China – No Pain No Gain

image

Monday was a busy day so I managed to copy and paste some interesting data produced by ForexLive.

“Foreign Direct Investment in China dropped 1% instead of rising the predicted 5% that economists expected.

In China, foreign direct investment refers to the accumulated foreign investment in domestic companies or entities in a given year.

Services sector rise is notable as it now accounts for 70.4% of all FDI with investment in high-tech services up to 94.7% yy.

These highlights are not pretty – the chart from from the release from ForexLive tells it all.

+6.0% prev
Yuan 56.77 bln ($8.89bln)
Jan-May yy +3.8%
Yuan 343.55 bln ($54.19bln)
Services sector +7%, yuan 241.8bln #($38.2bln)
Mfg sector fell 3.2% in the Jan-May period, with the number totalling 28.8% of FDI.

image
Chart courtesy of ForexLive.

That chart says it all – not pretty and a precursor to share market upheaval.

When one looks at foreign investment – one has to do so against the backdrop of the industry in which the investors are seeking – seems ‘service sector’ received favorable response.

Corporate debt in China is high – ridiculously high – especially in the manufacturing sector – the debt fueled growth of these companies meant that sooner or later the debt situation had to be addressed.

The People’s Bank of China did propose a debt for equity swap – I had written about this in a blog – that it would not work.

It cannot work – mismanagement and malinvestment will continue unless a process of weak and debt laden companies – any idiot management – are liquidated (no pun intended seeing I am discussing China) – and the stronger entities acquire the good assets – in so doing transforming production to suit the current economic climate.

Yes – it is a dog eat dog world – strongest do survive – restructure – and usually continue to do so within the business cycle – yes – debts have to be written off by the Banks.

Any advanced economy cannot support malinvestment and debt in a deflationary trend – the market forces destroy incompetence.

image

Well it seems that last weekend – yes a tad late – catching up on my reading – during the Lujiazui Forum – an annual finance forum – in Shanghai – it appears a lot is to change.

image

From the South China Morning Post in Hong Kong:

China hints at bankruptcy rules for finance sector.

“Mainland authorities have signaled they are ready to accept the threat of volatility from financial institutions going bankrupt, with official calls for an orderly way to let failed players go bust.

Central bank deputy governor Zhang Tao said on Sunday that ensuring the stability of the financial sector did not mean protecting every institution against failure.” (1)

That in itself – was good news – but ‘lo and behold’ there is more.

The article includes the following excerpt:

“Those institutions that need to be restructured should be restructured, and those doomed to go bankrupt should do so under the discipline of market forces,” Zhang said at the Lujiazui Forum in Shanghai.”

In another article in the Shanghai Daily

Tighter scrutiny call at finance forum

“Tighter scrutiny of the financial sector amid the challenges of global economic growth and China’s financial reform was one of the themes that emerged during the Lujiazui Forum in Shanghai yesterday.”

“Four top-level officials, including Xiang Junbo, chairman of the nation’s top insurance regulator, spoke during the morning session of the two-day meeting, discussing China’s approach in developing a more reasonable financial market under supply-side reforms.”

“China has established a relatively complicated financial system with diversified products,” Zhang Tao, deputy governor of People’s Bank of China, told the forum. “But the general level of our financial services still has much room for improvement, as we should face and solve the structural weakness shown by some specific sectors.”

Zhang spoke about the financial macro prudential management mechanism in cooperation with the government’s plan of leveraging down and capacity elimination, and highlighted the necessity of bringing in financial innovations such as peer-to-peer lending and equity crowd funding into the mechanism. New financial technologies brought explosive development in China’s Internet financial sector, providing services for broader investors, Zhang said.

“Financial innovation itself is affirmative, but at the same time, we should not overlook the risks hiding behind, which calls for further regulation and management to catch up with the pace of sector’s development,” he said. (2)

Then – in the same paper – we had the former Deputy Governor of the PBOC, Wu Xiaoling.

Gaining without any pain seems ‘illusionary’

No pain, no gain — that’s what a former Chinese central bank official emphasized yesterday at the Lujiazui Forum as she cautioned China’s policy-makers that it’s time to halt uncalled-for support for certain sectors and let the market play its role.

With China’s real economy remaining sluggish and domestic consumers shifting their demand to overseas, the Chinese government has been accelerating its efforts since last year to combat overcapacity in sectors such as steel and encouraging new industries such as innovation to be the catalyst to revive the economy.

Such change hurts but the pain is a necessary process as Wu Xiaoling, former deputy governor of the People’s Bank of China and now dean of the PBC School of Finance at Tsinghua University, said in a panel discussion on supply-side reforms, financial innovation and macro prudential regulations at the forum.

“Monetary stimulus or credit easing is not a long-term plan,” Wu said. “It’s illusionary for someone to imagine a bright future without growing pains.”

Two things that hit me over these articles:-

Firstly foreign investors – let us say speculators – ‘will’ be in the crosshairs and stand to lose a lot of money and then – the change of direction – No Pain No Gain is exactly what China needs to mature in all sectors of the economy.

Time will tell – in the meantime some pain for a lot of foreign investors.

Interesting times indeed.

1. http://news.forexlive.com/!/china-fdi-may-yy-10-vs-50-expected-20160612
2. http://www.scmp.com/news/china/economy/article/1973857/china-hints-bankruptcy-rules-finance-sector
3. http://www.shanghaidaily.com/nation/Tighter-scrutiny-call-at-finance-forum/shdaily.shtml
4. http://www.shanghaidaily.com/business/finance/Gaining-without-any-pain-seems-illusionary/shdaily.shtml

Advertisements

Silly Willy – A big stick hit the bear

 

image

 

Well Porky Poroshenko – President of Ukraine – (aka Willy Wonker and his chocolate factory)  – has been up to no good with Ukrainian units – bombing electrical infrastructure and some 20 houses in the Donetsk region of eastern Ukraine.

The local militia retaliated – killing 9 and wounding 19 Ukrainian soldiers.

Not reported by mainstream media – as I have said before – this will not end well.

So much for the Minsk Accord – so much for the UN ground monitors – and as per usual the biased Ukrainian news have a slant on the story – to ensure a balanced review I have the Ukrainian link below.

Question – why did they have to take out the electrical sub-station and aim their weapons at 20 residential houses?

 

image

As reported by DNI news:

“In total nine AFU servicemen killed, 19 wounded as a result of unsuccessful attacks on the DPR positions in the areas of the localities of Gorlovka and Avdeyevka, reported the Vice-Commander of the DPR Defense Ministry operative command Donetsk Eduard Basurin.

Tonight the AFU units of the 53d brigade made an attempt to advance deep into our defense to 700 meters near Gorlovka, and for this purpose applied large-caliber artillery and mortars on residential districts. Our units managed to repel the attack of the enemy near Gorlovka. The AFU suffered losses: six Ukrainian servicemen were killed and 12 were wounded.

According to Basurin, as a result of the firings of Gorlovka 16 houses were damaged. Meanwhile the same night the units of the AFU 16th battalion of the 58th brigade made an attempt to attack near the occupied locality of Avdeyevka to the North from Donetsk.

Because of unprofessional actions of the command the enemy suffered irretrievable losses in number of three dead and about seven wounded.”

 

https://dninews.com/article/9-ukrainian-security-officers-killed-19-wounded-result-unsuccessful-attacks-near-gorlovka

http://www.unian.info/war/1372680-russia-deploys-tanks-infantry-fighting-vehicles-self-propelled-artillery-units-in-khartsyzk.html

Obama and NATO – no common sense

Obama and NATO have no common sense – this will not end well.

image
I have no respect for a leader of any country – who is stupid enough to poke a bear with a stick – with little of no provocation.

Willy Wonker – the Ukrainian chocolate King – and Ukrainian President  – has built up forces in Eastern Ukraine and has resumed bombing civilians in the Donetsk region.

Then we have the Polish President allowing NATO to carry out its biggest exercise in Poland since the end of communism in 1989 – complete with a display of thousands of paratroopers – it emerged that Russian troops have been deployed to the Ukrainian border.

Scores of U.S. troops and then military vehicles parachuted into a spacious, grassy training area on the outskirts of the central city of Torun.

The force’s mission was to secure a bridge on the Vistula River as part of the Polish-led Anakonda-16 exercise that involves about 31,000 troops and runs through mid-June.

Then the U.S. and NATO have installed a missile defense system in Romania and neighboring countries – this is insanity and highly provocative – this will not end well for Europe – nor for America.

image

As reported by Reuters:

The United States switched on an $800 million missile shield in Romania on Thursday that it sees as vital to defend itself and Europe from so-called rogue states but the Kremlin says is aimed at blunting its own nuclear arsenal. (1)

European Union is in the cross hairs – as too the Americans – there is no doubt that the world is on the edge of an ugly situation

This will not end well.

Why is Obama permitting such a stupid and reckless actions is beyond me – he is making a grave mistake and for some reason the idiot in control wants to poke the bear with a number of sticks.

image

Then we have the U.K. getting involved with an approved transit of a Russian submarine through the straits of Dover – yes approved to attend the Battle of Jutland centenary.

Excerpt from the UK Guardian article:

“The Royal Navy has intercepted a Russian submarine as it cruised towards the Channel.

The sub was being escorted by the frigate HMS Kent on Tuesday evening and was expected to pass the strait of Dover on Wednesday morning.

It is understood that the Stary Oskol, a Kilo-class submarine capable of carrying cruise missiles and torpedoes, was first detected in the North Sea, where Nato forces are monitoring the waters.

The Ministry of Defence said it would continue to be shadowed by the Type 23 Duke-class frigate, which had been taking part in commemorations for the Battle of Jutland centenary.” (2)

Russia should be happy – an escort through the Straits – at least they could target that frigate first should a conflict arise – then the question would be – can the submarine fire its missiles?

The Obama administration continues to push the limits with Russian patience – by increasing military force levels in the Baltic states and Eastern Europe – and in the meantime Russia has started the process of deploying a larger force in a key location between Belarus and Ukraine in the town of Klintsy – 50 km north of the Ukrainian border.

From Reuters:

“Russia is building an army base near its border with Ukraine, the latest in a chain of new military sites along what the Kremlin sees as its frontline in a growing confrontation with NATO.

While there have been no clashes between the former Cold War rivals, Russia is building up forces on its western frontiers at a time when the NATO alliance is staging major military exercises and increasing deployments on its eastern flank.”

“On the western side of the line, NATO has been rotating troops and equipment in greater numbers to members states that were part of the Soviet-led Warsaw Pact during the Cold War.” (3)

But please America – take note – NATO can be obliterated in 60 hours or less – and what about America?

Enjoy what your President is doing – after all he does know what he does – right?
It is a disturbing trend with the reported incidents with American naval vessels electronics being blinded in the Black Sea – by Russian aviation and a RAND Corporation assessment stating Russia’s ability to overwhelm NATO in less than 60 hours or less – the news from the Deputy Secretary of Defense for Russia, Ukraine, and Eurasia Micheal Carpenter in testimony in front of the U.S. Senate yesterday is quite disturbing – see video below.

image
Putin has also stated:

NATO fends us off with vague statements that this is no threat to Russia … that the whole project began as a preventive measure against Iran’s nuclear program. Where is that program now? It doesn’t exist. … We have been saying since the early 2000s that we will have to react somehow to your moves to undermine international security. No one is listening to us.”

 

Saudia Arabia – from bad to worse

Interesting is it not – that Saudi Arabia is practically bankrupt – yes the State has a huge problem – and whilst the Royal family – The House of Saud – has control of a huge Sovereign Wealth Fund – they may consider this ‘theirs’ – and not the States.

If anything can go – wrong it will go wrong.

image

 

The war in Yemen costs a lot of money – in addition the funding of ISIS and Al Nusra drains available capital.

Basically the whole State of Saudi Arabia are dependent on the Royal family for income – plus subsidized fuel – the latter having been suspended.

Rating Agencies have downgraded the major Banks and the State – due to their debt.

image

The House of Saud – in 2015 – had proposed to float their oil company Saudi Aramco – to raise much needed cashflow.

Then we have a price increase by the company – in Asia and the U.S. having – due to apparent ‘demand’ – and this during a deflationary trend.

It appears they are not aware that Iran has a very large number of tankers going through to Asia – or they desperately need revenue on existing contracts.

Then on top of that the U.S. – now a major oil producer – has started production again – the current price being more than satisfactory to make a profit.

Oh and Russia – yes  – cheap oil through to China.

So good luck on increased income from existing contracts.

image

As the Telegraph  U.K. reports

Saudi Arabia has lifted the price of its crude exports to the US and Asia by less than expected, and deepened cuts for European buyers, in a bid to balance the Kingdom’s need to boost oil revenue while keeping a grip on its dominant market share.

The world’s largest crude exporter more than doubled the price it charges Asian customers on top of the regional oil market price, lifting exports by 35 cents a barrel to 60 cents, in its second consecutive monthly price increase. But the state-backed Saudi Aramco stopped short of the 50 cent a barrel hike expected by the market in a move that analysts said was a defensive play to stop it losing market share.

For US buyers the price of Saudi crude has increased by 20 cents a barrel, to 55 cents, on top of the regional benchmark price. Meanwhile, customers in North West Europe will receive a 35 cents a barrel price cut.

Korea joins the currency wars

There are no friends in war.

In a currency war that party that acts first transfers deflation to its major trading partners.

image

 

Korea has now joined – the first move for the Korean Central Bank since June 2015.

Rates were cut on the key overnight rate to 1.25 percent from 1.50 percent.

The Korean Won moved quickly by 0.7 percent – against the USD – but shortly thereafter pared the move to half of the intended consequences.

image

If the U.S. Fed Reserve does not move to strengthen the U.S. dollar – things will become very messy indeed.

 

Where do countries get money to stimulate?

 

Damn it Yellen – Wake Up

I had an email from a friend who stated ‘Yellen will not increase interest rates’ – to which I agreed -my comments in fact contradict what I have written on this blog in the prior post ‘Game of Clones’.

Why did I agree with him?

The U.S. Federal Reserve can increase interest rates – but they are idiots – they will not – and those reasons are the external impact of a strengthening U.S. dollar on highly indebted countries.

Yes external – global financial system stability – and in that vein stuff the national monetary policy – Pension funds – and savers as the highly indebted global countries have priority – push the U.S. Pension funds and those that do save monies – into risky assets – create a stock market and housing bubble and in so doing – ruin the middle class and support Main Street bankers.

image

What Yellen and the other Governors of the Federal Reserve do not realize is that they can increase interest rates – and to offset the strengthening of U.S. dollar – place a limit on the amount of U.S. dollars that can be held external to the United States.

In other words limit the amount of U.S dollars that can be invested in – by ALL countries – central banks and for international trade.

Currently around 62 percent of all foreign holders are invested in the U.S. dollar and that means in macroeconomic terms – that there is a distortion – whereby this foreign investment does nothing for the advanced U.S. economy – in actuality it reduces the savings by the U.S. consumers – they become net spenders.

Investments in the U.S. dollar reserves should be capped – reduce the exposure by at least 20 percent – force foreign central banks to take on other currencies – from advanced economies.

Reduce this distortion – limit the amount of foreign investment in the U.S. dollar and this will basically force everyone – to seek solace in another currency – the first cab off the rank would be the Euro – that then would allow the E.U. to deal with their own domestic problems – as too Yen and the Japanese economy – GBP and England.

image.

The U.S. would benefit principally through the consumers savings rate – this would increase – debt reduced.

The stupidity of the current situation being allowed to continue – forces an increase in the value of the U.S. dollar against all currencies – and that in itself perpetuates the currency wars – those engaged in this war of depreciation of currency value – just pass the deflation onto their major trading partners – and the pain of indebted emerging economies will only get worse – as the global trade continues its downturn.

That process in global trade cannot be halted under the current circumstances – each country has to address their own domestic issues – politicians – add consumers to that basket as well – have to wake up and stop spending and reduce the size of government – debt – and operate within a ‘surplus’ current account budget.

And yes – governments operating on a current account surplus is totally at odds with the majority of economists including one Krugman – if someone could show me the benefits of increased spending and debt – that goes against a ‘trend’ of global declining trade and a deflationary spiral – then that essay I would be interested in reading.

The U.S. dollar is the global reserve currency – currency of choice with ‘dark matter’ attached – an insurance policy if you wish – that the U.S. dollar will be accepted in every currency.

The majority of international transactions are conducted in U.S. dollars for that simple reason – that – together with the world’s largest economy and the ability to issue U.S. dollar credit at will.

The U.S. Government and the U.S. dollar are ‘the hegemon’.

And no – the U.S. dollar will not be replaced by any other currency as the ‘global reserve currency’ – unless of course the U.S. deems this necessary – highly unlikely as there is no equal – no peer – and whilst the U.S. dollar retains this status – there is demand – and this enables the U.S. Treasury to borrow – at far lower rates than other countries.

The latter would not be the case should that dollar not hold that ‘global reserve status’ and hence the U.S. Treasury would never support this contention – especially in light of the U.S. debt situation – the budget would be blown just on the interest payments alone.

This current inflow of foreign capital into investments in the United States – grossly distorts the U.S. economy – whereby the net results of the trade deficits – is that the consumers do not save. If one wants confirmation of this fact – they should check Stephen Roach’s copious articles on this very subject.

If the U.S. dollar wants to retain credibility in the market place – then the U.S. Federal Reserve should act accordingly – instead they are acting like pre-schoolers – playing with the ‘value’ to deter interest increases – to reduce the strength of the dollar – and in so doing making the currency wars far worse.

For every action – there is an equal reaction – a balancing must take place and ignorance of capital flows is no excuse for the powers of the Federal Reserve – nor for that matter the U.S. Treasury.

Yes – the U.S. Federal Reserve and the U.S. dollar will lose credibility by virtue of nothing being done to normalize interest rates – the currency itself and the U.S. Federal Reserves comments – whether dovish or hawkish on the U.S. economy – and world economy will have no bearing whatsoever on the value of the U.S. dollar against all currencies.

The policy of ‘do not fight the Fed’ will become meaningless – whilst the stupidity of those that have control of the interest rates previously – Messrs Summers, Volker, Greenspan and Bernanke dictating higher and lower rates – all that transpired was the creation of speculative bubbles – that popped with significant impact on the U.S. and other country’s economies.

The U.S. Federal Reserve in attempting to stop a strengthening dollar – will not deter capital from seeking U.S. dollars – this in turn will increase the value and have an adverse affect on those countries that borrowed in the U.S. denominated debt – a lot – it is cheap money in the scale of things – a bubble in sovereign debt.

It is a fact – that any country whose economy is ‘perceived’ as a safe haven – in times of trouble – whether – increased political and economic instability – war – will receive huge inflows of capital creating currency disruptions.

Take the U.S. dollar during the Bush era and the invasion of Iraq for the non existing ‘weapons of mass destruction’ – the initial rally in the U.S. dollar left everyone gasping for breath – short lived as it was – it was a flight to a ‘safe haven’.

What made the matter worse was the ‘short covering’ by hedge funds and institutions – the buying of U.S. dollars to limit losses.
More recently the exit of capital from the Euro – through individual country insolvencies – Club Med countries – and the transfer of capital to those periphery safe haven countries – in particular Switzerland – Sweden and Denmark.

The flow on effect is the imposition of negative interest rates to defer currency speculators.

Then we have current situation with the British pound – and the Euro – being sold all due to the ‘Brexit’ vote – the uncertainty with the E.U. alliance – through propaganda of the ‘stay’ group and apparently 72 percent of economists – if they are economists that is – causing intense mischief with capital fleeing from the pound to the Yen and U.S. dollar – Australia and Canada.

I commented in a recent blog ‘Yen – Currency of Choice’ due to the flip-flopping of the U.S. Federal Reserve on interest rates.

Capital sought Yen over the U.S. dollar as Japan was perceived to be the most stable currency – only due to the Bank of Japan investing very heavily in U.S. Bonds – nearly on par with China.

If you have been reading these recent blog entries – and on the subsequent strengthening of the Yen – I put this firmly at the feet – or mouth – of one Janet Yellen – the U.S. Federal Reserve chair – and rightly so.
As a lot was at stake for the Japanese economy and the major trading partners – a subsequent monetary policy was introduced – that transferred deflation to the major trading partners Australia – New Zealand – both of these countries had to deflate their currencies through reduction of interest rates – and thereafter China devalued – and they will continue to do so ‘ad nausium’.

China has no choice – if they freely floated the Yuan – it would sink – against all currencies – thereby creating a devaluation of all assets domestically – exports would be very costly and their manufacturing competitiveness would collapse.

The process that they have chosen was to de-peg the Yuan against the U.S. dollar and peg the currency to a basket of currencies – one presumes their major trading partners.

If Yellen does increase the interest rates – which she should do – as the U.S. economic ‘window’ is still ajar to accommodate further rate increases – then the opportunity is available to discourage investment in the U.S. – limit central bank investments.

The stage will be set to allow a gradual normalization of interest rates globally – with heartache for those countries that gorged themselves on U.S. dollar loans.

From my perspective the indebted countries – deserve everything that comes there way – greed of the politicians – self serving largesse in spending to be reelected – with little forethought – as to the fact that the current low interest rates will not – and cannot stimulate an economy.

image

Consumer spending – through further borrowings – has its limits.

Austerity will be demanded from the citizens – this will be a further burden due to the lunatic politicians being in control of the public purse – yes the simple fact of the matter is that taxpayers will have to repay the debt – regardless of which government is in control of any country.

Should Yellen not increase rates – then she won’t be able to do so in the future – the economic window – to correct the past wrongs is closing – the Japanese disease of deflation and higher unemployment – together with higher debt levels – will continue for the foreseeable future.

The recent mellow U.S. employment numbers are a testament to this.

Just look at history – the Japanese economy has had the ‘low interest regime’ and high debts to GDP for 25 years and nothing – repeat nothing – that the Bank of Japan has tried has worked.

We are living in extraordinary times – in normal circumstances the non increase in rates would eventually lead to the normal spate of higher inflation rates – increased costs.

With rising inflation – increased demand for relatively cheaper imports – and a reduction in exports further deteriorates the current account deficit – leading to a dollar depreciation.

This is not the case this time round – deflation is rampant around the globe and all country current accounts are in deficit – or close to deficit signaling no growth – thereby deferring any normalization – demanding Keynesian stimulus to kick start individual economies.

And where do they get the money for that?

image