Yes Virginia...It's a Bubble...

[GRG55]

Re: Yes Virginia...It's a Bubble...

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.

The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.

I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?

The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

Imagine that...

Yuan Drops as SDR Approval Seen Prompting PBOC to Reduce Support

December 1, 2015 — 1:47 AM MST

The yuan weakened in offshore trading amid speculation China’s central bank will rein in intervention now that the IMF vote on reserve-currency status is out of the way...

...“The PBOC should be reducing its currency intervention and the yuan is likely to decline on weak economic fundamentals in China,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. “That said, China will have to strike a balance between letting the market play a bigger role and not allowing any major depreciation.”...

[touchring]

Re: Yes Virginia...It's a Bubble...

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.


The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.


I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?


The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

My 2 cents on the reasons why the bubble is going on a lot longer than what we believe it will (including myself).

1. Sudden fall of Europe into disarray, politically, socially (Islamic problem, Turkey racial violence) and economically. Even though not responsible for it, China is the greatest beneficiary from the sabotage of Europe.

2. China's huge under-developed rural economy and cities in west and central China - there's still >10% growth in these places.

3. Cheaper (relative to city living) cost of living in rural China provides a free safety net for urban workers. Savings can go a lot further in rural villages and towns. Migrant workers can work X years and earn enough cash to rest Y years in their home village - something which is impossible for many of us. Pensioners can live in rural China for peanuts by growing their own food.

4. Lower military outlay - relatively speaking - http://www.indexmundi.com/g/r.aspx?v=132

5. Improving transportation system - if you can read basic Chinese and speak Mandarin, you don't need to join a tour group to visit China. Cab taxis are also very affordable if you decide to go the easy way.

6. High domestic security - other than the notorious few, most cities are relatively safe even at night for women and foreigners - grown ups, not small children and infants as kidnapping for sale is common.

7. Improving confidence in the central government - crackdown on corruption and improvements in legal system. Retired senior leadership are not immune to persecution.

8. Improving workforce productivity and use of automation and the Internet - if you haven't been to China, you'll be surprised by the degree of business automation that exists in China. In my recent trip, I checked in and checked out from hotels in 5 minutes.

9. Practicality - Chinese businessmen are very practical and strive to deliver at minimum cost and at minimum price - you won't find workers smiling at you at the entrance like you do in Japan - there's no wastage of labor - labor is in short supply in China. Service is minimum (in some cases - non existent) unless you're paying top dollars. There is the website FAQ, contact form and telephone hotline though. One hostel I checked into even had a visitor's guide at the entrance with information such as how to get to various tourist places (bus service numbers and subway lines to take), how to get to a nearby city, how to call a cab, the checkout time, the WIFI password, a local map. Inside the room, there are signs with instructions on how to use the shower, where to find the hot water and cold water - not a joke.

Do not expect the kind of service you get at places like Phuket in Thailand or Bali in Indonesia unless you stay in a top end 5 star hotel.

10. Diversification through rising external economy and moving up the value chain - many Chinese companies, both state owned and private have invested hundreds of billions if not trillions overseas (I'm referring to business, not real estate).

11. Lower commodity prices - not many people remembers that China consumes more natural resources than it exports so cheaper commodity and oil prices actually subsidizes the consumer economy.


China faces serious problems such as an aging workforce and labor shortages and even the threat of earthquake to new construction in the longer term, but barring natural disasters such as a catastrophic earthquake or nuclear accident, I don't think the Chinese bubble will deflate as quickly as most hope or anticipate, at least in the near term.

[GRG55]

Re: Yes Virginia...It's a Bubble...

if they take the pile of sub-AAA leveraged debt, and created instruments which had first, second, third etc claim to the payments, i'm sure they could create AAA rated debt instruments using the 1st and maybe the 2nd or even the 3rd tranche....

i wouldn't be surprised if it were happening already.

The premise of this thread when it was created in 2010 was that post-GFC China was simply replicating the same credit driven, bubble creating goosing of economic activity as so many other places worldwide, and that drew so much criticism of the USA. The obvious signs at the time were the gross mis-allocation of capital into the property markets (Jim Chanos' "Dubai times 1000" quip). But it has since spread widely across all of China's internal markets and economy.

The much vaunted central planners in Beijing seem to be having difficulty dealing with the inevitable and predictable fallout. And the ranks of the China boosters seems to be thinning judging by the commentary on this thread now; it's been a while since the last time anyone advanced the always implausible scenario of the Chinese using their foreign reserves, or their alleged massive accumulation of physical gold, to bring down the US$.

I wonder if the timing of admittance of the yuan into the IMF SDR basket is an acknowledgement of the need for external support as it enters a period of almost certain depreciation against the US$?

The irrefutable lesson (yet again) is that these things go on much longer and achieve levels of distortion that are almost unimaginable to any of us watching from the sidelines.

[jk]

Re: Yes Virginia...It's a Bubble...

...Typical of such funds is the Great Wall Long Term Profit Gradated Debt Fund, whose top three holdings are all sub-AAA-rated local government fundraising company bonds.

The firm adds leverage by borrowing cheaply in the bond repurchase (repo) market, fund documents show."So for instance you can take 2 billion yuan of government debt as collateral and receive 750 to 800 million of cash, and use that to buy more debt," said an underwriter at an international bank in Shanghai who asked not to be named...

..."Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing...

if they take the pile of sub-AAA leveraged debt, and created instruments which had first, second, third etc claim to the payments, i'm sure they could create AAA rated debt instruments using the 1st and maybe the 2nd or even the 3rd tranche....

i wouldn't be surprised if it were happening already.

[GRG55]

Re: Yes Virginia...It's a Bubble...

I understand a lot of this was packaged and sold as income product to private individuals, and also that during the peak of the insane credit boom in China many local companies found it more lucrative to lend out the cash on their balance sheets and place loans with other companies instead of investing in expanding their own business. That is why there are guarantor entities for much of this debt; it was part of the marketing promotion to individuals.

I also think this is why there may not be a large risk of contagion as the debt is held widely, payments can be "deferred" and losses spread around across a broad swath of the economy and public.

China's shadow banking risk shifts to booming bond market

SHANGHAI, Nov 29 A year after China's financial regulators squared up to the systemic perils of "shadow banking", the threat is shifting to a booming corporate bond market, and risky borrowers' debt is finding its way into products aimed at retail investors.

An opaque network of trust companies and non-bank lenders had grown their annual market to a hefty 2.9 trillion yuan ($450 billion) in loans before regulators stepped in, spooked by rising defaults on wealth-management products (WMPs) backed by such high-interest shadow lending.

Now the high-risk borrowers who took those loans, such as unlisted real-estate firms struggling with a stagnant property market and financing companies backing shoddy local government investment, are finding a new avenue of funding after regulators began allowing unlisted companies to issue bonds on public exchanges.

New corporate bond issuance leaped to 914 billion yuan in the third quarter, accounting for 29 percent of all new credit, up from 381 billion yuan and just 8 percent in the first.
And the profile of new borrowers looks strikingly like the patrons of the shadow banking set.

Of the 57 firms posting bond listing announcements in Shanghai in October, 23 were local-government-owned project or infrastructure investment firms.

Beijing engineered the freeing up of the bond markets as a transparent alternative funding route, and the credit crunch that followed its clampdown on shadow banking guaranteed a high take-up.

But wealth managers are now turning these bonds into leveraged high-yielding products and selling them to investors desperate for returns after a real-estate slump and summer stock-market crash...

...Demand is hot for these products, and the higher the yield, the higher the risk, which is amplified if the fund's assets are partly bought on credit, or leveraged.

Colight Asset Management, a private fund offering bond-backed WMPs, raised more than 40 million yuan in just four days in November from an 8.7 percent yielding, 400 percent leveraged bond-based product, according to customer service staff member Chen Xun.

Much bigger companies such as Pacific Asset Management Co. and the Agricultural Bank of China also offer similar high-yielding leveraged products.

Investors, however, assume that products offered by big names are relatively safe.

"The risk of default is very slim," said a 45 year-old business manager in Shanghai surnamed Pan who invests in WMPs on an exchange backed by China's second-largest insurer, Ping An Group. "I'm sure such a big company as Ping An will make sure investors can get their money back."...

...Typical of such funds is the Great Wall Long Term Profit Gradated Debt Fund, whose top three holdings are all sub-AAA-rated local government fundraising company bonds.

The firm adds leverage by borrowing cheaply in the bond repurchase (repo) market, fund documents show."So for instance you can take 2 billion yuan of government debt as collateral and receive 750 to 800 million of cash, and use that to buy more debt," said an underwriter at an international bank in Shanghai who asked not to be named...

..."Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing...

[GRG55]

Re: Yes Virginia...It's a Bubble...

Take a page from the US response to the Global Financial Crisis. Defer, delay, rinse, repeat....hope the economy grows and inflation returns.

And raise lots of equity while the capital markets still allow:

No Thirst for Qingdao Bank

Nov 26, 2015 8:46 PM EST

China's city banks are hoping that a revived appetite for Chinese companies, and Hong Kong IPOs, will help them to sell shares to investors skeptical of their bad-debt levels.

Bank of Qingdao's offering, at a time when Hong Kong IPO volumes are at a five-year high, doesn't augur well. The first Chinese lender to go public since a $1.3 billion sale by Shengjing Bank late last year, the institution raised $607 million after pricing its IPO at the bottom end of a HK$4.75 to HK$5.21 range.

The price couldn't have gone any lower, even if the seller had been willing: The HK$4.75 level is exactly equal to Bank of Qingdao's book value, and Chinese rules prevent the sale of state assets for less than that floor.

Demand was limp even after a record 72 percent was taken up by cornerstone investors, institutions or well-known individuals who signal trust in an offering by committing to buy shares and hold them for a minimum period. Bank of Qingdao's cornerstone investors included Soul Htite, the American co-founder of U.S. online peer-to-peer lender LendingClub. The bank's backers also include Italy's Intesa Sanpaolo , which held a 20 percent stake before the share sale.

A port city on China's eastern seaboard, Qingdao is a former German colony that is home to the nation's biggest brewer. More recently, the city has been better known for its role in a $10 billion fraudulent metals trading scandal that snared banks including Standard Chartered.

The struggle to sell Bank of Qingdao should hardly be surprising. The 14 Chinese banks listed in Hong Kong trade at an average of just 0.89 times book. That partly reflects doubts over the banks' bad-debt levels and concern that these will rise as China's economy continues to slow...

...Chinese banks' troubled loans swelled to almost 4 trillion yuan ($628 billion) at the end of September, more than the gross domestic product of Sweden, according to figures released this month by the China Banking Regulatory Commission. While non-performing loans were 1.59 percent of outstanding credit, that rises to 5.4 percent if ``special mention'' loans where payment is at risk are included.

Chinese borrowers are taking on record amounts of debt to repay interest on existing obligations, according to Beijing-based Hua Chuang Securities, echoing the ``Ponzi finance'' conditions that U.S. economist Hyman Minsky saw as a predictor of financial crises.

Against this backdrop, two more city banks are set to test the Hong Kong market. Bank of Jinzhou, which has disclosed making loans to troubled solar energy firm Hanergy, began taking orders this week for an IPO that could raise as much as $943 million. Also in the queue is Bank of Zhengzhou...

[santafe2]

Re: Yes Virginia...It's a Bubble...

I also think this is why there may not be a large risk of contagion as the debt is held widely, payments can be "deferred" and losses spread around across a broad swath of the economy and public.

Take a page from the US response to the Global Financial Crisis. Defer, delay, rinse, repeat....hope the economy grows and inflation returns.

[GRG55]

Re: Yes Virginia...It's a Bubble...

jk I have been poking around the Chinese foreign debt subject for a few weeks now.
All very murky.
The chart shows one estimate of the overall size of Chinese foreign debt. source: http://qz.com/223991/the-chinese-gov...think-it-does/
It's tempting to just subtract deposits from borrowing to arrive at $400 billion net debt.
But the deposits may be at some firms and the notes at others, so most of the $700 billion might be the amount at risk.
And of course the curve is rising sharply so the amounts may be greater now.

It seems most of this is short term lending backed by letters of credit and pledged collateral, which may or may not really exist.
To me short term is better. The smart guys on wall street may have seen this problem early and be backing out of the Chinese credit market as the loans expire.
If the US and others are shutting off lending to China that may be one driver for the recent increase in Chinese insolvencies.
The names I see mentioned most often for exposure are Citi and Louis Dreyfus.
Let us know if you find who is holding the hot potatoe.

The letters of credit tend to be for trade finance. Given the institutionalized corruption in China that some of the collateral (such as physical raw material) may not actually exist would not be a surprise. But LC defaults will be a separate and not particularly concerning matter, given their very short term nature, compared with corporate bond issuance and defaults.

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

do you [or anyone else here for that matter] know anything about the holders of chinese corporate debt? i'm trying to figure out whether there's the possibility of contagion. i've been thinking that the next crash would be in corporate debt, led by low grade debt of energy companies. but now i'm trying to think about whether chinese corporate debt could lead the parade to the dump.

jk I have been poking around the Chinese foreign debt subject for a few weeks now.
All very murky.
The chart shows one estimate of the overall size of Chinese foreign debt. source: http://qz.com/223991/the-chinese-gov...think-it-does/
It's tempting to just subtract deposits from borrowing to arrive at $400 billion net debt.
But the deposits may be at some firms and the notes at others, so most of the $700 billion might be the amount at risk.
And of course the curve is rising sharply so the amounts may be greater now.

It seems most of this is short term lending backed by letters of credit and pledged collateral, which may or may not really exist.
To me short term is better. The smart guys on wall street may have seen this problem early and be backing out of the Chinese credit market as the loans expire.
If the US and others are shutting off lending to China that may be one driver for the recent increase in Chinese insolvencies.
The names I see mentioned most often for exposure are Citi and Louis Dreyfus.
Let us know if you find who is holding the hot potatoe.

[GRG55]

Re: Yes Virginia...It's a Bubble...

do you [or anyone else here for that matter] know anything about the holders of chinese corporate debt? i'm trying to figure out whether there's the possibility of contagion. i've been thinking that the next crash would be in corporate debt, led by low grade debt of energy companies. but now i'm trying to think about whether chinese corporate debt could lead the parade to the dump.

I understand a lot of this was packaged and sold as income product to private individuals, and also that during the peak of the insane credit boom in China many local companies found it more lucrative to lend out the cash on their balance sheets and place loans with other companies instead of investing in expanding their own business. That is why there are guarantor entities for much of this debt; it was part of the marketing promotion to individuals.

I also think this is why there may not be a large risk of contagion as the debt is held widely, payments can be "deferred" and losses spread around across a broad swath of the economy and public.

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

do you [or anyone else here for that matter] know anything about the holders of chinese corporate debt? i'm trying to figure out whether there's the possibility of contagion. i've been thinking that the next crash would be in corporate debt, led by low grade debt of energy companies. but now i'm trying to think about whether chinese corporate debt could lead the parade to the dump.

We should be waiting for the obligatory "the Chinese debt situation is under control" statement.

[jk]

Re: Yes Virginia...It's a Bubble...

Gravity is exerting its usual influence:

China's Bond Stresses Mount as Two More Companies Flag Concerns

November 26, 2015 — 9:49 PM MST

A Chinese fertilizer maker and a pig iron producer have flagged bond payment difficulties, adding to signs of stress in the nation’s corporate note market after at least six defaults this year.

Jiangsu Lvling Runfa Chemical Co., based in the eastern city of Suqian, is asking its guarantor to repay 53.1 million yuan ($8.3 million) in bond principal and interest due Dec. 4, according to a statement posted on Chinamoney’s website. Sichuan Shengda Group Ltd., based in the southwestern province of Sichuan, is uncertain it can repay notes due in 2018 that holders can opt to sell back early on Dec. 5, it said in a statement on the same website Thursday.

More companies in China are struggling to repay bonds amid the worst economic slowdown in a quarter century. China Shanshui Cement Group Ltd. this month became at least the sixth company in 2015 to default on yuan-denominated domestic notes. State-owned steel trader Sinosteel Co. postponed a bond payment for a second time last week...

...Bank of Tianjin Co., the trustee manager on Sichuan Shengda’s notes, said it will hold a bondholder meeting on Dec. 3, according to a statement to Chinamoney Thursday. Sichuan Shengda’s subsidiary’s pig iron production is in halt because of falling prices and the cash shortage, the lender said in a separate statement...

...The stress isn’t limited to bonds. China Fishery Group Ltd. failed to repay a $31 million installment due earlier this month on a $650 million loan, according to Standard & Poor’s. Creditor banks may have found it difficult to roll over the debt following a government investigation the company flagged in August, according to JPMorgan Chase & Co.

do you [or anyone else here for that matter] know anything about the holders of chinese corporate debt? i'm trying to figure out whether there's the possibility of contagion. i've been thinking that the next crash would be in corporate debt, led by low grade debt of energy companies. but now i'm trying to think about whether chinese corporate debt could lead the parade to the dump.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Repeat after me:

China property is a "cash market";

The Chinese government "won't let" the property market crash;

China has 1.1 Billion people that need homes so all the empty apartments will get filled;

It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...

(feel free to add your own China myth to the list)

Misallocation of capital? In China? Perish the thought...

Last updated: April 16, 2013 5:32 pm

China local authority debt ‘out of control’

Gravity is exerting its usual influence:

China's Bond Stresses Mount as Two More Companies Flag Concerns

November 26, 2015 — 9:49 PM MST

A Chinese fertilizer maker and a pig iron producer have flagged bond payment difficulties, adding to signs of stress in the nation’s corporate note market after at least six defaults this year.

Jiangsu Lvling Runfa Chemical Co., based in the eastern city of Suqian, is asking its guarantor to repay 53.1 million yuan ($8.3 million) in bond principal and interest due Dec. 4, according to a statement posted on Chinamoney’s website. Sichuan Shengda Group Ltd., based in the southwestern province of Sichuan, is uncertain it can repay notes due in 2018 that holders can opt to sell back early on Dec. 5, it said in a statement on the same website Thursday.

More companies in China are struggling to repay bonds amid the worst economic slowdown in a quarter century. China Shanshui Cement Group Ltd. this month became at least the sixth company in 2015 to default on yuan-denominated domestic notes. State-owned steel trader Sinosteel Co. postponed a bond payment for a second time last week...

...Bank of Tianjin Co., the trustee manager on Sichuan Shengda’s notes, said it will hold a bondholder meeting on Dec. 3, according to a statement to Chinamoney Thursday. Sichuan Shengda’s subsidiary’s pig iron production is in halt because of falling prices and the cash shortage, the lender said in a separate statement...

...The stress isn’t limited to bonds. China Fishery Group Ltd. failed to repay a $31 million installment due earlier this month on a $650 million loan, according to Standard & Poor’s. Creditor banks may have found it difficult to roll over the debt following a government investigation the company flagged in August, according to JPMorgan Chase & Co.

[touchring]

Re: Yes Virginia...It's a Bubble...

https://www.techinasia.com/alibaba-p...-sales-growth/

Alibaba posts white-hot Q3, driven by more mobile sales growth


In the second quarter of 2015, Alibaba broke new ground: for the first time ever, more than half of the company’s revenues came from mobile sales. In the third quarter, according to the company’s report today, that trend continued in a big way. Mobile revenues accounted for 51 percent of Alibaba’s total China commerce revenue in Q2, and just a quarter later, that number is up to 61 percent.


In total, Alibaba reported US$3.5 billion in revenue this quarter, which represents year-on-year growth of 32 percent. Its gross merchandise volume (GMV) this quarter was US$112 billion, up 28 percent year-on-year.


But it’s in mobile where the growth numbers get really crazy. This quarter, the company’s mobile GMV was US$69 billion, which is up 121 percent year-on-year.


That’s a massive lift, and it has been powered by two things. First, a growth in users: Alibaba’s monthly active mobile users hit 346 million this quarter, up 59 percent year on year. Second, the company’s mobile monetization rate has jumped from 2.16 percent in June to 2.39 percent now. That might seem like a tiny difference; it’s just 0.23 percent growth. But when you’ve got 346 million users, 0.23 percent monetization growth means nearly 800,000 more people are buying when they hop on Alibaba’s mobile apps, as compared to last quarter. That’s nothing to sneeze at.


Crunching the numbers further suggests that Alibaba’s mobile users spent slightly more in Q3, too. Given a mobile GMV of US$69 billion, the company’s 346 million mobile users spent an average of nearly US$199.50 each. That’s an improvement over last quarter, where mobile users spent about US$195 each.


If you’re the visual sort, here’s how Alibaba itself breaks down its quarterly accomplishments:


Sept30Infographic


Growth amidst the slowdown
While these numbers are impressive, Alibaba’s overall earnings picture in Q3 2015 certainly doesn’t present the kind of skyrocketing growth you may remember from the company’s heady pre-IPO days. But in the context of China’s economic slowdown, many were expecting weaker numbers from Alibaba.


Wall Street was certainly impressed by the company’s Q3 numbers. After the earnings were announced, Alibaba’s stock jumped nearly 9 percent – just a week ago the stock was under US$70 a share, and after the Q3 numbers broke, its stock broke US$82 per share. The share price has since slid backwards somewhat.

[touchring]

Re: Yes Virginia...It's a Bubble...

repeat