Werknemers verdelen packs op S.F. Express in Shenzhen, China, op november. 11, 2013. Private bedrijven in China zijn gestopt om te investeren in verdere uitbreiding in 2016. (ChinaFotoPress / ChinaFotoPress via Getty Images)Werknemers verdelen packs op S.F. Express in Shenzhen, China, op november. 11, 2013. Private bedrijven in China zijn gestopt om te investeren in verdere uitbreiding in 2016. (ChinaFotoPress / ChinaFotoPress via Getty Images)

Eerder de motor van een relatief efficiënte groei, het lijkt erop dat de private sector in China heeft gegeven. De investeringen van particuliere bedrijven gingen negatief in juni en daalde een ander 0.6 procent in juli. Dat is juist, negatieve groei maand over maand, iets heel ondoorgrondelijk tijdens de jaren van hoogconjunctuur van bovenstaande 20 procent groei slechts een paar jaar geleden.

"Wij geloven dat de particuliere [investering] vertraging is meer structureel ditmaal, gesleept door zwakkere beleggingsrendement en dalende vertrouwen van het bedrijfsleven te midden van beperkte hervormingen en deregulering. Sterke State Owned Enterprise (SOE) investering is het onwaarschijnlijk dat volledig te compenseren de zwakte, in plaats daarvan, het zou meer overcapaciteit te maken en verslechteren kapitaal rendement,"De investeringsbank Morgan Stanley schrijft in een notitie.

Voor de eerste helft van 2016, particuliere investeringen is slechts tot 2.4 procent ten opzichte van het jaar. Dit is zorgwekkend omdat de private sector is verantwoordelijk voor het grootste deel van de reële economische ontwikkeling van China en de relatief efficiënte allocatie van kapitaal.

De regering zal proberen om de private sector coöpteren in de uitgaven door middel van monetair en fiscaal beleid.

- Viktor Shvets, global strategist, Macquarie Securities

Om de daling van de particuliere investeringen in evenwicht te brengen, de staat gebruikt staatsbedrijven als countercylical instrumenten begrotingsbeleid. aandeel van de investeringen SOE's in vaste activa stegen 23.5 procent ten opzichte van de eerste helft van 2015. Als gevolg van inefficiënte investeringen uit de jaren vóór, overcapaciteit, en montage defaults, Morgan Stanley denkt dat dit is onverstandig.

(Morgan Stanley)

(Morgan Stanley)

Morgan Stanley merkt op dat particuliere bedrijven vermijden sectoren zoals mijnbouw en staalindustrie, die worden geplaagd door overcapaciteit. Maar ze ook niet kunnen investeren in de dienstensector wat ze willen vanwege de hoge toetredingsdrempels en te veel regelgeving.

Particuliere investeringen buiten-manufacturing lezen diensten afgenomen 1.1 procent in de eerste helft van 2016 gedurende het jaar, in vergelijking tot 15 groei procent in 2015. staatsbedrijven, aan de andere kant, versterkte investeringen in diensten 39.6 procent.

Zoveel voor een succesvolle herbalancering van diensten, die wordt beschouwd als een spil van de inspanningen om de Chinese economie te hervormen. Het gebeurd, maar in opdracht van de staat.

(Morgan Stanley)

(Morgan Stanley)

globaal, er zijn gewoon niet genoeg goede investeringsmogelijkheden rond en de financieringskosten voor de particuliere bedrijven zijn zo hoog als 15 procent, veel hoger dan het rendement op activa. In tegenstelling tot hun staatsbedrijven tegenhangers, private bedrijven daadwerkelijk proberen te zijn winstgevend en ze niet de winst in te zien China's vertragende economie.

Daarnaast, het gebrek aan vooruitgang in de veelgeprezen hervormingsagenda kwetst vertrouwen van het bedrijfsleven en de financiële zichtbaarheid. Zhang Qiurong, die eigenaar is van een speciaal papier bedrijf vertelde de Wall Street Journal: "De economische vooruitzichten is echt grimmig. Je moet om te overleven, dat op de eerste plaats. "

Dhr. Zhang's gevoelens worden weerspiegeld in de China Economic Policy Onzekerheid Index, die is toegenomen gestaag 2016, bijna het bereiken van de recordniveaus van onzekerheid gezien tijdens de laatste overdracht van de Communistische Partij leiderschap in 2012.

De economische vooruitzichten is echt grimmig. Je moet om te overleven, dat op de eerste plaats.

- Zhang Qiurong

Het gevolg van de onzekerheid? Bedrijven zijn oppotten van geld bij de bank en gewoon niet uitgeven en investeren.

"Ondanks tal van liquiditeit gepompt in de markt, bedrijven liever bank het geld in rekening-courant bij het ontbreken van goede beleggingsmogelijkheden, hetgeen in lijn is met een record lage private investeringen data,"Sheng Songcheng, hoofd van statistieken en analyse op de People's Bank of China zei eerder dit jaar. Geldmiddelen en kortlopende deposito's bij banken groeide 25.4 procent in juli.

Om aan de bezwaren van de brekende particuliere investeringen in China tegen te gaan, het regime prompt aangekondigd publiek-private partnerschappen (PPP) investeringsprogramma's de moeite waard $1.6 biljoen en spanning 9,285 projecten, eerste gerapporteerd door Xinhua op augustus. 15.

"De regering zal proberen om de private sector coöpteren in de uitgaven door middel van monetair en fiscaal beleid,", Zegt Viktor Shvets, globale strateeg bij Macquarie effecten.

Het probleem is dat deze strategie hoogstwaarschijnlijk werkt.

"De impact van de PPP op de Chinese groei van de investeringen zal waarschijnlijk worden beperkt, gezien het kleine aandeel van de pps-projecten in uitvoering (minder dan 0.5% van de totale [investering]), de nog steeds lage participatie verhouding van particuliere investeerders ... Internationale ervaring leert dat private financiering van de publieke investeringen met zich meebrengt grote fiscale risico's bij het ontbreken van een goede juridische en institutionele setup,"Schrijft Morgan Stanley. En een goede juridische en institutionele set-up is niet wat China is bekend om.

Als de PPP en de korte termijn monetaire en fiscale stimuleringsmaatregelen zal niet werken, China heeft eigenlijk te te brengen over de hervormingen aan de particuliere sector om opnieuw te besteden krijgen.

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Lokale Chinese bewoners lopen op een ondergelopen straat in zware regen in Wuhan, centraal China, in juli 6 2016. (Wang Hij / Getty Images)Lokale Chinese bewoners lopen op een ondergelopen straat in zware regen in Wuhan, centraal China, in juli 6 2016. (Wang Hij / Getty Images)

Chinese president Xi Jinping zelden commentaar direct op de economie. In plaats daarvan, Hij laat zijn premier Li Keqiang aan het woord. Of Xi spreekt door een van de mondstukken regime zoals People's Daily of Xinhua.

Op 21-only juli een week na China gepubliceerd unexciting BBP-cijfers-het was Xinhua die kwam naar buiten met een commentaar op hoe belangrijk de hervorming is voor China en dat er is geen alternatief op korte termijn pijn en lange termijn winst.

"China moet duwen door middel van hervormingen, want er is geen plan B,"Het mondstuk staten.

Het artikel is slechts een Xinhua commentaar en niet noemen een 'gezaghebbende persoon ", zoals de People's Daily doorgaans doet, maar gezien de mate van controle Xi persoonlijk uitoefent over de media, het had waarschijnlijk zijn zegen.

Deeloplossingen niet meer werken.

- Xinhua

Het artikel streeft de hervorming verhalende we eerder hebben gehoord: markthervormingen, duurzaam groeimodel, innovatie, consumentenbestedingen, aanbodzijde structurele hervormingen, administratieve rompslomp etc. Dus we kunnen dat Xi aannemen en zijn premier stil te staan ​​achter de hervormingsagenda.

'Wat is geboden niet tijdelijk fixes: Mijn regering heeft de verleidingen van kwantitatieve versoepeling en competitieve devaluatie van de munt verzette. In plaats daarvan, we kiezen voor structurele hervormingen,"Xinhua citeert premier Li Keqiang.

Reality Check

Het probleem, zoals het geval is zo vele malen met Chinese media en uitingen van de Communistische Partij, is dat de vorderingen niet de werkelijkheid weerspiegelen.

Met betrekking tot tijdelijke fixes, China zojuist een record bedrag van het krediet in het eerste kwartaal, ten bedrage van $712 miljard aan nieuwe leningen. Deze leningen ging niet in de particuliere sector als Li beweert, maar in grote lijnen gestimuleerd investeringen van staatsbedrijven.

Chinees schip-bouwers, bijvoorbeeld, rapporteerde een sterke stijging van de bestellingen vol 44.7 procent van januari tot juni van dit jaar in vergelijking met vorig jaar. Particuliere investeringen aan de andere kant alleen maar gegroeid 3.9 procent in het tweede kwartaal van 2016, overwegende dat de totale investering roos 9.6 procent.

"Staatsbedrijven (SOE) blijven investeren in de overcapaciteit industrieën, die lijden aan een tragere groei van de productie,"Schrijft de investeringsbank Natixis in een nota.

Echter, te oordelen naar de Xinhua stuk en anderen voor, het regime erkent duidelijk de problemen: "Problemen van de Chinese economie, waaronder een onrustige vastgoedsector, industriële overcapaciteit, stijgende schulden en het gebrek aan nieuwe groeimotoren, zijn allemaal verbonden met elkaar en versnipperde oplossingen niet meer werken. De enige manier om de vitaliteit te herstellen naar de economie te duwen door middel van hervormingen. "Ze zijn niet gebeuren.

In plaats daarvan, centrale bank ambtenaren pleiten voor begrotingstekorten van maximaal 5 procent om de economie te ondersteunen en ze toegeven dat de traditionele monetaire stimuleringsmaatregelen werkt niet meer.

"Ondanks tal van liquiditeit gepompt in de markt, bedrijven liever bank het geld in rekening-courant bij het ontbreken van goede beleggingsmogelijkheden, hetgeen in lijn is met een record lage private investeringen data,"Sheng Songcheng, hoofd van statistieken en analyse op de People's Bank of China (PBOC) zei onlangs.

U kunt een goede oude financiële crisis hebben zonder de 1997-1998 Aziatische kwestie buitenlandse schuld.

— Willem Buiter, Citigroup

Willem Buiter, de chief economist van Citigroup zegt dat China nodig heeft om de banken te herkapitaliseren en gaan door een ronde van de centrale bank gefinancierd tekorten op te helderen verleden excessen. Hij denkt dat China niet zal een financiële crisis anders voorkomen:

"Tenzij ze bereid zijn te gaan voor Chinese helicopter geld, fiscale stimulans voornamelijk gericht op de consumptie niet op de investeringen. Ja, sommige investeringen zoals sociale woningbouw, betaalbare woningen, Ja, zelfs sommige infrastructuur. Maar organisatie ondersteunende infrastructuur, geen hogesnelheidstreinen in Tibet. Het moet worden gefinancierd door de centrale overheid, de enige entiteit met diepe zakken, en het moet worden in geld uitgedrukte door de People's Bank of China. "

schuld Semantiek

Sprekend over schuld en een financiële crisis, natuurlijk, Xinhua heeft een afwijkende uitzicht: "De meeste van China's schulden binnenlandse, en haar schuld niveaus zijn binnen controle en lager dan andere grote economieën. Een matige tekort niveau (2.4 procent 2015 en een doelstelling van 3 procent 2016), grote huishoudelijke besparingen en de enorme deviezenreserves te versterken vermogen van het land om risico's te verduren. "

Vergeet over het feit dat de centrale bank ambtenaren die reeds pleiten voor een 5 procent tekort, Standard and Poors zojuist een rapport waarschuwing over gevaarlijk hoge schuld van China's levels. "De neerwaartse risico's zijn materiaal, vooral als Chinese autoriteiten verliezen hun greep op evenwicht brengen van de economie," er staat.

china schuld

Deviezenreserves gedaald van $4 biljoen in 2014 naar $3.2 biljoen nu. Hedge fund managers als Kyle Bass van Hayman Hoofdstad denk dat de crisis drempel rond $2.5 biljoen.

"Ze zijn zo ver vooruit op excessen in de wereld in voorgaande crises, we worden geconfronteerd met de grootste macro onbalans in de wereldgeschiedenis,"Vertelde hij RealVisionTV.

Willem Buiter zegt dat het debat van de externe versus interne schuld is grotendeels zinloos: "Je kunt een goede oude financiële crisis hebben zonder de 1997-1998 Aziatische kwestie buitenlandse schuld."

Zowel Kyle Bass en Buiter ziet een verdere devaluatie van de Chinese munt als zeer waarschijnlijk. "De Chinese overheid wil een devaluatie, ze willen gewoon op hun voorwaarden. In de komende twee jaar, dit is aan het gebeuren,"Aldus Bass.

Eén ding Xinhua krijgt recht: De dagen van dubbelcijferige groei zijn voorbij. "Om zeker te zijn, Chinese economie kan niet, en mag niet, herhaalt zijn verleden recordgroei. Het kan op een hobbelige reis, maar een langzamere handhaven, maar stabiele groei. "Wat is de beste van het land kan hopen.

Volg Valentin op Twitter: @vxschmid

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Chinese arbeiders bereiden knuffels in een fabriek in Zhejiang, China, september 17, 2015  (Kevin Frayer / Getty Images)Chinese arbeiders bereiden knuffels in een fabriek in Zhejiang, China, september 17, 2015  (Kevin Frayer / Getty Images)

Elke vorm van verbetering zal moeten ergens beginnen. Voor de Chinese economie, het uitgangspunt is het tweede kwartaal van 2016, althans volgens de gegevens experts van China Beige Book (CBB).

Elk kwartaal ze overzien duizenden Chinese bedrijven en vraag hen of hun inkomsten stegen, of ze huren of niet en wat ze denken aan de toekomst.

De resultaten zijn een veel betere vertegenwoordiging dan de officiële data, die vaak volgt voorsprong CBB is een kwart of twee later.

Transport bouw volgde haar slechtste prestatie ooit in Q1 met zijn grootste verbetering ooit.

- China Beige Book

Dus na een mooie slechte eerste kwartaal, CBB zegt dat de meeste indicatoren verbeterd in het tweede kwartaal, hoewel activiteit is ongeveer vlak over het jaar. In de meeste gevallen, minder dan 50 procent van de respondenten melden een verbetering in de verkoop, verhuren, kapitaaluitgaven, of de bancaire kredietverlening.

Dus de resultaten nauwelijks vormen een bloeiende economie, maar zijn veel beter dan de hieronder 40 economie vanaf het eerste kwartaal.

"De rebound is een prestatie ruwweg in navolging van die van een jaar geleden-profitorganisaties en capex was matig beter dan het tweede kwartaal van 2015, omzet en groei van de lonen waren vergelijkbaar, en output, nieuwe binnenlandse orders, vorderingen, en schulden al verzwakt in het afgelopen jaar,"CBB zegt in een voorschot release van haar verslag

Het probleem: Het verslag over het tweede kwartaal van 2015 keek soortgelijke, alleen weten wat er te later erger.

Maar laten we focussen op de eerste verbeteringen, die in de meeste gevallen te bevestigen officiële gegevens gedurende het tweede kwartaal.

fiscale Stimulus

Nadat de centrale regering duidelijk gemaakt dat het inschakelen van de tappen van de fiscale stimulus en gericht een 3 procent tekort 2016, volgde door middel van.

Volgens CBB, een van de belangrijkste doelstellingen voor fiscale uitgaven is de transportsector, die grotendeels wordt gecontroleerd door de overheid direct of staatsbedrijven (SOE).

"Transport bouw volgde haar slechtste prestatie ooit in Q1 met zijn grootste verbetering ooit, een omkering die moeilijk te verklaren behalve onder vermelding (effectief) actie overheid,"Stelt het rapport.

Dus de opbrengsten verbeterd op 59 procent van het vervoer bouwbedrijven ondervraagde, hetgeen 43 procentpunt hoger dan in het eerste kwartaal.

Nieuwe gegevens uit onze 3000-firm onderzoek is nog steeds optimistischer, toont Q2 capex herstellende sterk van het eerste kwartaal zwakte.

- China Beige Book

Vervoer omzet in het algemeen verbeterd op 57 procent van de bedrijven en de meeste bedrijven (63) voorspellen een hogere omzet in de komende zes maanden. Ook van belang, 51 procent van de staalbedrijven rapporteerden hogere omzet, eventueel verbonden met de toename van transport opbouw.

Een andere favoriet voor stimuleringsmaatregelen van de overheid is vastgoed, ook verbeterd. De helft van de bedrijven melding van een toename in de omzet dit kwartaal, een verbetering van 23 procentpunten. Het is interessant om op te merken dat de best presterende kwam uit de minder geliefde Tier 3 steden.

Dit past bij het verhaal van de officiële gegevens die enorme prijsverhogingen en volumestijgingen gerapporteerd. Residentieel vastgoed bouw bleef op 43 procent, nauwelijks verrassend met 18 miljoen onverkochte eenheden nog op de markt.

(Capital Economics)

(Capital Economics)

diensten Up

De dienstensector toonde ook enkele echte winst, een prestatie die velen hebben gewacht in de China rebalancing verhaal. De omzet voor de dienstensector ondernemingen steeg in 57 procent van de gevallen, een boost die waarschijnlijk wordt losgekoppeld van stimuleringsmaatregelen van de overheid en past de rebalancing verhaal van productie naar diensten.

"Dit is een moeilijke prestatie te repliceren, maar het is precies wat diensten moeten doen om voor de algemene groei in stand te houden als overtollige productiecapaciteit is gericht, stelt het rapport. "

Media, restaurants, gezondheidszorg, en alles deed het goed.

Het onderstaande 50 Economie

De rest van de economie is de onderstaande 50 economie. Beter dan vorig kwartaal, maar minder dan de helft van de bedrijven zijn het maken van serieuze headways. Investeringen, fabricage, kleinhandel, commodities, en residentieel vastgoed bouw al vallen in die categorie, in grote lijnen in navolging van officiële gegevens.

CBB merkt op dat particuliere investeringen niet is losgekoppeld van de publieke investeringen en moet een rebound snel te zien. De meeste officiële gegevens toont een grote daling van de particuliere investeringen, terwijl de staat investering stijgt.

"Nieuwe gegevens uit onze 3000-firm onderzoek is nog steeds optimistischer, toont Q2 capex herstellende sterk van het eerste kwartaal zwakte,"Stelt het rapport. "Private ondernemingen leidde de weg in Q2."

Ondanks het algemeen positief rapport, sommige donkere vlekken nog steeds. Alleen 37 procent van de bedrijven zijn het inhuren van meer mensen, met name particuliere bedrijven. De arbeidsmarkt blijft rechts, vooral alleen ongeschoolde arbeidskrachten verbeterd op 29 procent van de bedrijven, bevestiging van officiële gegevens dat migrerende werknemers zijn niet meer verlaten van het platteland.

(Capital Economics)

(Capital Economics)

Kolen bedrijven deden het bijzonder slecht in de sector grondstoffen, met alleen 33 procent van de bedrijven die een verbetering. De export voor het geheel van de verwerkende sector verbeterd op slechts 34 procent van de bedrijven.

Bancaire kredietverlening aan bedrijven is ook niet gebeurt, ondanks China's Record Credit binge in het eerste kwartaal. Het lenen gestegen op slechts 17 procent van de bedrijven, als aanvraag voor leningen steeg bij 37 procent en de beschikbaarheid van leningen steeg op 33 procent. Bijna een vijfde van alle lening aanvraag wordt afgewezen, volgens de bankiers die aan de enquête.

Bijna een vijfde van alle lening aanvraag wordt afgewezen, volgens de bankiers die aan de enquête.

Omdat bedrijven niet eisen nieuwe leningen, rente daalde ook over de hele linie (bank, obligaties, en schaduw leningen) en blijven in de buurt van laagterecords, een van de redenen waarom de yuan was onder constante druk in Q2.

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Financial markets usually take a shorter term view and focus on things like quarterly economic growth, the exchange rate, as well as capital flows—especially when it comes to China recently.
Every once in a while, it’s good to focus on some longer term indicators, which will shape the economy for the next decades, like population growth and the availability of workers.
Case in point: Every year the National Bureau of Statistics (NBS) in China puts out a report analyzing the status of migrant workers and just released the one for 2015.
There are major demographic shifts underway, including that the working age population has peaked. , Capital Economics

Because migrant workers usually work without formal contracts and in very economically sensitive segments like construction and manufacturing, changes in wages and employment provide a good snapshot of where the overall job situation and economy are right now.
Longer-term trends in worker migration describe the potential for the economy to increase productivity per worker, as they move from lower value-added jobs like farming in the countryside to higher value-added jobs in the city. This was big in China over the last 20 jaar.
Capital Economics
Chinese migrant workers make up 277 million or one-third of China’s workforce. Some of them actually don’t move from their home province and just work in different jobs from agriculture in their home provinces. They are still classified as migrants because of China’s hukou registration system. Some of them move to another province in China to try their luck to build a better future.
For the short-term, the report confirms that the Chinese economy is getting worse, as other on-the-ground surveys confirmed throughout 2015 and the first quarter of 2016.
Wage growth slowed from 9.9 procent 2014 naar 5.6 procent 2015 on average, with manufacturing and construction showing the biggest declines.
The number of workers not paid on time increased to 2.8 million during that period, the bulk of them coming from those two sectors. On average, they will have to do without three months’ pay for the foreseeable future.
For the long-term view, the trend of migration from the countryside to the cities, which contributed to China’s fast economic growth for the last 20 years is probably over.
The pool of surplus workers in the countryside has now all but dried up. , Capital Economics

“There are major demographic shifts underway, including that the working age population has peaked,” research firm Capital Economics writes in a note to clients.
The net increase in migrant workers peaked in 2010 at around 12 miljoen; last year they only increased by 3.5 miljoen. According to Capital Economics and other researchers, China has reached the Lewis Turning point—the move from the countryside to cities is over.
The Chinese regime wants to increase the number of people with urban hukou to 45 procent 2020 from around 35 procent 2014. It may succeed because of a bureaucratic trick.
Capital Economics
“The government has been granting more urban hukous to migrant workers since 2010. Once migrants have an urban hukou they are reclassified as urban workers and removed from the migrant data,” Capital Economics states.
This is positive for the statistic, but does not change the economic reality on the ground, as only migrants who already live in the cities can get the urban hukou.
The population still left in the countryside is staying put as the wages for agricultural work have risen and the country faces shortages of important food items, such as pork.
“The pool of surplus workers in the countryside has now all but dried up. Rural wages are rising rapidly making it harder to entice them to go elsewhere,” writes Capital Economics.
Urban Benefit
Consulting firm McKinsey, echter, is going against the grain and suggests Chinese consumers aged 15-59 and living in cities will increase by 100 miljoen door 2030.
“By 2030, the number of consumers in this segment will grow by 20 procent. … Their average per capita consumption is expected to more than double from $4,800 per person annually to $10,700. Door 2030, this group will spend 12 cents of every $1 of worldwide urban consumption,” McKinsey states in its Urban World Global Consumer Report without saying how it obtained the data or its estimates.
According to the chart below, McKinsey expects the population aged 15-59 to keep growing in most urban areas in China.
McKinsey
The projection comes despite the fact that this age group declined by almost 5 million in the whole of China in 2015 according to official data, and other institutions like the World Bank, expect the working age population to decline another 10 procent 2040.

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Not a day goes by without talk and commentary about China’s debt situation. Yesterday, it was Société Générale’s Yao Wei sounding the alarm bell, this time it is Paul Krake from View From the Peak investment research.
“We had a false start in a rebound in Chinese economic in the first quarter of the year … The Chinese leadership is very concerned about the current debt dynamics in China,” he said in an interview with RealVisionTV.
Activity rebounded a bit during the first quarter, thanks to a record amount of new debt, but this stimulus is already wearing off again and Krake thinks the Chinese regime won’t engage in continuous stimulus and debt expansion.
“Any thoughts or hopes of a large credit-fueled stimulus from Beijing is barking up the wrong tree. Als gevolg, aggregate demand globally is going to be poor.”
(Visual Capitalist)
And even if China succeeded in changing its economy from capital investment to consumption, the transition will take a long time, slow down Chinese growth and hurt other emerging markets.
“Unfortunately for China and more unfortunately for the world is that no one outside China wins in a world dominated by Alibaba and Ping An insurance. Brazil doesn’t care if the Chinese buy more insurance policies. Indonesia doesn’t care if more Chinese are going to the movies or buying stuff online. The emerging world is still very much dependent on Chinese fixed asset investment and that is in structural decline.”
niettemin, Krake thinks the Chinese regime has means and ways to manage a debt crisis, similar to Société Générale’s analysis of a possible debt restructuring.
“We are not in a crisis mode. China has a lot of debt and we all know that," hij zegt. Maar: “The Lehman- style moment that many are espousing is not going to occur.”
The same goes for the management of the currency, where many speculators are betting on a large one-off devaluation of the yuan.
“I don’t really see a one-off disorderly devaluation of the yuan coming. The Chinese have plenty of policy tools, both draconian and market related, to stem the flow of capital flight.”
These tools don’t change his opinion on whether the world should buy China now or not: “China is broadly uninvestable.”

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By now most people have realized that China is, een, addicted to debt and, twee, its debt addiction is not sustainable.
Any country investing around 50 percent of GDP in infrastructure and productive assets over a decade or so will run into overcapacity problems. Overcapacity simply means there is infrastructure and factories to make things, but nobody is consuming them.
Nee, or not enough consumption means no cash flow and if the projects are debt-financed this creates a payment problem.
It is impossible to avoid deterioration in the efficiency of credit allocation with the pace of debt growth that China has seen. — Wei Yao, Societe Generale

China fans—until recently—have brushed this argument aside saying that the country is growing very fast and will one day be able to use this infrastructure. voorts, the totalitarian communist regime could always bail out everybody.
(IIF)
There are still some people who believe China will escape its 300-350 percent debt to GDP load and decreasing debt efficiency without much of a crisis.
This optimistic scenario is unlikely to happen according to Société Générale’s chief China economist Wei Yao. She thinks China has to restructure one way or another and presents some more realistic albeit unpleasant outcomes.
(Societe Generale)
“It is impossible to avoid deterioration in the efficiency of credit allocation with the pace of debt growth that China has seen. In our view, the reason that China has so far avoided a banking crisis is because it remains a relatively closed system,” writes Yao.
SOE SOS
The main problem, according to Yao, are the State Owned Enterprises (staatsbedrijven), which have the most debt (127 percent debt to GDP), worst profitability (3.4 procent van het BBP), and worst return on assets (smaller than 2 procent). More than a quarter of the industrial SOEs are consistently loss-making.
Total losses in the banking sector could reach $1.2 biljoen, equivalent to more than 60 percent of commercial banks’ capital, 50 percent of fiscal revenues and 12 procent van het BBP. — Wei Yao, Societe Generale

Given their track record, Société Générale estimates about 18 percent of SOE debt could go bad, leading to total losses of around $800 miljard. Losses to the Chinese banking system because state banks own most of SOE loans and bonds.
The Communist Party ultimately controls the whole banking system either outright or through the state organs. And it’s CCP officials who benefit most from corruption. “The bankers, whose primary allegiance is to the Party rather than to their institutions, still have little choice but to support local government projects,” Mark DeWeaver wrote in his book “Animal Spirits With Chinese Characteristics.”
(Societe Generale)
So Société Générale thinks that”all in all, SOE debt restructuring could jeopardize 50 percent or more of the banks’ capital base, which—if it materializes quickly—would almost certainly knock China’s banking sector into a systemic crisis.”
While these words may sound shocking to the uninitiated, it is nothing we haven’t seen before. China had to bail out SOEs and banks in the late 1990s when 30 naar 50 percent of all debt went bad.
In the late 1990s, the government completely bailed out the SOEs and the banks, but this is unlikely to happen again.

So bailing out the SOEs will also involve bailing out the banks as well. Nobody likes bail-outs, but Société Générale has some suggestions how to minimize the damage.
Eerste, the so-called “zombie companies” should be closed down systematically and the debt written off. Given the magnitude of the bad loans, echter, the banks cannot shoulder that cost alone, a cost which is going to be higher than just the bad SOE debt.
Because of some knock on effects and some private sector problems, “total losses in the banking sector could reach $1.2 biljoen, equivalent to more than 60 percent of commercial banks’ capital, 50 percent of fiscal revenues and 12 percent of GDP.”
Restructuring Options
In the late 1990s, the government completely bailed out the SOEs and the banks, but this is unlikely to happen again.
“Previously, the government—also the sole shareholder of China’s banking sector at the time—picked up the lion’s share of the bill, and it received significant help from solid economic growth in the 2000s. Deze keer, not only will that same split be hard to achieve—and it should not be replicated—but future economic growth will not be as helpful either,” writes Yao.
Aside from forcing banks to exchange bad debt for an equity stake in the troubled company, which is a short-term fix, banks will have to use up their existing capital base and also raise new money from private investors.
The central government would then issue new bonds (currently only 15 percent of debt to GDP are in the form of government bonds) op de wijs van 10 procent van het BBP.
The bottom line is that the government bail-out program could be designed in a way to greatly limit its impacts on currency and capital account stability. — Wei Yao, Societe Generale

“The new [bond] supply would be equivalent to 3-9 procent van het BBP, 12-35 percent of fiscal revenues and 20-60 percent of outstanding [obligaties]. In addition to bank recapitalization, the government would have to provide fiscal support to address unemployment pain and other social effects. The total fiscal bill would probably be considerably more than 10 percent of GDP.”
The People’s Bank of China (PBOC) could play a role by either doing Quantitative Easing (QE) and buying up some of the bond supply or by using up its foreign exchange reserves to make up for the banking losses. It would have to because the Chinese bond market is not liquid enough to just double in size within the space of a year or so.
Both options are not without problems, echter, as QE would put further pressure on the already brittle currency whereas the selling of foreign exchange reserves would put deflationary pressure on the already deflating manufacturing economy.
In the best case scenario, those two factors could offset each other.
“The bottom line is that the government bail-out program could be designed in a way to greatly limit its impacts on currency and capital account stability. Such designs seem

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Op het oppervlak, things are quite straight forward: China has been growing fast thanks to a historic expansion in debt and recently failed to transition its economy from investment in things that don’t move to consumers who move around and buy stuff.
It has taken the market quite some time to come to that conclusion as most people thought the central planners in Beijing were invincible. Nu, the sentiment is more negative, despite another ramp up in debt and investment to stabilize the economy in early 2016.
(Macquarie)
Investment bank Macquarie, echter, goes against the grain and says China’s debt problem is misunderstood and there is untapped potential in the Chinese economy.
First of all, Macquarie states the debt is not the problem: “Focusing on debt misses the main point: debt under state capitalism is different from that in market economy,” it states in a report.
State capitalism in China’s case means China controls who lends and who borrows by owning most of the banking system as well as the State Owned Enterprises (SOE). It also writes the accounting rules and can tell banks to roll over debt indefinitely. China’s banking system was bust at the end of the 1990s and the regime swept the problem under the rug by setting up bad banks and using accounting gimmicks to forget about the problem.
In principle, the regime could do this again, although it likely won’t get away scot-free this time. “The hope, again similar to the 1999 crisis, is that nominal growth will grow enough to reduce the debt to GDP ratio to a manageable proportion. Echter, given the environment of slow growth amid collapsing productivity, such a strategy could instead lead to the scenario of Japan’s ‘lost decade’,” the Institute of International Finance states in a report.
(Macquarie)
Declining capacity utilization rates are only one indicator that a lot of capital and labor was wasted and therefore won’t generate much nominal GDP growth in the future without further increasing debt.  
Another thing has changed from 15 jaren geleden: China doesn’t control its depositor base as tightly as before. Chinese savers, who are the ultimate lenders in the Chinese economy, were mostly confined to saving money in the form of bank deposits. And although bank deposits still make up the majority of savings, Chinese savers have used the liberalization of the financial system to get money out of the country.
Even the state controlled companies (who can also be savers, depending on the sector and company) have ramped up overseas investments, contributing to the $676 billion in outflows in 2015. Macquarie also notes “foreign asset accumulation is more of a concern,” now and that outflows have a significant impact on China’s monetary policy.

As for the positives, Macquarie buys into the themes of further urbanization as well as increases in productivity, consumption, and services. The key point according to Macquarie, which may indeed be missed by the markets, is that more than 56 percent of the population lives in the cities, but only 40 percent have been properly registered under the Hukou residency system.
It also notes that China’s top four cities contribute less to the country’s GDP than either London or Tokyo, which is why there is further upside. And while most observers agree that a reform of the Hukou system would liberate millions of Chinese others doubt the service and consumer revolution that Macquarie thinks is going to happen just because it churns out more college graduate than everybody else.
(Macquarie)
“Sheer numbers of graduates are not translating into talent that can turn ideas into scalable businesses,” Eric Roth, head of Mc Kinsey’s Global Innovation and Growth Practice, wrote on the company’s blog.
“Chinese companies have an abundance of structures and processes, but suffer from the inability to translate these into an increased stream of value-creating innovation.

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Let’s start with the facts: During the first quarter of 2016 and during a time when the Chinese economy stared into the abyss, the Chinese financial system created $712 miljard aan nieuwe leningen. This is the highest amount of loans created on record, even higher than in 2009, right after the financial crisis.
Because China has one of the highest debt loads on the planet (346 percent of GDP according to Rabobank estimatesothers estimate as low as 250 procent), analysts are sounding the alarm bells.
If China’s new loans were a whole economy, it would be bigger than Indonesia and the Netherlands. (Royal Bank of Scotland)
“China has engineered yet another credit boom to arrest the sharp drop in growth,” writes Marcus Wright of the Royal Bank of Scotland. What he means with “yet anotheris the previous record build up in debt after the financial crisis which went almost exclusively into projects with little or no economic value. This is why the analyst calls the increase in debt a move “further away from what is desired.
Ten slotte, even the Chinese regime admitted it needs to reduce investment spending, cut overcapacity, and rebalance the economy toward more consumer spending. So what about the record increase in debt in the first quarter? Not to worry, says Xinhua, the regime’s mouthpiece in an editorial published May 2.
“China will not resort to large stimulus measures; policymakers are more than aware of the consequences of such a short-sighted program,” it says, adding that “fears are unfoundedand that “this rapid increase in loans is temporary.
The ramp up in debt is reminiscent of the financial crisis (Royal Bank of Scotland)
Note that Xinhua speaks of stimulus in the future tense, as if the increase in debt wasn’t stimulus that already happened in the first quarter and as if banks were somehow independent of the central government. Because the central and local branches of government own most banks in China, almost any increase in debt is equivalent to official government stimulus, as Mark DeWeaver demonstrated in his book “Animal Spirits With Chinese Characteristics.
Christopher Balding, professor of economics at Peking University had this to say about the Xinhua editorial: “I think you guys already missed that off-ramp,” he commented on Twitter.
Further evidence he may be right and Xinhua may be wrong: The fiscal deficit. China usually runs deficits of about 1 procent, with notable exceptions during the financial crisis, when it approached 3 procent. Dit jaar, the regime is targeting a deficit of 3 percent or more, making it the highest in 34 jaar.  
(Royal Bank of Scotland)
Weer, Xinhua thinks this will all be productive investment in the long-term: "Echter, instead of being channeled to investment projects with short-term impact on GDP, as was the case back then, the lion’s share of the current new loans ended up funding long-term programs, supporting small businesses, and facilitating consumption, such as housing.
We all know accurate statistics isn’t exactly China’s strong point, but counting housing as consumption is a novelty even the National Bureau of Statistics would have a bone to pick with.
Also not consumption is what Xinhua lists as “the start of numerous infrastructure projects,” and the systematic stockpiling of commodities.
In plaats daarvan, the Royal Bank of Scotland thinks China has exactly the same problems as before and has abandoned the rebalancing objective to keep the economy from crashing.
“The economy remains beset by: an excessive reliance on investment driven growth; a structurally low share of GDP going to household incomes; overcapacity in key sectors; hidden non-performing loans in the banking sector [en] ad-hoc, reactive policy-making that fails to address the underlying distortions in the economy.
Or in the words of famous psychologist Abraham Maslow: “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.

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Every economy has themes. Voor de Chinese economie, the only theme up until recently was rapid growth. First because of exports, then because of investment in infrastructure and factories.
The Chinese economy of 2016 has many different themes. One theme is an unprecedented economic slowdown, reflected in official numbers and much worse in unofficial estimates. But then there is the theme of rebalancing. The old economy of manufacturing, investering, and exports is slowing down but the new consumer and services led economy is supposed to take over the baton.
With official sector data notoriously unreliable, China analysts get conflicting messages and don’t know which theme is actually happening. To shed light on this murky situation, Leland Miller and his team at the China Beige Book (CBB) interview thousands of companies and hundreds of bankers in China each quarter to get an accurate gauge of the themes prevailing in the Chinese economy.
Led by rising layoffs at private firms, first quarter job growth took another notable hit.— China Beige Book

CBB collects data from thousands of Chinese firms every quarter including some in-depth interviews with local executives. Hoewel de CBB niet definitieve groeicijfers geven, Het registreert hoeveel bedrijven hun inkomsten verhoogd of hoeveel werknemers ontslagen, bijvoorbeeld.
Labor Weakness
The most interesting finding of this quarter’s report is that the labor market is finally reflecting the weakness in the general economy. This hasn’t been the case throughout the slow-down, which started in the second quarter of 2014 according to the CBB data.
“Led by rising layoffs at private firms, first quarter job growth took another notable hit, sliding to a new four-year low. Expectations of future hiring have also taken a dive,” states the report. Alleen 23 percent of respondents said they were hiring, met 15 percent of companies said they are firing. China has announced it will lay off millions in the moribund steel and coal sectors of State Owned Enterprises (SOE). Echter, the CBB survey indicates it was mostly private companies which didn’t want to hire more workers.
Alleen 28 percent of the companies said they will hire in the near future. Another interesting development is the slowing growth in the country’s supply of skilled and unskilled labor. The constant flow of rural workers to the cities dramatically increased productivity over the last 20 years and provided China with a low-cost labor advantage. Echter, many analysts now estimate that the Lewis Turning Point has been reached and China’s working age population is declining. The CBB report confirms this thesis, as only 33 percent and 24 percent of the companies reported growth in skilled and unskilled labor.
The good news: Profit growth stabilized overall and didn’t further deteriorate compared to last quarter, although the report notes this may be due to cost cutting and layoffs.
Old Economy
Capital expenditure increased at only 33 procent van de bedrijven, a record low in the 5-year history of the CBB. Again it was private companies leading the way here, whereas SOEs tried to budge the trend. Another part of the old economy—fabricage—continues to deteriorate, especially when compared to the first quarter of last year. Alleen 42 percent of companies reported revenue gains, which technically means the sector is in recession.
gezamenlijk, our data show that that firms first stopped borrowing, then cut spending, and now are becoming allergic to hiring. — China Beige Book

Most notable here is the textile sector, which has lost competitiveness due to higher wages. As a consequence, multinational companies relocate their production elsewhere in Asia or even back to the United States. The number of companies reporting gains crashed by 31 percentage points to only 24 percent compared to last year.
The last part of the old economy, the manufacturing export sector, is also very weak, met alleen 27 percent of companies reporting revenue gains.
The CBB cautions that any kind of monetary easing, like the Reserve Requirement Ratio cut earlier this year, is not having its intended effect. Alleen 16 percent of companies say they are borrowing money. Weer, contrary to the People’s Bank of China’s (PBOC) easing effort, interest rates at banks and shadow lenders increased, presenting an interesting paradox. The central bank eases credit conditions, firms do not wish to borrow, and yet interest rates are on the rise. Helaas, the CBB doesn’t explain this phenomenon but succinctly summarizes the current state of affairs like this
“Collectively, our data show that that firms first stopped borrowing, then cut spending, and now are becoming allergic to hiring.
The PBOC has been cutting reserve requirements but the CBB days it didn’t help much (Natixis)
Rebalancing
So what about the new economy? Services, consumption, kleinhandel?
“Revenue growth in retail and services each slowed again in the first quarter, a rebuke to those analysts who optimistically repeat the mantra of ‘two-tiered economyin lieu of compiling relevant data.So no, at least for now, even though e-commerce companies reported gains.
The worst performers in retail were textile and furniture and appliances. The China watchers who speculated the home furnishing section would take a hit because of a slowdown in property were right.
Services presented a mixed picture, met 47 percent of firms saying their revenues increased, which is down from 48 percent compared to a year ago and not enough to take over from the old economy.
Within the service sector, China shows a remarkable similarity to the United States: The strongest subsector was healthcare.
As for the property market, residential is still under pressure but commercial property showed a rebound compared to the last quarter.
“Talk of a property rebound was also accurate only on the surface, in light of sharp differences by city size, region, and commercial (soaring) or residential (plunging) orientation,” the report states.
With respect to the official data rebound in prices and record volumes of used homes transacted in residential real-estate, the CBB survey poses more questions than it answers. Or maybe we should just trust the data on the ground and not the officially reported ones, as Andrew Kollier of Orient Capital pointed out: “I don’t trust the official figures of a rebound because

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The good news first. The slowdown in the Chinese economy and lower commodity prices mean more money for the consumer in the West.
“What happens to the overall world economy depends on whether the boost to income and spending of the consumer will outweigh the hit to the income and spending of the producers,” says Diana Choyleva, chief economist of Lombard Street Research.
While mining companies like Anglo American PLC and commodity traders like Glencore PLC are suffering, consumers are enjoying lower prices, especially regarding gasoline.
ONS. disposable income has gotten a boost from low commodity prices (St. Louis Fed)
But while consumers in the European Union have spent most of it according to Choyleva, consumers in the United States are staying put because a big chunk of their savings is tied up in the stock market.
“The longer financial market volatility continues, the more likely it is that the American consumer will continue saving the real income gains and not spend them,” says Choyleva.
Good for China
The same is true for China. Take money away from the producers and put it in the consumer’s pocket. A devaluation of the currency could help this process, says Choyleva.

“An open capital account and weaker currency will produce higher domestic interest rates. It’s exactly what China needs in order to move toward higher consumption,” zij zegt. Because most of Chinese household savings are in interest bearing deposit accounts within the banking system, higher rates mean higher income and thus higher consumption.
Lower Chinese investment by producers and the government, aan de andere kant, would enable Western businesses to pick up the slack and increase business investment.
Given where debt-to-GDP is at the moment, it actually has at most one or two years to do the wrong thing before it blows up.Diana ChoylevaLombard Street Research

As for higher import prices because of a weaker currency, Mrs. Choyleva says this is nothing to worry about because China doesn’t actually import a lot of consumer good but rather commodities needed for investment.
Bad for China
Echter, it looks like Western central banks aren’t letting China get away with this strategy. “It would have been much better for them to let the currency go in a one-off fashion. Maar natuurlijk, that would be like a red rag to the bull; whether it’s the Japanese bull or the American bull,” says Choyleva.
The Bank of Japan has recently reiterated its aggressive stance on monetary easing and even told China to implement stricter capital controls to stem capital outflows and prevent a depreciation.
“We are in the midst of a currency war. It’s quite clear that if every major central bank in the world tries to devalue its way out of trouble, no one will succeed, unless of course, we find life on Mars,” says Choyleva.
It has in the past, when its run into these hurdles, tried to go through one last, great surge of lending.Evan LorenzGrant’s Interest Rate Observer

Evan Lorenz of Grant’s Interest Rate Observer thinks a sharp Chinese devaluation would definitely make in onto the U.S. election agenda in 2016.
“It would be a political catastrophe right now. We’re in the middle of a U.S. election right now. China has already become an election issue. I have to imagine that the Republican front-runner Donald Trump is going to make China headline news until the election in November should they devalue 10-15 procent. That may lead to trade sanctions or some problems for China down the line,” hij zegt.
Ugly for China
Evan Lorenz has a more pessimistic view on the whole China rebalancing story. “It does seem like China’s overinvestment bubble is starting to pop with bad repercussions for China and the rest of the world,” hij zegt.
He says China has a massive debt problem (240 percent of GDP officially), which is impossible to solve without dramatically slower growth. The regime has recently set a target of 6.5 procent tot 7 procent, but Lorenz thinks this won’t be achievable.

“It’s unclear whether it’s going to be 0, 1, 2, or even -1 percent but I do expect lower growth,” hij zegt. The real problem, echter, would be for China to inflate another bubble to counter slow growth.
MEER:China Boosts Debt in December, the Market Doesn’t Buy ItChina and Greece Show Not All Debt Is Created Equal
“If the authorities throw money at the problem, forget reform, maybe we will have a short-term relief rally. Given the alarming pace of increase in debt in China, given the investment excesses of the past, given the lack of structural reform in places like Japan and the Euro-area, then it’s very unlikely that this will be a healthy and long term improvement. On the contrary, the fallout from that sort of policy would be much worse,” says Mrs. Choyleva.
“It has in the past, when its run into these hurdles, tried to go through one last, great surge of lending and we saw that around the transition of CCP chairman Xi Jinping in the last Congress of 2012,says Lorenz.
It seems China is following this “great surgepolicy in 2016 as well as it has created more than $1 trillion in total debt financing until the end of February, a new record.
This will not end well, according to Mrs. Choyleva: “China doesn’t have another ten years to be blowing up bubbles and kicking the can down the road. Given where debt-to-GDP is at the moment, it actually has at most one or two years to do the wrong thing before it blows up. The positive take on this is that it still has the funds to clean up the excesses now if it does the right thing.If it does the right thing.

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China allowed the world to catch a breath on Friday. Chinese stocks rose 2 percent and the central bank fixed the currency a tad higher. Global stocks are more or less unchanged.
After a week of complete market chaos, this is a welcome break, but won’t change anything in the long-term says James Rickards, author of “Currency Warsand “The Death of Money.
“The Chinese are communists and they don’t know anything about capital markets. Putting communists in charge of capital markets is like giving a loaded gun to a three-year old,” he told Canadian broadcaster CBC.
He says their biggest mistake was to shock the world by devaluing their currency last August. “You never shock the system, you always let people know what’s coming,” hij zei. In die tijd, the move came as a complete surprise and shook the world’s belief in Chinese central planning.
(Macquarie)
Vanaf dat moment, the Chinese authorities have learnt their lesson-although a bit late-and are sending signals the currency has further to drop.
Volgens Reuters, the central bank stated on its website on Friday, jan. 8.
“The central bank also said it would make the yuan more international, keep the currency basically stable, further improve the currency formation mechanism and deepen reforms of the foreign exchange management system and financial institutions.
Translated, this means the yuan will depreciate further against the dollar. China has a restricted set of choices, according to the law of the impossible trinity:
1. Have an open capital account2. Have independent monetary policy3. Have a stable exchange rate
At any given time, only two are possible and Rickards says China will chose an independent monetary policy and an open capital account, similar to most developed markets. “They have to devalue the currency. They are not going to close the capital account, there is too much pressure from the International Monetary Fund. They are not going to give up independent monetary policy. They are not going to raise rates to stop the capital outflows, so they have to devalue the currency,” hij zei.
As for the transition to a consumer economy, Rickards thinks it will take longer than people expect.
“I am not so sure the demand is there. There are a lot of Chinese people, but their income distribution is widely skewed. They have a sort of middle class of 200 million people out of a population of 1.2 miljard, but those people are practically eating bark of the trees, they are pretty poor,” hij zei.
“Those who do have some money, a lot of them sank the money into overvalued assets like real estate and stocks, so they are taking a beating. This transition to the consumer driven economy, we are talking something that will play out over 5 of 10 jaar, it is not going to rescue the situation today. China’s growth has hit an air pocket, it is going to go down a lot.

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China is probably looking forward to the new year. A fresh start on Feb. 8, putting all the currency chaos behind.
This may well remain wishful thinking, as events are going from bad to worseand Jan. 6 is no exception.
The Chinese yuan fell 0.6 procent—this is a lot for a big currency—naar 6.55, the lowest level since March 2011. Traders dumped the yuan after China’s central bank fixed its value 0.22 percent lower, another official devaluation.
China first devalued the yuan in August of 2015 and then intervened with great force in the market to keep its value relatively stable, spending $255 billion of its foreign currency reserves by the end of November.
China’s foreign exchange reserves as of Nov. 30, 2015. (Bloomberg)
After the International Monetary Fund included China in its basket of reserve currencies in November as well, Beijing reduced the reserve burn and let the currency drift down gradually.
Beijing also gave the market a fair warning, as it said it would index the value of the yuan against a basket of currencies, not just the U.S. dollar.
The yuan’s value in U.S. dollars dropped in 2015, but it rose against the trade-weighted basket. This gives Beijing justification to further devalue against the dollar.
(Capital Economics)
“China is going to have to dramatically devalue its currency,” Kyle Bass, principal at Hayman Capital Management LLC., told Wall Street Week. He thinks the devaluation could be as much as 20 procent.

So investors took heed and are getting out of the yuan as fast as they can. Ten slotte, why stick around to lose money in a falling currency. Het probleem: This herd behavior leads to, you guess it, a falling yuan.
And while Chinese regulators can stop them from wantonly selling the mainland currency (CNY) because of capital controls, nobody is stopping them from selling the freely traded offshore yuan (CNH), mostly traded in Hong Kong
READ about China’s two different currencies here
The CNH dropped 1.1 percent against the dollar, trading as low as 6.70, the lowest since September 2010. The spread between the mainland and the offshore currency also widened to a record 2.5 procent.
(Bloomberg)
Capital Outflows
Behind the move in the currencies is the tectonic shift in capital flows. Up until 2014, China attracted capital, driving the exchange up. Now capital is moving out, driving the exchange rate down.
“You’ve gone from a period which you had this one-way betthe currency was going to appreciate, capital inflowsto the reverse. Having a period in which your own residents want to diversify into something else,” says Harvard professor Carmen Reinhart.
She thinks China is facing “a significant internal debt crisis,” which is why domestic citizens and international investors are moving their money out.
READ Carmen Reinhart on China’s Debt Crisis
“You do have a shift in capital flows and in fact, that shift has also accelerated purchases of real estate in London, in Boston, in New York. You see that it’s not just Treasurys. We see that from China and we see that from Russia,” zij zegt.
Bloomberg estimates as much as $367 billion of capital left China in last three months of 2015. Epoch Times previously estimated capital outflows of $850 billion in the first nine months of 2015, so the total could be more than $1.2 biljoen, the same as Societe Generale’s worst case estimate.
China’s big trade surplus is the reason it didn’t have to sell more foreign exchange reserves to keep the currency from collapsing.
Why Devalue
There is nothing China can do against the capital flows per se, expect for completely reforming its economy.
It can intervene in the markets by selling its foreign currency reserves to stop the exchange rate from collapsing. For the onshore yuan, it can also enforce capital controls more strictly, which it has done, but that goes against the promised reforms.
Echter, given only bad choices, managing a gradual devaluation in the offshore and onshore yuan is actually the best of the worst.
Past currency crises, like the British pound devaluation in 1992, the Asian financial crisis in 1997, and the recent Ruble crash, show the value of the currencies will always drop to its equilibrium levelno matter how much a country spends intervening in the market.

So if the currency has to drop, China can at least keep its large stash of foreign currency reserves, although cynics may then ask what good are they for after all.
“The foreign exchange reserves are just that: they are foreign. They are not renminbi [RMB]; they are not money that can be brought to bear domestically,” says Fraser Howie, author of “Red Capitalism.
A lower currency on the other hand will support the country’s export sector, welke, thanks to rising land and labor costs, is not as competitive as it used to be. Kyle Bass thinks a devaluation will help China “come back to some level of competitiveness with the rest of the world.
It needs to compete not to generate growth, as many think. Although the Beijing Academy of Sciences just estimated GDP will only grow 6.7 procent 2016 (below the official target of 7 procent)—it is employment and public sentiment that matters most to the regime.
The export sector still contributes around 10 percent to total employment.
Gordon Chang, author of “The Coming Collapse of China” zegt: “Where you have people just sick and fed up, especially when the system is no longer delivering prosperity. When you have real serious economic problems, I think people are going to say, ‘I’ve had enough.’
Until then, the yuan has a lot further to drop.

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The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on Jan. 4, it managed to reverse another 3 percent drop on Jan. 5.
So in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy.
According to their analysts the regime has to fight multiple battles at once and will ultimately lose to market forces.   
“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.
(Google Finance)
The report points out that a spike in private sector debt almost inevitably leads to a financial crisis.  China’s private debt to GDP ratio went up 75 percent between 2009 en 2014, bringing total debt to GDP to about 300 procent. Too much to sustain.
Western analysts often point out that China can handle it and that Beijing has found its own brand of state sponsored capitalism which can prevent a crisis from happening.
Cui shows this assumption is wrong from the start. China already went through all forms of debt crises (currency devaluation, hyper-inflation, and bank recapitalization) since the reform and opening up policies started in 1978.
(Bank of America)
“Banking sector NPL reached some 40 percent in the late 1990s and early 2000s and the government had to strip off some 20 percent of GDP equivalent of bad debt from the banking system between 1999 and 2005,Cui writes.
(Bank of America)
He also writes that investors assumptions about how the Chinese regime runs the economy will face another severe test in 2016. The assumptions were as follows:

GDP will keep growing fast
The yuan will appreciate against the dollar
The regime will support the stock market
No major company will default on its debt
The regime will prop up the real estate market

Vanaf 2016, most of these assumptions are no longer true. Daarnaast, market participants and the regime have made the debt problem worse by adhering to them.
This is “a classic case of short term stability breeding long term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fall-out will be,” Cui writes.
For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.
And even if the regime wants to continue to deliver on the five assumptions, it won’t be able to, as they sometimes contradict themselves. Bijvoorbeeld, it is impossible to keep growth from crashing by printing money without further downward pressure on the currency.
So after the events of last August and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower.
Another key point Cui doesn’t mention but is important is reform. The regime promises reform and even follows through in some cases. But if push comes to shove, it resorts back to central planning to mold the market according to its needs, with less and less success.  
“It seems to us that the government’s policy options are rapidly narrowingone only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slow-down in economic growth is typically a prelude to financial sector instability,” writes Cui and predicts the Shanghai Composite to drop by 27 procent 2016.
 

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Western commentators complain that China’s 7 percent stock crash on Jan.4 is a dreadful start to the new year.
Goed, technically speaking, the Chinese still can hope their new year is going to be better than the old one, as it only starts on February 8.
Until then, it looks like it’s going to be downhill for the economy, stocks, and the yuan.
The Shanghai composite slipped 6.9 procent tot 3296 on Jan. 4, triggering circuit breakers. The onshore yuan dropped 0.37 percent against the dollar.
(Google Finance)
 
Official GDP numbers come out on Jan. 19 but whatever the official number, it real growth won’t be good judging from data on the ground.
Market commentators blame recent weak manufacturing data and new IPOs but analysts knew all of this beforehand.
Eigenlijk, if you look at any data coming out of China, whether it’s official or unofficial, all of it is pointing south.
Research Firm Capital Economics compiled a chart book of important indicators for the Chinese economy based on official data, showing firmly established downtrends.
The currency will devalue further against the dollar because it has actually gotten stronger in trade weighted terms in 2015 and that’s what China cares about.
This is the only reason why China launched a trade weighted index for the yuanso it has a justification to devalue further against the dollar.
(Capital Economics)
Official GDP growth slowed to 6.9 percent in the third quarter of 2015, but Capital Economic’s own activity proxy indicates growth of only 4 procent.
Electricity consumption, one of the best economic indicators is not growing at all.
(Capital Economics)
Retail sales are still growing at 10 procent, but retail is not a large share of the economy and growth fell from a peak of almost 20 percent right after the financial crisis.
(Capital Economics)
Trade has collapsed, firmly trending down.
(Capital Economics)
Producer and commodity prices are deep in deflationary territory. Capital Economics is optimistic this will change soon though.
(Capital Economics)
Credit is still growing, but also trending down. Ook, the ratio of output per unit of credit decreased dramatically over the years.
(Capital Economics)
Knowing all this, how can traders be surprised by weak manufacturing data? Hope dies last.
 

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China ends 2015 with an economic win: de U.S.. Congress approved a reform package to boost China’s voting rights at the International Monetary Fund (IMF) van 3.8 procent tot 6 procent.
This win, echter, is largely symbolic, similar to the inclusion of the Chinese renminbi in the IMF’s reserve currency basket (SDR), which happened in November this year.
In 2015, China gained prestige on the international stage while the economy at home had its worst year since reforms started in earnest in 1992.
International Prestige
In spite of being symbolic and far removed from the day-to-day action of global finance, the IMF’s endorsement of China as a whole is a big win Beijing pursued for years. The inclusion of the yuan into the Special Drawing Rights Basket (SDR) means the IMF thinks the currency, and by extension the whole Chinese political economy, is on par with the dollar, euro, yen, and pound sterling.
Why symbolic? Until China’s plan to replace the dollar with the SDR as the global reserve currency becomes reality, there are too few of the SDRs in circulation ($285 miljard) to change the demand for the yuan as a reserve asset. Its use is also limited to member countries, who use it mostly for transactions with the IMF.
Ook, the increase in voting rights doesn’t change the power structure at the IMF, since the United States retains veto power with 16.5 percent of total votes. Echter, it recognizes China’s efforts to build up an alternative power structure to the Bretton Woods financial system set up after World War II. China successfully launched its Asian Infrastructure and Investment Bank this year, convincing even staunch U.S. allies like Australia and the U. K. to participate.
The regime plans more reforms of the exchange rate, interest rates, as well as housing registration next year.

China also refined its efforts to compete in global gold trading and started several initiatives to gain control over global trade, like the Silk Road initiative, which plans to bring another U.S. ally, Pakistan, closer to China economically, as it opens up trade with central Asia and eventually Europe. China launched new clearing centers for the yuan worldwide, now the fourth most used currency in the world.
As part of the reforms to convince the IMF to give it more voting rights and include it in the SDR, China has for the first time since 2009 updated its official gold reserves, which increased more than 60 procent tot 1,743 metric tonnes (1,921 short tons). It also lifted the cap on interest rates banks pay out to depositors to shift income to consumers, who are supposed to become the growth engine of the economy. It has somewhat liberalized its exchange rate compared to the dollar, although it is still closely managed. The regime plans more reforms of the exchange rate, interest rates, as well as housing registration next year.

Problems at Home
All these reforms move the economy away from a closed-off, centrally planned system to a real market economy fully integrated in the global financial system.
Helaas, it may be too little too late and China is now chasing reforms it should have undertaken while the economy was still growing fast. Officieel, China will grow at 7 procent 2015, the lowest rate since 1990. Unofficially, growth has crashed to around 2 procent, with a marked deceleration in the fourth quarter.
In 2015, even the most optimistic analysts realized China’s investment driven growth model is over. Even more so than official data on investment, the plunge in commodity prices as well as producer prices in China suggest a severe slowdown, maybe even outright recession. This unexpected change in demand has left commodity exporters like Russia, Canada, Brazilië, and Australia reeling and has wreaked havoc among international mining and commodity giants. They spent hundreds of billions building up their infrastructure to satisfy supposedly never-ending Chinese demand.
We will remember 2015 as a historic turning point for Chinaand the world.

The only debate still raging among investors and academics is whether the consumer or service sector can take over from manufacturing, investering, and exports. Although there are some signs of resilience in all of these sectors, a real rebalancing will take decades and will be painful, according to Peking University professor Michael Pettis. The consumer just doesn’t have enough income to make up for all the wasteful investment spending.
Wasteful investment spending has created economy-wide debt close to 300 procent van het BBP: Debt that needs servicing. Dit jaar, reports about defaults and the inability of companies to service their debt have become more frequent, despite the efforts of the regime to provide monetary easing through lower interest rates and different accounting gimmicks, like the local government debt swap program.
Financial Markets
Too much debt and too little growth are the main reasons for the stock market boom and bust, as well as the shock currency devaluation in mid-August. Because many firms cannot service their debt loan anymore, the regime engineered a stock market boom, giving companies access to capital, which doesn’t carry interest and doesn’t have to be repaid.
This worked for a while, but because banks created the stock bubble with margin debt, it had to crash sooner or later, and eventually did in July. With the stock market bust, all asset classes in China were impaired and became uninvestable.
The real estate bubble had already burst in 2014. The fact the second half of 2015 was relatively better doesn’t make a big difference. The stock market had crashed and local government bonds or corporate bonds as of the beginning of the year carried the risk of default, something quite unknown to investors in Chinese companies.
A board shows the stock movements inside the Shanghai Stock Exchange in the Lujiazui Financial District of Shanghai on Sept. 22, 2015. (Johannes Eisele / AFP / Getty Images)
These factors worsened a trend, which probably started in mid-2014: kapitaaluitstroom. Ever since China joined the World Trade Organization in 2001, it has accumulated trillions of dollarsworth of foreign currency reserves, by running massive trade surpluses and attracting foreign capital. The country still has a trade surplus,

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