next century bring?

Recession?

Monday, April 13th, 2015

Stratfor:

In the second quarter, the depth of China’s economic problems will become even clearer, with virtually every major indicator — barring, perhaps, those for services industries and household consumption — likely to show slowing or negative growth. Attention will especially focus on the housing sector slowdown’s effects on financial stability and employment in regions most directly exposed to construction-related industries, especially the rust and resource belts of northern and northeast China. Stratfor expects reports of defaults by local property developers, resource companies and building materials businesses to become more common this quarter, along with anecdotal evidence of localized economic and employment crises in provinces like Shanxi. However, thanks in part to proactive government measures to calm local financial crises and in part to China’s inherent internal economic fragmentation, these crises will remain fairly isolated within the quarter.

Economic fragmentation, in conjunction with the government’s desire to allow the economic slowdown to continue and to use the slowdown to drive economic reform and restructuring, make it highly unlikely that Beijing will reverse course and engage in large-scale economic stimulus this quarter. Further interest rate or reserve requirement ratio cuts are possible — even probable — but will serve primarily to ensure that banks have ample liquidity to manage rising non-performing loan ratios. Otherwise, Beijing likely will continue using targeted fiscal and financial measures to boost certain regions and industries — notably services, agriculture and manufacturing — rather than opt for investment and credit expansion on anything approaching the scale of the post-2008 period. In the meantime, Chinese authorities will continue the messy process of implementing long-discussed reforms such as establishing a national property registry, creating a deposit insurance scheme (as a step toward liberalizing deposit rates at state-owned banks), and expanding municipal bond pilot programs.

In the political sphere, China’s second quarter will be dominated by the ongoing anti-corruption campaign. Over the coming months, the campaign will focus on officials from the 26 state-owned enterprises publicly named as potential targets in February, with particular attention to businesses in the struggling resources and construction-related industries. China will continue expanding investment, diplomatic and overland infrastructure ties across its periphery this quarter. Beijing will pay particular attention to implementing President Xi Jinping’s much-touted Silk Road Economic Belt initiative and solidifying plans to build overland rail ties to Thailand.

So we’ve gone from a world where 8% growth in China is a recession to the possibility of something much more traditional. Times appear to have changed.

Miscellaneous learning opportunity

Wednesday, April 8th, 2015

Stratfor:

The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China’s traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river’s dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong — a complex of capillaries without which China likely would never have coalesced into a single political entity…

Only after the Qin captured the Yangtze’s three primary regions — the Upper, Middle and Lower stretches — in 221 B.C., thereby gaining access to the southeast coast, did “China” as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history.

If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain — the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.

Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs — Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north’s control. Conquering and integrating them from the outside therefore required not only overwhelming military power — historically, northern China’s advantage — but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible…

the Yangtze River is by far the world’s busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation’s total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year — up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico. This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization…

Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China’s economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity — like the growth model it embodied — became a social and political liability.

A debt bubble helped keep things moving for a while; however, this rebalancing towards the interior seems like a more effective program over the longer term. It’s amazing that China has come this far this fast, without the massive dislocations some had forecast. (Spengler chimes in as well.)

Vapors

Monday, April 6th, 2015

Larry Summers:

I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out. This failure of strategy and tactics was a long time coming…With U.S. commitments unhonored and U.S.-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank.

So it is that Larry Summers not only gives the vapors, he gets them too. HT: PL

Letting banks fail

Friday, April 3rd, 2015

Stratfor:

China has taken another step in shifting its economy. Zhou Xiaochuan, chairman of the People’s Bank of China, announced March 31 that starting May 1, the Chinese government would insure individual deposits of up to 500,000 yuan (about $81,000) at Chinese banks. By providing an explicit guarantee on ordinary bank deposits, the insurance scheme will pave the way for Beijing to liberalize deposit interest rates, allowing banks to compete more fiercely to attract new depositors.

At the same time, it will enable China’s government, at least in theory, to step back from its longstanding but implicit promise not to let individual banks fail, injecting risk into the system. This deposit insurance is a key step toward curbing the moral hazard and widespread capital misallocation that characterize China’s economy, something that has long eluded Chinese decision-makers focused on maintaining high levels of economic growth. It would have the added advantage of boosting consumer confidence and spending.

Soon we’ll probably see some bank failures. It makes sense, given the lending practices since 2008/9.

Sectoral slowing

Friday, March 13th, 2015

Fortune:

Chinese industrial production grew only 6.8% in January and February, the slowest since 2008. Real estate sales plunged 15.8% in value. Fixed-asset investment, the principal driver of Chinese growth, recorded anemic growth at 1.05% and 1.03% in January and February, respectively (compared with 1.49% and 1.42% in the same period last year).

This fellow has his work cut out for him.

Rudd: “The strongest Chinese president since Mao”

Thursday, March 12th, 2015

Xi Jinping, the last party plenum in 2014 with its entrenching of the anti-corruption movement into the fabric of Chinese law, and the restoration of party legitimacy are among the subjects of a remarkable interview of the 26th PM of Australia, Kevin Rudd (who speaks Mandarin). Some excerpts:

“All of us who’ve grown up in study of Western political science assume the $14,000 per capita income threshold; then people demand more liberties, and what you end up with is one form of democratic government or other. Xi Jinping does not have that as his game plan for China. What he is attempting is to defy history. Frank Fukuyama’s point, we end with liberal capitalism is not where China is going. Xi Jinping is seeking to advance a radical alternative.”

On a perhaps unrelated but interesting note, the SCMP reports that Xi Jinping just reshuffled the leadership at China’s version of the Secret Service. The WaPo covers some similar territory:

To mark China’s Spring Festival, Xi made a visit in mid-February to the small northern village of Liangjiahe, where he was banished in 1969 as a raw 15-year-old during the turmoil of the Cultural Revolution, where he worked for seven years and where he joined the Communist Party. His father had been persecuted and jailed in one of Mao Zedong’s purges, and Xi suffered humiliation, hunger and homelessness, sleeping in a cave, carrying manure and building roads, according to official accounts. “Perplexed” when he was sent to the countryside, Xi emerged as if remolded by the painful years he spent there. He learned enough in the village to be able to cast himself as a man of the people. The lessons also made him profoundly distrust those same people.

He is also a president whose worldview, and vision for China, were shaped by two historic traumas. The first was the trauma of the Cultural Revolution, when Mao used the people to tear his own party to shreds, and Xi was caught up in the chaos. The second was the trauma of the collapse of the Soviet Union under Mikhail Gorbachev in 1991, as the public was invited to rise up and the Communist Party there was consigned to oblivion. For if Xi casts himself as the man to save the Communist Party from its demons, he is also a man obsessively determined to retain full control of any reform process, in ways that Mao and Gorbachev did not do.

The twin traumas help explain why he won’t allow the people to drive any process of change. His determination to crack down on corruption, for example, is matched by an equal resolve to exclude the public from participating in that campaign, lest the forces he unleashes spin out of control. “The combination of that domestic trauma, experienced as a young person, and the trauma of the collapse of the Soviet Union, those two traumas, one domestic and one foreign, have really shaped him,” said Roderick MacFarquhar, a leading expert in Chinese politics at Harvard University. “He has seen what happens if you allow too much criticism of the party and the establishment.”

This is a guy who seems almost perfectly ill-suiteded to deal with China’s $30 trillion debt problem, a problem that requires information transparency in markets, and a huge number of legal, financial, and corporate restructuring experts who are, for the most part, both non-political and capable of making important decisions at their level.

15 years that went by pretty fast

Saturday, March 7th, 2015

NYT:

entire industries have emerged and seized the dominant positions in the Nasdaq index even as their predecessors faltered. Apple, now the world’s largest company by market capitalization, barely registered in 2000, and the first iPhone was not announced until 2007. Over a billion smartphones were shipped in 2014.

Google, which now ranks third and dominates the market for Internet search advertising, went public in 2004 at $85 a share, giving the company a market value then of $23 billion. Today, its market capitalization is over $360 billion, and its shares were trading this week above $570.

Facebook, now No. 5 in Nasdaq’s ranking, dominates social networking, another industry that did not exist in 2000. It went public less than three years ago, and is already valued at over $180 billion.

Had the Nasdaq index itself not been transformed by innovation and competition, it would be nowhere near its previous peak. The stocks of many of the surviving companies, like Microsoft and Intel, have not come close to the levels they reached before 2000. That means investors who bought and held the stocks of individual companies in 2000, as opposed to broad mutual funds tied to the Nasdaq or index funds like the QQQs, are still underwater

Some things are going really well and some are going really badly. Hard to know where we’ll be in another 15 years.

Very unusual, and so forth

Wednesday, February 4th, 2015

Strong words from the Gallup CEO on the ridicuoulsly low labor force participation rate. Guy’s not with the program. What’s up with that? And the UN reports more horror from ISIS. Finally, China cut reserve requirements. That’s it. Things along the line of the UN report are so awful that words fail.

Fast

Wednesday, January 28th, 2015

Reuters

The company sold 74.5 million iPhones in its fiscal first quarter ended Dec. 27, while many analysts had expected fewer than 70 million. Revenue rose to $74.6 billion from $57.6 billion a year earlier.

Profit of $18 billion was the biggest ever reported by a public company, worldwide, according to S&P analyst Howard Silverblatt. Apple’s cash pile is now $178 billion, enough to buy IBM or the equivalent to $556 for every American.

Apple Chief Executive Officer Tim Cook said the Cupertino, California-based company would release its next product, the Apple Watch, in April.

The iPhone did not exist a decade ago. We wonder if official measures of productivity are way off today, much less than is actually happening. The instantaneousness of everything has its large downsides, but we think that historians may find that this current period of economic downturn and dislocation would have been far worse without the vast power and speed of these tiny talking computers.

Of course productivity is roughly defined as an increase in output when inputs remain constant. Most of the uses of the tiny computers in supply chain reductions, energy conservation and optimization, shorter and more accurate decision algorithms, etc. have yet to be discovered or implemented. Therefore, even with the ridiculousness of loons at the EPA etc., the economy might actually do well.

China changes

Sunday, December 28th, 2014

FT:

Beijing lifted controls on credit and flooded the economy with cash, much of which was funnelled into an expanding property bubble. The result was a construction boom and an unprecedented increase in total debt to GDP from 147 per cent at the end of 2008 to 251 per cent by the end of June this year, according to estimates from Standard Chartered. Credit expansion has slowed in recent months but is still growing a lot faster than GDP while providing less and less growth for each renminbi borrowed…Despite many years of extreme overcapacity and falling profits – the price of steel is now less than the price of cabbage in China – steel production in China was up 5.4 per cent in the first nine months of this year. Bankruptcies are another area where the pain has not yet really begun.

NYT:

Mr. Xing borrowed heavily to expand. The debt could be serviced as long as coal prices were high, but they began to fall in 2012 as the economy slowed. Mr. Xing sought to diversify, using his close ties with local officials to lease farmland and build apartment blocks, small dams, walnut plantations and a paved, solar lamp-lit road from the city to his home village. When coal prices collapsed, Mr. Xing’s company filed to restructure $5 billion in unpayable loans. The housing blocks are still concrete shells, and farmers say that the walnut plantations are not mature enough yet to harvest and that Liansheng owes them money. Mr. Xing was detained in March, and his whereabouts is unknown.

GE China CEO:

China is going through some fundamental changes. The next decade or two or three will be very different. If you look at some of the challenges the country is facing, they’re very much lined up with where GE’s core competencies are. Energy demand is going to continue to increase. Urbanization is going to continue. There will be more roads and more airports. There are definitely more people aging. Quality and affordable health care will be a big priority for the government. The point here is that, our portfolio and our technologies, they are a good fit…GE has over 18,000 employees in China today. Over 90% of employees are local…the direction the new administration is taking the country is the right one. They are trading the speed of growth for the quality of growth, shifting to more consumer-oriented growth.

Reuters:

China’s trade will grow 3.5 percent in 2014, implying the country will fall short of a current 7.5 percent official growth target, according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers. The initial version of the report published on the website on Saturday, which quoted Minister of Commerce Gao Hucheng, was replaced with a new version that had identical wording but with all the numbers and percentages removed…

Foreign direct investment will amount to $120 billion for the year, the earlier version of Ministry of Commerce report said, in line with official forecasts. The earlier version of the report also said outward non-financial investment from China could also come in around the same level. That would mark the first time outward flows have pulled even with inward investment flows in China, and would imply a major surge in outward investment…The earlier version of the report also predicted that retail sales growth would come in at 12 percent for 2014, in line with the current average growth rate.

Stratfor:

The rules that Beijing issued Dec. 22 will require local governments above the county level to create special departments for registering ownership and land use rights, housing and a variety of natural resources. They will mandate that local authorities keep entries electronically and in print and that they update them regularly. These records will then be subject to both central and provincial oversight. According to news reports, the regulations will require property owners to register their holdings with local authorities. Anyone found guilty of “abuse of power” or otherwise failing to fully disclose their holdings will be prosecuted…

the central government’s effort to expand a property tax scheme, which it is currently being piloted in Chongqing and Shanghai municipalities, to the national level. If effectively implemented, the effects of such a tax on China’s property markets would be manifold. Such a tax could provide a crucial supplemental revenue source for local governments, which are responsible for the vast majority of government-related expenditures in China today. Similarly placing a regular tax on homeownership would incentivize those who own more than one property to put their additional properties to productive use. Currently, homebuyers pay taxes at purchase but not thereafter. This means that many treat second and third homes as investments rather than as sources of income through rent. The new tax would create the basis for a more stable and sustainable rental market and curb extreme property speculation…

Beijing’s efforts to widen a municipal bond pilot program currently in progress in 10 regions and cities across the country will also be critical. By opening municipal bond markets, central authorities aim to create new ways for local governments to raise capital. This would allow these governments to repay outstanding debts and to cover new expenditures, further reducing their reliance on land sales for revenue generation. Beijing will need to implement bond markets and the national property registry in tandem over the coming years. This is essential. For a national property registry to be effective in curbing speculation, a municipal bond market must be in place. This would give investors new avenues for generating reasonable returns on their investments…

Opposition to these and other reforms still in the planning stages will run high. Most objection will come from local governments and a range of local-level actors — particularly property developers and speculators. Municipal governments will hesitate to carry out top-down reform initiatives that, in spite of long-term benefits, will likely result in direct revenue loss, slowing local economic activity and causing a rise in unemployment. Local government officials, too, are often directly and indirectly tied to property developers and speculators. Because of this, they will hesitate to carry out measures that either limit their own financial prospects or implicate them in illegal activity.

Stratfor addressed some related issues a few months ago. This is impressive stuff; these are difficult and complex changes. Obviously the changes are essential to getting to a self-sustaining economy and not the one that was 70% dependent on exports for success. Good luck!

Their trajectory and ours

Sunday, December 7th, 2014

On our flight to Hong Kong today, there was no internet, so what’s today’s American going to do? Read? Pshaw! We watched TV. One show was called Shades of Life, the Winter’s Fairy-tale episode. It’s a Horatio Alger story of a guy with a very tough childhood becoming a successful entrepreneur. He sure knows how to clean a toilet and polish an office; fortunately his wife (whose family seems to hate this guy at first) knows ppt and accounting and through pluck and luck and a number of bad rejections and false starts he creates a big building maintenance company. We also watched the film Two States. It’s about an MBA guy from Delhi and an MBA girl from Chennai who want to get married, but his Punjabi family can’t stand her Tamil Brahmin family and vice versa. They’re both intractable, and most of the film is about how to create enough peace so that there can be a wedding. At the end, enough problems are resolved so that an extraordinarily elaborate wedding takes place, and the flash forward at the end is about playing with the beautiful babies. (There were other entertainments that covered similar ground to these two productions.)

What struck us is that the TV show and the movie were, among other things, sermons; that’s a little strong but you catch the drift. The point of the Hong Kong story is that: life’s tough, and if you want to succeed, suck it up and keep trying. Indeed, at one point, the young wife, after yet another setback for hubby, actually says in English “Tomorrow is Another Day.” Hard to miss the point of that! The happy ending involves riches and a fabulous home and grounds. As for the Indian movie, well forget Murphy Brown — these guys refuse to even elope. The family issues absolutely have to be ironed out and there will be no wedding until that happens, and the notion that there might be kids on the side simply does not exist.

In contemporary America, would we be likely to often see a Horatio Alger story without a Hollywood sneer at an ending such as this one has? And as for the Indian movie, first click the Murphy Brown link above and let’s talk. 40-80% illegitimacy rates are insane because they lead to gangs, youth crime and violence for the boys and different but comparable disasters for the girls. But if you’ve watched CNN lately, it’s unlikely you’ve seen these important issues discussed. Much safer for one and all to wallow in the fetid swamps of victimhood than deal with the profound problem which is driving a stake into the heart of both personal and political self-governance.

It’s easy to imagine plentiful American versions of the Hong Kong and Indian shows in US theaters as well as prime time radio and TV 50-75 years ago. Are they still around much today? There’s more than one reason for that of course, and they doesn’t bode well for the future.

Been there, done that

Thursday, December 4th, 2014

Marketwatch (slightly edited):

It’s official: America is now No. 2…China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A. As recently as 2000, we produced nearly three times as much as the Chinese. To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in terms of purchasing-power parity (PPP)

PPP? Where have we seen that before? Ah yes, we considered it at length a decade ago. (China has grown spectacularly in the last decade of course, but PPP is a little exaggerated compared to other measures.)

PS: doesn’t the reporter seem kind of happy about the story and headline?