What a mess.
BEIJING: China's regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy.
As part of Beijing's overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the "Big Four" will be forced to take some losses on the bad debt, said the sources, both of whom have direct knowledge of the plans.
Part of the debt will also be shifted to newly created companies, while private investors would be welcomed in projects previously off-limits to them, sources said.
Beijing will also lift a ban on provincial and municipal governments selling bonds, a step aimed at bolstering their finances with more transparent sources of funding.
Tuesday, May 31, 2011
The Economist...
...which in my experience is late to most macro developments, highlights the crony capitalism and agency risks I have been highlighting on this blog for years. The proverbial cat is out of the bag. I also love the "at least on paper" reference, as the entire world realizes they have been relying on economic and balance sheet figures that are at best "centrally managed" and at worst pure fabrications.
CHINA’S economy has, at least on paper, survived forces that have overwhelmed much of the rest of the world. But the recent round of bank tightening seems, at least indirectly, to be hitting with real force. Slowly, word has spread of Jin Libin, a resident of Inner Mongolia who ran a business empire encompassing supermarkets, mining and transport, who set himself on fire one day in April and burned to death. According to the Global Times, a government-run newspaper, he left private debts of $1.3 billion yuan ($191m) of private loans and another 150m yuan of loans from banks.
Still to be reflected is the impact of his collapse on his lenders, which, the Global Times says, included local banks, pawnshops and guaranty companies that had lent him money. No doubt there were also substantial loans from an impersonal network, a form of credit that is commonly used in China, though not legal. The consequences will not be trivial. Many other explosions driven by the same financial forces that brought down Mr Jin are sure to come.
CHINA’S economy has, at least on paper, survived forces that have overwhelmed much of the rest of the world. But the recent round of bank tightening seems, at least indirectly, to be hitting with real force. Slowly, word has spread of Jin Libin, a resident of Inner Mongolia who ran a business empire encompassing supermarkets, mining and transport, who set himself on fire one day in April and burned to death. According to the Global Times, a government-run newspaper, he left private debts of $1.3 billion yuan ($191m) of private loans and another 150m yuan of loans from banks.
Still to be reflected is the impact of his collapse on his lenders, which, the Global Times says, included local banks, pawnshops and guaranty companies that had lent him money. No doubt there were also substantial loans from an impersonal network, a form of credit that is commonly used in China, though not legal. The consequences will not be trivial. Many other explosions driven by the same financial forces that brought down Mr Jin are sure to come.
Sunday, May 29, 2011
False risks.
The below is yet another example of false beliefs regarding U.S. "debt", which is a sovereign currency issuer, and Greek obligations denominated in Euros which must be "obtained" by Greek authorities to pay these obligations. Its apples to oranges yet this simple error in assumptions colors a disproportionate portion of the debate regarding the U.S. debt ceiling. Furthermore, the risk of inflation is massively overstated with this type of analysis, as it ignores the demand side of the equation. Friedman famously said "inflation is always and everywhere a monetary phenomenon". He was incomplete. Inflation IN A FIAT CURRENCY REGIME comes from massive monetary creation by bank credit and associated wage demands.
Greece has a sovereign debt problem. The bonds of the Greek government have been downgraded by a major rating service. Their prices have fallen sharply in the market. This means that the risk is high that the government will default on its sovereign debt.
The interest rates that the Greek government must pay in order to borrow have risen sharply. This is worsening the government’s solvency and budget problems.
The government faces default. The government’s various spending cutbacks haven’t solved the problem.
They cannot solve the problem. It’s apparently too late. The government would have to restructure its debt by renegotiating with its multiple lenders. That’s a difficult and time-consuming process. It would have to work out repayment while simultaneously altering government policies so that the country’s private market economy could expand. This involves knotty political and economic issues that take years to resolve. The government doesn’t have this time.
The problem traces back to the earlier fact that for some years the government was able to borrow heavily at low interest rates. This means that it was able to sell its bonds at high prices. The problem arose because these market prices were too high.
Greece has a sovereign debt problem. The bonds of the Greek government have been downgraded by a major rating service. Their prices have fallen sharply in the market. This means that the risk is high that the government will default on its sovereign debt.
The interest rates that the Greek government must pay in order to borrow have risen sharply. This is worsening the government’s solvency and budget problems.
The government faces default. The government’s various spending cutbacks haven’t solved the problem.
They cannot solve the problem. It’s apparently too late. The government would have to restructure its debt by renegotiating with its multiple lenders. That’s a difficult and time-consuming process. It would have to work out repayment while simultaneously altering government policies so that the country’s private market economy could expand. This involves knotty political and economic issues that take years to resolve. The government doesn’t have this time.
The problem traces back to the earlier fact that for some years the government was able to borrow heavily at low interest rates. This means that it was able to sell its bonds at high prices. The problem arose because these market prices were too high.
Friday, May 27, 2011
Memorial Day
This will be an auspicious holiday, given the world is coming to grips with the fact that U.S. assets remain the only thing remotely close to "safe", even with the dismal housing numbers released today.
I expect some sort of announcement regarding the Euro situation this weekend given closed markets on Monday.
I expect some sort of announcement regarding the Euro situation this weekend given closed markets on Monday.
The Paper Dragon at home and abroad...
...the press continues the now popular assault on the business practices and "creative accounting" endemic to Chinese firms. I continued to be amazed that all of this was either ignored and how the investment world got caught up in this bubble.
First, the African problem (from The Economist)
Once feted as saviours in much of Africa, Chinese have come to be viewed with mixed feelings—especially in smaller countries where China’s weight is felt all the more. To blame, in part, are poor business practices imported alongside goods and services. Chinese construction work can be slapdash and buildings erected by mainland firms have on occasion fallen apart. A hospital in Luanda, the capital of Angola, was opened with great fanfare but cracks appeared in the walls within a few months and it soon closed. The Chinese-built road from Lusaka, Zambia’s capital, to Chirundu, 130km (81 miles) to the south-east, was quickly swept away by rains.
Business, Chinese style
Chinese expatriates in Africa come from a rough-and-tumble, anything-goes business culture that cares little about rules and regulations. Local sensitivities are routinely ignored at home, and so abroad.
Continuing on to creative accounting...
By FLOYD NORRIS
Published: May 26, 2011
To pull off a fraud that humiliates the cream of the global financial
elite, you need to have some friends. And where better to have them
than at the local bank?
The fraud at Longtop Financial Technologies, a Chinese financial
software company, was exposed this week in an amazing letter from its
auditors, Deloitte Touche Tohmatsu. It appears to be a tale of corrupt
bankers and their threats to auditors who had learned of the lies.
Deloitte, which had given clean audit opinions to Longtop for six
consecutive years, apparently was well on its way to providing a
seventh, for the fiscal year that ended March 31.
But for some reason — Deloitte did not say why —the auditor went back
to Longtop’s banks last week to again seek confirmation of cash
balances.
It appears Deloitte sought confirmations from bank headquarters,
rather than the local branches that had previously verified that
Longtop’s cash really was on deposit. And that set off panic at the
software firm.
“Within hours” of beginning the new round of confirmations on May 17,
the confirmation process was stopped, Deloitte stated in its letter of
resignation, the result of “intervention by the company’s officials
including the chief operating officer, the confirmation process was
stopped.”
First, the African problem (from The Economist)
Once feted as saviours in much of Africa, Chinese have come to be viewed with mixed feelings—especially in smaller countries where China’s weight is felt all the more. To blame, in part, are poor business practices imported alongside goods and services. Chinese construction work can be slapdash and buildings erected by mainland firms have on occasion fallen apart. A hospital in Luanda, the capital of Angola, was opened with great fanfare but cracks appeared in the walls within a few months and it soon closed. The Chinese-built road from Lusaka, Zambia’s capital, to Chirundu, 130km (81 miles) to the south-east, was quickly swept away by rains.
Business, Chinese style
Chinese expatriates in Africa come from a rough-and-tumble, anything-goes business culture that cares little about rules and regulations. Local sensitivities are routinely ignored at home, and so abroad.
Continuing on to creative accounting...
By FLOYD NORRIS
Published: May 26, 2011
To pull off a fraud that humiliates the cream of the global financial
elite, you need to have some friends. And where better to have them
than at the local bank?
The fraud at Longtop Financial Technologies, a Chinese financial
software company, was exposed this week in an amazing letter from its
auditors, Deloitte Touche Tohmatsu. It appears to be a tale of corrupt
bankers and their threats to auditors who had learned of the lies.
Deloitte, which had given clean audit opinions to Longtop for six
consecutive years, apparently was well on its way to providing a
seventh, for the fiscal year that ended March 31.
But for some reason — Deloitte did not say why —the auditor went back
to Longtop’s banks last week to again seek confirmation of cash
balances.
It appears Deloitte sought confirmations from bank headquarters,
rather than the local branches that had previously verified that
Longtop’s cash really was on deposit. And that set off panic at the
software firm.
“Within hours” of beginning the new round of confirmations on May 17,
the confirmation process was stopped, Deloitte stated in its letter of
resignation, the result of “intervention by the company’s officials
including the chief operating officer, the confirmation process was
stopped.”
Thursday, May 26, 2011
Market declines, inflation...
...lower (real) GDP forecasts, etc. And now, the world is focusing in on the demographic "challenges" the paper dragon faces.
This article is as good as any in levelling a healthy degree of skepticism regarding the Paper Dragon's prospects and global ambitions.
A snippet:
According to a United Nations forecast in 2008, the over-60 and over-65 age groups in China were expected to account for 12.3% and 8.2% of the population respectively in 2010, against 7.5% and 4.9% in India.
The new census demonstrates, however, that China’s population is aging even faster than expected. According to the survey, over-60 and over-65 make up 13.26% and 8.87% of the population.
The new Census also revealed that the imbalance between the ratio of boys to girls is also still increasing. The sex ratio in 2010 was 118.06, which is 1.2% more than 2000.
Based on the data of the 2000 census as well as the new census, China’s comprehensive national strength, from the viewpoint of its demographic structure, is currently at a historical peak. The working-age group of those 15-64 years, has reached almost 1 billion people, an all-time high, with the elderly dependency ratio less than 12%, and the general elderly dependency (ratio of the non-labor population to labor population) only 34%. In other words, China has never been less burdened by a non-labor population.
But again from the viewpoint of the demographical structure, China is set to repeat Japan’s economic recession experience of the 1990s. The difference is Japan became rich before growing old, while China is growing old before even getting rich. The average GDP of Japan today is above $40,000, while it is still just $4,000 in China.
This article is as good as any in levelling a healthy degree of skepticism regarding the Paper Dragon's prospects and global ambitions.
A snippet:
According to a United Nations forecast in 2008, the over-60 and over-65 age groups in China were expected to account for 12.3% and 8.2% of the population respectively in 2010, against 7.5% and 4.9% in India.
The new census demonstrates, however, that China’s population is aging even faster than expected. According to the survey, over-60 and over-65 make up 13.26% and 8.87% of the population.
The new Census also revealed that the imbalance between the ratio of boys to girls is also still increasing. The sex ratio in 2010 was 118.06, which is 1.2% more than 2000.
Based on the data of the 2000 census as well as the new census, China’s comprehensive national strength, from the viewpoint of its demographic structure, is currently at a historical peak. The working-age group of those 15-64 years, has reached almost 1 billion people, an all-time high, with the elderly dependency ratio less than 12%, and the general elderly dependency (ratio of the non-labor population to labor population) only 34%. In other words, China has never been less burdened by a non-labor population.
But again from the viewpoint of the demographical structure, China is set to repeat Japan’s economic recession experience of the 1990s. The difference is Japan became rich before growing old, while China is growing old before even getting rich. The average GDP of Japan today is above $40,000, while it is still just $4,000 in China.
Wednesday, May 25, 2011
Ratings agencies...
...near and far attempting to direct and hold attention.
05/25/11 Novato, California – Beijing-based Dagong Credit Rating Co. is China’s leading credit rating agency and, despite the limited international influence of its ratings, it keeps pumping out sovereign debt downgrades for the industrialized West.
The latest nation up… or down as the case may be… is the UK. It was already cut from its triple-A standing — as indicated by ratings from US agencies — to AA- in Dagong’s first headline-inducing ratings release. Recently, the UK has again been downgraded, this time to A+ with a negative outlook, due to its deteriorating solvency.
According to the BBC News:
“The agency blamed the UK’s sluggish growth, which it said would be stuck in the 1.3%-1.5% range for two more years, hurting government finances. The downgrade from AA- to A+ puts Britain on a par with Chile and heavily-indebted Belgium, and the US, which Dagong downgraded in November.
05/25/11 Novato, California – Beijing-based Dagong Credit Rating Co. is China’s leading credit rating agency and, despite the limited international influence of its ratings, it keeps pumping out sovereign debt downgrades for the industrialized West.
The latest nation up… or down as the case may be… is the UK. It was already cut from its triple-A standing — as indicated by ratings from US agencies — to AA- in Dagong’s first headline-inducing ratings release. Recently, the UK has again been downgraded, this time to A+ with a negative outlook, due to its deteriorating solvency.
According to the BBC News:
“The agency blamed the UK’s sluggish growth, which it said would be stuck in the 1.3%-1.5% range for two more years, hurting government finances. The downgrade from AA- to A+ puts Britain on a par with Chile and heavily-indebted Belgium, and the US, which Dagong downgraded in November.
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