It has arrived for China

Clearly, one can detect a pattern to China related stories. Things are unfolding/unravelling rapidly. Of course, ‘rapid’ or not depends on the eye of the beholder. If the trend continues, it may have implications for regional and geo politics. How China responds to domestic economic stress – not just in economic terms – will be of interest. Wonder if regional aggression would be viewed as a legitimate diversionary tactic.

Here are very interesting links:

Default risks in the economy are rising and sovereign cost of capital too will rise. Therefore, interest rates across the risk spectrum are rising and will continue to rise. A vicious circle has set in already in China.

If the stimulus (via credit) happens, then they have really no stomach for reforms. Right now, stimulus will happen through a weaker RMB for a while. I think that is what the Renminbi trading band widening was meant to achieve. My piece in MINT on the widening of the trading band questions its efficacy but at the same time anticipates that China will play the Renminbi card, nonetheless.

This is an amusing news item. The ‘green’ target is inconsistent with the growth target of 7.5%. There is still a tendency to try and have the best of all worlds.

The growth in China bank assets post-2008 (ht: Zerohedge) easily dwarfs the rise in US bank assets. The US was offcially on Quantitative Easing and China was not.

I had referred to this insightful piece in Peterson Institute on Cinda,  one of China’s Asset Management Companies which is acting as an alternate credit source for China’s property sector, in my MINT article. Yet, it is worth highlighting separately. Raises several troubling questions on China’s rebalancing, credit restraint intent and effectiveness in translating intent (if it exists) into action, etc. Is China in control of things happening in the economy or it is making a pretense of reforms while the economy and various sector are in full control of ‘status quo’ interests to the detriment of the overall economy and society?

A closely held Chinese real estate developer with 3.5 billion yuan ($566.6 million) of debt has collapsed and its largest shareholder was detained, government officials familiar with the matter said yesterday. Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. [Link]

Notice the real estate connection and the earlier Peterson Insitute note referring to the AMC Cinda buying distressed loans of real estate companies directly from them. So, how resilient is the balance-sheet of Cinda?

On March 19, as the Federal Reserve was concluding its two-day policy meeting in the US, China’s State Council released a statement on a stimulus package accelerating construction spending, etc.  [Link]

Minxin Pei’s piece in FT offers nothing new. It summarises the seemingly impossible policy trade-offs that China faces.

Zerohedge has a long post based on a Goldman Sachs research report on China Commodity Financing Deals. It is borrowing overseas to take advantage of interest rate differential and, at the same time, invest in physical commodities while simultaneously selling the futures on the commodity. No, forget it. I do not get it. It is complicated. I need to ask some smart hedge funds trader or sales head to know what is going on here. Since I do not understand it, I am entitled to be concerned about it.

In contrast, this is quite crystal clear and the implications are scary for the world. But, wait. What did I say? Scary? As I write this, the S&P 500 stock index is making another historical all-time high. Truly, truly bizarre.

Clearly, China’s moment of reckoning has already arrived. It does not matter if analysts and economists get it. Things will take their own course now.


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