In the Financial/Economic News

[Randy W]

Hong Kong seems pretty well stuck with their dollar beg, although I'm not ebtirely clear why

 

Hong Kong’s currency peg problem: It hurts but we are stuck with it

 

Even though Hong Kong is in the middle of a downturn as a result of an economic slowdown in mainland China and a drop in the number of tourists coming to the city, the Hong Kong Monetary Authority yesterday said it will still need to track the US interest rate under the currency peg arrangement by increasing the local official rate by 25 basis points to 0.75 per cent.

 

The city has lost control over interest rates because of the peg, which requires local rates to synchronise with those of the US even when Hong Kong and the US are in different economic cycles. Hong Kong was forced to cut interest rates during the high-inflation era of the 1990s and now it has to raise rates when it could have been better off doing the opposite.

 

Stephen Innes, senior trader at Oanda Asia Pacific, said: “The peg is outdated and certainly in need of reform. There is no question that the Fed hike will add more pressure on the peg. It will leave Hong Kong in a precarious situation, making Hong Kong products less and less competitive in the region.”

 

HKMA chief executive Norman Chan, however, rejected any suggestions of change.

 

“The peg has served Hong Kong well as a small economy. The HKMA has no intention to change the peg,” he said, adding the International Monetary Fund also supports Hong Kong’s dollar peg.

 

Hong Kong adopted the peg in 1983 to fix the Hong Kong dollar to the US dollar at 7.8. The decision was made at a time when negotiations over handover of the former British colony to China had led to a loss of confidence in the currency, triggering panic.

 

[Randy W]

Black debut as China markets suspend business after 7 per cent fall triggers circuit breaker on first trading day of 2016

Expiry of ban on share sales by major shareholders this Friday spooks investors; regional markets down on poor China data

 

A newly launched circuit breaker cut short the year’s first trading day in the Shanghai and Shenzhen A-share markets on Monday, with analysts warning the new policy and expiry of a ban on selling shares by major stock owners of Chinese companies will usher in a volatile week.

Poor Chinese economic data dragged down Asian regional stock markets in what shaped up to be the worst first trading to start a year, with Hong Kong brokers labelling it a “black” debut which they believe could be an omen for a poor performance in equities in 2016.

Under the circuit breaker for Chinese markets launched on Monday, the trading of stocks, index futures and options will be suspended for 15 minutes when the CSI 300 Index, which tracks large-cap stocks in Shanghai and Shenzhen, falls or rises by 5 per cent, with trading halted for the rest of the session when the index moves by 7 per cent.

Trading on the Shanghai and Shenzhen stock markets were suspended for the rest of the day at 1:33 pm after the CSI 300 Index fell 7 per cent to close prematurely on Monday at 3,469.07.

 

 

[Randy W]

If you want some reading material on the Chinese economy - it looks like the paywall is down at SCMP

 

House of cards: property glut could spell doom for Chinese economy

The Chinese economy has a long history of proving its doubters wrong. But a growing number of experts are wondering whether this time the doubters might be on to something. Beijing’s goal for 2016 is to keep growth ticking over at around 6.5 per cent but four issues, like horsemen of an economic apocalypse, are threatening those plans: industrial overcapacity, heavy business taxes, sky-high property inventories and financial risks. We examine each threat in a four-part series that starts today. Zhou Xin explores the real estate ambitions that have fallen to ruin in Anyang, Henan province.

[Thomas Promise]

China's stock market nose dive today is hitting the Dow as well. Down 370 points so far. The Yuan is at 6.54 to $1 also.

[Randy W]

SCMP headline today (Thursday)

 

China markets shut down for second time this week as stock rout hammers shares

Shanghai and Shenzhen markets trade for grand total of 13 minutes before falls trigger circuit breakers

 

Trading was halted for first time at 9:42 am when the large-cap CSI300 index fell more than 5 per cent. It took just another minute after trading resumed at 9:57 am for the market to fall by a total of 7 per cent, triggering the second stage of the circuit breaker which closed all trading in the Chinese markets.

 

[Thomas Promise]

If the Chinse economy collapses in may not be a welcome mat for the Laowei. It maybe 1949 all over again.

[Randy W]

in the WSJ

Chicken Little With Chinese Characteristics

 

 

Growth rates in China fall precipitously. China’s nonperforming loans soar. Banks stop lending, consumer confidence tanks and the yuan falls sharply. These are among the assumptions laid out in a series of recent worst-case scenarios on what a collapse in China might look like and what the global spillover effects would be.

There is a long history of doom-and-gloom predictions focused on the world’s second-largest economy. China tends to attract such unwanted attention in part because it is so big and important, has a murky decision-making system that is difficult to interpret and because its recent policy and communication strategy–particularly involving the stock and currency markets–has been wobbly, analysts say.

“I’m not a collapse-ist, but there is reason people should be concerned,” said Arthur Kroeber, managing director with research firm GaveKal Dragonomics Research. “Having some paranoid people out there with their worst-cases scenarios is of value.”

. . .

“Of course these risks are overstated. I don’t think China’s economy is likely to collapse,” said Renmin University professor Shi Yinhong. “But sometimes even Chinese themselves have difficulty understanding China’s policy-making process.”

“Everyone was used to China’s high growth, but now it’s slowing and we’re at a historic turning point,” Mr. Shi added. “So people have curiosity about China. It’s natural.”

 

[Thomas Promise]

In for a hell of s ride today the Dow is down in pre-market trading 354 points.

[tsap seui]

Oh Lord, who is gonna lend the Chinese money...so they can lend us money?

 

I had hoped the Chinese would have been smart and studied us (as far as housing anyway...I know nothing about stock markets) and not have let their building those untold how many tall apartment buildings with escalated prices fool everyone into thinking they were going to become billionaires off of buying outrageously high priced homes and sit on them for a few years in the hopes of future riches. But alas, it is the same old same old as us. The circle is unbroken.

 

In 2009, I counted 27 tower cranes sitting idle on various housing projects as we sped towards the Caca Hotel to get married in Shenyang.Oh my, thought I, someone needs to put a moratorium on this mess and slow things down, let it catch up to itself. I read about families going together to buy multi-million dollar homes, and renting them out for sums like, 1,200 per month, thinking the rent didn't matter, the home is going to escalate straight up anyhow. Oh boy, now Wenyan is telling me about all of the job losses, familiar malls and food marts that are shut down, because they built newer more expensive ones. And how food prices have all but doubled once again (for the third or forth time since I first went over in 2006.

 

Sad to see and hear of.

[johnxiaoying]

I remember riding the bullet train from Shanghai to Nanjing two years ago and seeing those large apartment buildings being constructed zipping by one after another, all vacant, and it took some time to get past them at 180 mph. I imagine they're still empty. Then there's the ghost cities that will hold up to one million people that have been constructed around China that are vacant, complete with municipal buildings, business buildings, parks, etc. It kept employment going for awhile.

 

They are finding what goes up fast will also come down fast (it the big apartment buildings don't just fall over on their own). Ah, the pain of it all.

[Randy W]

Paul Krugman weighs in in the NY Times

 

When China Stumbles

 

 

For those just starting to pay attention: It has been obvious for a while that China’s economy is in big trouble. How big is hard to say, because nobody believes official Chinese statistics.

The basic problem is that China’s economic model, which involves very high saving and very low consumption, was only sustainable as long as the country could grow extremely fast, justifying high investment. This in turn was possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession.

A reasonable strategy would have been to buy time with credit expansion and infrastructure spending while reforming the economy in ways that put more purchasing power into families’ hands. Unfortunately, China pursued only the first half of that strategy, buying time and then squandering it. The result has been rapidly rising debt, much of it owed to poorly regulated “shadow banks,” and a threat of financial meltdown.

. . .

So the Chinese situation looks fairly grim — and new numbers have reinforced fears of a hard landing, leading not just to a plunge in Chinese stocks but to sharp declines in stock prices worldwide.

. . .

As I suggested above, however, I have a hard time making the numbers for that kind of catastrophe work. Yes, China is a big economy, accounting in particular for about a quarter of world manufacturing, so what happens there has implications for all of us. And China buys more than $2 trillion worth of goods and services from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. Even a drastic fall in Chinese imports would be only a modest hit to world spending.

What about financial linkages? One reason America’s subprime crisis turned global in 2008 was that foreigners in general, and European banks in particular, turned out to be badly exposed to losses on U.S. securities. But China has capital controls — that is, it isn’t very open to foreign investors — so there’s very little direct spillover from plunging stocks or even domestic debt defaults.

All of this says that while China itself is in big trouble, the consequences for the rest of us should be manageable. But I have to admit that I’m not as relaxed about this as the above analysis says I should be. If you like, I lack the courage of my complacency. Why?

Part of the answer is that business cycles across nations often seem to be more synchronized than they “should” be. For example, Europe and the United States export to each other only a small fraction of what they produce, yet they often have recessions and recoveries at the same time. Financial linkages may be part of the story, but one also suspects that there is psychological contagion: Good or bad news in one major economy affects animal spirits in others.

. . .

Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.

 

 

[Randy W]

This is another opinion piece, but may be of interest as a discussion of China's current economic situation


from the Editor-in=Chief of the South China Morning Post
About the author:

Wang Xiangwei took up the role of Editor-in-Chief in February 2012, responsible for the editorial direction and newsroom operations. He started his 20-year career at the China Daily, before moving to the UK, where he gained valuable experience at a number of news organisations, including the BBC Chinese Service. In 1993, he moved to Hong Kong and worked at the Eastern Express before joining the South China Morning Post in 1996 as our China Business Reporter. He was subsequently promoted to China Editor in 2000 and Deputy Editor in 2007, a position he held for four years prior to being promoted to his current position. Mr. Wang has a Masters degree in Journalism, and a Bachelors degree in English.

 

 

Why China will not sharply devalue the yuan

Beijing faces long battle with speculators, but tinkering with the currency would be counterproductive and at odds with its international stance

 

Against this background, the massive sell-off in stocks and yuan has greatly undermined investors’ confidence in the ability of Chinese leaders to steer the world’s second largest economy forward.

If they are worried, they have put on a good poker face. China had the confidence and capability to ensure sustained and sound economic development, President Xi Jinxing said at the opening ceremony of the US$100 billion Asian Infrastructure Investment Bank in Beijing.

. . .

Indeed, how to stabilise the stock and currency markets this year will prove to be an acute test of the wisdom and capability of the leadership.

On stock markets, the authorities have failed miserably so far, exemplified by the ill-considered introduction of the circuit breaker mechanism, only to have it suspended four days later. The rules were meant to act as a kind of emergency brake to combat the wild market swings but had the opposite effect.

The authorities have been micro-managing the mainland’s stock markets since their inception in the 1990s, which has been a key contributor to the swings and prevented the markets from becoming more mature and professional.

. . .

On the currency front, China’s battle with speculators is expected to be a prolonged one for this year. Although Chinese leaders including Premier Li have repeatedly vowed to keep the yuan stable, speculators are unlikely to be scared away amid a slowing economy and expanding capital outflow.

. . .

the authorities have conclusive evidence that the speculators are mostly domestic, in Guangdong, Shanghai and Zhejiang as well as Hong Kong and Taiwan.

. . .

In theory, a continuous devaluation in the yuan may help China’s exports and prevent a sharp fall in asset prices at home, but the mainland authorities have good reasons not to tinker with the currency too much – not least because this would help trigger competitive devaluations by other countries which would in turn wipe out the benefits from such an action.

More interestingly, Beijing assured Washington that it would keep the yuan stable after the US approved changes to International Monetary Fund governance to give China a bigger voice and agreed to add the yuan to its reserve currency basket.

[Randy W]

In the SCMP

 

 

Communist mouthpiece accuses billionaire investor George Soros of avoiding Chinese economy and ‘declaring war against China’
Announcement to short Asian currencies put a bulls-eye on billionaire as China’s Central Bank struggle between keeping the yuan stable or reviving the economy

 

China’s state-run media has escalated its rhetoric against market speculation on its currency and economy, with a top mouthpiece claiming billionaire investor George Soros had “declared war against China”.

 

The strong words come amid a policy dilemma for Beijing’s central bankers. One one hand, they face expectations of further interest rate hikes by the US Federal Reserve and further monetary easing in Japan. On the other hand, they face a slowdown in the domestic economy that has come at the same time as China tries to restructure its economic drivers. So the central bankers face a stark choice – keep the yuan stable or revive the economy.

 

Both the Hong Kong dollar and the yuan fell yesterday morning as speculators returned to the market and the two central banks stayed away. The Shanghai stock market index lost 6.4 per cent to hit a 13-month low.

 

Soros said last week that a hard landing in the Chinese economy was “unavoidable” and he was shorting Asian currencies.

In a move to manage the fallout, Beijing is using its state media to fend off speculators.

 

 

 

Sure enough, in the People's Daily . . .

 

Op-ed: Think twice before declaring war on Chinese currency
By Mei Xinyu (People's Daily Online) 10:14, January 27, 2016

The author is a researcher of the research institute of China’s Ministry of Commerce.

 

Given his influence, the global financial market saw more severe fluctuations and Asian currencies are facing more speculative pressure.
However, Soros’ challenge to the RMB and Hong Kong dollar are doomed to fail, without any doubt.

Although the Chinese economy had a rough year in 2015 with a falling growth rate, volatile stock market and RMB depreciation against USD, its fundamentals still stood out among major economies.

Last year, the economic growth of China was twice that of the U.S. Against the 10-percent-drop in global trade, China’s export only declined by 1.8 percent.
In addition, China is still upgrading its industrial structure and leading in more areas.

These statistics indicate that China’s macro-economy is far more stable than those of other BRICS countries and most developed countries. Economic shock alone won’t overturn China.

It is true that in 2015, the RMB saw a moderate devaluation against the USD. However, it is just a slight correction since, except for a minor fluctuation in 2000, the RMB has been appreciating against the USD for nearly 20 years.

 

Xinhua:

 

Commentary: China stays confident in face of speculators

Source: Xinhua 2016-01-27 09:39:49

 

So why do speculators make claims that run counter to reality? Analysts said it is because either the short-sellers haven't done their homework or that they are intentionally trying to create panic to snap profits.

 

Edited January 27, 2016 by Randy W (see edit history)

[Randy W]

. . . and Caixin

 

Central Bank Props up Offshore Yuan in Hong Kong
The People's Bank of China supports the country's currency and fends off short sellers in the world's largest overseas yuan market

 

The offshore yuan market in Hong Kong has been shaken to the core by weeks of volatility that analysts blame on strong intervention by China's central bank.

Wild fluctuations for yuan-based interbank lending rates as well as onshore-offshore yuan spreads in Hong Kong began in January and could continue indefinitely while the People's Bank of China defends its currency against short sellers.

 

. . .

 

Yang said January was likely just the beginning for a period of powerful policy intervention by Beijing.

"The central bank has plenty of ammunition to carry out intervention," he said. "Any small steps it takes will make waves in Hong Kong's forex market."

Beijing's policy steps are also affecting Hong Kong's financial system, Tao Dong, chief analyst at Credit Suisse Asia, said in a January 21 report. For example, he said, investors prevented by the central bank from betting on a weaker yuan had turned their attention to short selling Hong Kong dollars, putting pressure on the city's stock exchange and real estate markets, and raising borrowing costs.

Hong Kong investors of all stripes would do well to prepare for continued volatility for the city's offshore yuan market through 2016, Charles Li, chief executive of the Hong Kong Exchanges and Clearing Ltd., said in a blog posted on January 12.

And the yuan's exchange rate against the U.S. dollar may fluctuate more than many expected, Li said. Fund managers, commercial investors and stock market players face a bumpy road ahead, he wrote, so "fasten your seat belt."

 

[Randy W]

These are VERY interesting articles about China vs. George Soros, if you'd like to read more. In the SCMP

 

Chinese media’s war of words with billionaire investor George Soros goes on as Premier Li Keqiang calls shorting of economy ‘absurd’

 

“So why do speculators make claims that run counter to reality? Analysts say it is because either the short-sellers have not done their homework or because they are intentionally trying to create panic to snap up profits,” Xinhua said.

Beijing is trying to play up confidence in the world’s second biggest economy, but some cracks have become too wide to ignore.

. . .

“China is still a developing country, and it will remain at the initial stage of socialism for a long period of time. Those who allege that China has caused international market turmoil really over-estimate China,” Li said.

How Beijing and Hong Kong sent billionaire George Soros packing the last time he attacked Asian markets

The history of how George Soros has affected currencies and economies in Asia is remembered with some bitterness

In 1998, Soros, whose aggressive currency trades were blamed for destroying the Thai and Malaysian economies in the Asian financial crisis a year earlier, turned his attention to attacking Hong Kong markets. On that occasion, Hong Kong, backed by Beijing, faced him with an unprecedented HK$118 billion stock-buying spree to prop up stock prices and defend the currency peg in August 1998.

“Today’s situation has some similarities to then,” said Shen Jianguang, the chief economist with Mizuho Securities Asia in Hong Kong. “It’s hard to attack the yuan, but it’s possible to attack the Hong Kong markets.”

The Hong Kong dollar is pegged to the greenback, but it’s also viewed as a proxy of the yuan and the Chinese economy. With bets on a weaker yuan growing, the Hong Kong currency and stock markets have already witnessed turbulence, while Beijing is engaging in a war of words with Soros.

. . .

“A big brother like Soros will have a lot of followers when he says something, but it will be another matter when people are asked to put money down to follow his bet,” said Chen Xingdong, the chief China economist with BNP Paribas in Beijing.

. . .

In 1998, Soros was forced to walk away from Hong Kong with losses. He later praised the Hong Kong administration’s efforts under then-financial secretary Donald Tsang Yam-kuen.

When Soros visited Hong Kong in 2001 he said local monetary authorities had done “a very good job when they intervened to arrest the collapse of the Hong Kong market”.

. . .

Now, with Soros knocking on China’s door again, it’s time to see whether China has learnt any lessons from history.

 

http://www.scmp.com/sites/default/files/styles/486w/public/images/methode/2016/01/28/a41ea210-c565-11e5-bbaf-0bb83de8b470_486x.jpg?itok=ace12R1Z