Jan 272016
 January 27, 2016  Posted by at 4:40 pm Finance Tagged with: , , , , ,

Berenice Abbott Broome Street, Nos. 504-506, Manhattan 1935

Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.

Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”

The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.

The real issue is what people would think if Beijing announced a more realistic 2% or less GDP growth number. The thought alone scares Lagarde as much as anyone, including the Politburo. The sole option seems to be to keep lying as long as you can get away with it. But how and where the yuan will be valued by China itself has become entirely inconsequential compared to how markets value the currency.

The PBoC spent a fortune trying to straighten the offshore and onshore yuan(s), only to see the two diverge sharply again, as Shanghai stocks posted the biggest loss on Tuesday, at 6.4%, since the ‘unfortunate’ circuit breaker incident. That puts additional pressure on the Hong Kong dollar peg, and ultimately on the mainland China peg to whatever it is they’re trying to peg to.

Beijing might solve some of these problems by devaluing the yuan by 30%, or even 50%, but it would invite a large amount of other problems in the door if it did. Like a full-blown currency war. Still, it’s just a matter of time till Xi and Li either do it voluntarily or are forced to by ‘the market’.

What they are trying very hard NOT to communicate is how much pain their Ponzi debt burden has put them in. It’s not even fully clear to what extent Xi himself is aware of this, but he knows at least enough to keep his mouth shut on the topic. It’s quite possible that some of his top aides dare not reveal the real tally to their boss for fear of their jobs and heads.

In concert with denial and obfuscation, pride and hubris may be clouding the image the Chinese have of themselves and their economy. The rest of the world has followed them in that to a large degree, but it’s got to wake up at some point. If what the WSJ quotes a Beijing-based investor as saying is halfway true, and Xi realizes the opportunity it provides him, a huge devaluation may be imminent after all, if Shanghai shares keep falling the way they are.

Yuan’s Fall Is Just ‘Noise’ Amid Deeper China Woes

The country is already littered with “zombie” factories, empty apartment blocks that form ghostly suburbs, mothballed power stations and other infrastructure that nobody needs. But yet more wasteful projects are in the pipeline, even as the government talks about cutting industrial overcapacity. “That’s the misalignment—everything else is noise,” says Rodney Jones, the Beijing-based principal of Wigram Capital Advisors, who was a partner at Soros Fund Management during the 1990s. If debt keeps piling up at the current rate, China faces an eventual financial crisis, perhaps leading to years of subpar growth, mirroring the fate of Japan after its bubble burst in the early 1990s.

Mr. Jones argues that global equity markets haven’t property adjusted to this risk, even after a 16% decline in U.S. dollar terms from their May peak. “The world will have to learn to live without demand from China,” he says. “It’ll come as a shock.” A sharp devaluation won’t fix these distortions, and might even make matters worse if, as likely, it were to trigger financial mayhem in China’s trading partners. An alternative—further clamping cross-border currency controls—would be a humiliating retreat from Beijing’s policy of making the yuan more international.

If China imports continue to fall the way they have recently, a development that has already relentlessly hammered global commodities markets and exporting emerging nations, the advantages of a large devaluation could become irresistible even for a proud president. With capital flight in 2015 estimated at $1 trillion, and a roughly equal chunk of foreign reserves thrown at attempts to ‘stabilize’ the yuan, that pride is getting costly.


But it occureed to me today that perhaps I simply haven’t been cynical enough yet when pondering the matter. The support for a strong yuan, the one thing that is constantly ‘communicated’ to the world, may be just another facade. Beijing may have long decided to go for the jugular. China will have to adjust to the popping of its growth fairy tale and Ponzi economy no matter what it tries to do to prevent it.

Might as well swallow the bitter pill in one go then and get it over with?! It would make exports much more attractive at a time when more expensive imports are much less of an issue. As nice example is the very disappointing sales of iPhones in the country, prompting this comment from Apple CEO Tim Cook today: “We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look.” I think he might want to consider that what happened before was extreme, not what is now.

Beijing did a few things recently that triggered my cynicism radar. First, they targeted George Soros.

China Accuses George Soros Of ‘Declaring War’ On Yuan

Chinese state media has stepped up a salvo of biting commentaries against George Soros and other currency traders as the yuan comes under pressure, with the billionaire investor accused of “declaring war” on the unit. At the annual World Economic Forum in Davos last week, Soros told Bloomberg TV that the world’s second-largest economy was heading for more troubles. “A hard landing is practically unavoidable,” he said. Soros [..] pointed to deflation and excessive debt as reasons for China’s slowdown.

[..] Soros “publicly ‘declared war’ on China”, the paper said, citing the 85-year-old as saying that he had taken positions against Asian currencies. But some readers questioned whether the official rhetoric could fuel Chinese investors’ fears. “They say a lot of loud slogans, but do official media even know that Chinese investors are in hell?” said one poster on social media network Weibo. “I’m afraid that Chinese investors will die in a stampede before Soros even shows his hand.”

And I’m thinking: why should you go after Soros in a very public way when you know the whole world will take note and there’s nothing you can do other than stomp your feet and thump your chest? “Look, everyone, the world’s most notorious and successful short seller is after us, but we’re so much smarter!” Maybe they think Chinese mom and pop investor juggernauts will fall for their ‘whatever it takes’ tale, but they have to deal with the entire planet here.

Could this be simple stupidity? At a certain point that gets hard to believe. An even better example, and one that is really brow-raising, was the announcement of an inquiry into China’s statistics chief:

Head Of China’s Statistics Bureau Investigated For Corruption

The head of China’s statistics bureau is being investigated for corruption, the country’s watchdog said on Tuesday. “Wang Baoan is suspected of severe disciplinary violations, he is currently under investigation,” the Central Commission for Discipline Inspection said in a one-line statement on its website, using a phrase that is usually used to refer to corruption. The announcement came just hours after Wang appeared at a media briefing in Beijing on China’s economy in 2015. Last week the National Bureau of Statistics released data that showed China’s economy grew at the slowest pace in 25 years. Wang reiterated on Tuesday that the country’s GDP calculations were reliable, Chinese media reported, despite widespread criticism of the data.

Here’s a guy seeking to soothe his audience, which in present circumstances includes the whole globe, and you cut him off at the knees just hours after? He says all’s fine, and then you sent a message to the world that he can’t be trusted?

The timing seems crucial here. They could have waited a week, or two, so the connection between the two events (Wang’s statement and the inquiry announcement) would have been much less obvious. They could also, of course, have had the inquiry but kept it hush-hush. Instead, as in the Soros case, there’s a big public declaration.

Wang is head of a statistics bureau that, says the NYT, is tasked with:

Inquiry in China Adds to Doubt Over Reliability of Economic Data

The statistics bureau has a variety of responsibilities that are hard to balance even in the best of times. The bureau is supposed to provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses, even while reassuring the public about growth and maintaining consumer confidence. It is also supposed to release enough detailed and accurate information for investors and corporate leaders to make sound decisions about economic and financial prospects.

That leads us right back to the start of this article. Wang must provide “enough detailed and accurate information” for investors”, but how can he do that if the real numbers are as bad as I strongly think they are? In that case, accurate information would drive most investors away and drive others towards shorting the yuan.

He must also “provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses”, and perhaps he screwed up there (too much varnish). Xi may have found out something real bad that Wang didn’t tell him about. But even then, the fact stands that Xi risks triggering exactly what he pretends to want to prevent, by taking this to the press.

To summarize: yes, it’s possible that Beijing has a communication problem. I’ve never had the idea that Xi understands that now his power dream has come true, he finds that power is not absolute, if and when he wishes to have a financial market that allows for China to get richer through trade. That he realizes the price to pay for that is having much less than total control.

Still, after glancing through this stuff, I wouldn’t be at all surprised if the decision for a very substantial devaluation of the yuan has already been taken. It would be a panic move, with largely unpredictable consequences, but then Beijing has plenty to panic about.

And I can’t wait to see what Lagarde has to say when she figures out her new currency basket baby turns around to bite her in the ass.

PS: Something I scribbled last week: Time and again, I see ‘experts’ claim that the fact that the Chinese services sector now makes up half of GDP, is a positive. But, even if we forget for now that much of its growth is due to financial services, the real meaning is the opposite. The services sector has been able to become so important simply because the manufacturing sector is plunging as badly as it is.

Home Forums Is China About To Drop A Devaluation Bomb?

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    Berenice Abbott Broome Street, Nos. 504-506, Manhattan 1935 Though she had no intention of being funny, we laughed out loud, as undoubtedly many did w
    [See the full post at: Is China About To Drop A Devaluation Bomb?]


    I have to wonder if China isn’t going about their problem all wrong. They are a command economy in which the multitude of people are focused on saving. The currency to labor exchange rate is so low that the people who have currency are more apt to send it home for essentials or to save this scarce currency than to use it as a consumable. In essence, they cannot shift their economy unless they make money more plentiful to the common people, for it is those people alone who can drive their consumption engine.

    It stands to reason, that in a command economy, one means of increasing demand would be to offer credits to each household, such that they can use but not save them. Each individual might receive, as an example, the equivalence of $500 USD in credits. These credits could only be used to purchase China made goods, and this would result in the credits returning to the Chinese factories (government) where workers would again earn wages. This would stimulate demand. It would not burden the households they seek to make consumers of. In essence, it wouldn’t be all that different from trading real goods for the fictitious… sorry, fiat currencies of other nations. The Chinese government is already using their foreign currencies to prop up their market. This would be a means of increasing demand and stimulating local activity/spending more directly.

    China has long had a trade surplus. They are trading real goods for promises that will be defaulted upon. This supports their industry but does nothing to make China sustainable in the long term. It would seem a shift in that paradigm might enrich their own society enough that the burden on people is lessened enough for them to start spending. Of course, the weight of retirement savings, and savings for personal calamities, must likewise be addressed. In China, those who don’t save for a future don’t have one. They need a system to secure people in their old age, or ill health, such that spending isn’t seen as the risk it is today.

    I guess in short, what I’m saying is that they need a @#%@’n plan. It’s not enough to pressure citizens to spend, or to decide they are shifting towards a more service driven economy. They need the structure in place to make Chinese people certain of their personal futures. They need to remove the burden of risk. When you really look at it, this means they need to empower their people. And there’s a culture shift if I’ve ever seen one.


    Ishkabibble – “I guess in short, what I’m saying is that they need a @#%@’n plan. It’s not enough to pressure citizens to spend, or to decide they are shifting towards a more service driven economy. They need the structure in place to make Chinese people certain of their personal futures. They need to remove the burden of risk.”

    China’s very own social security system. Anything to get them spending. No wonder the elite agreed to social security: it got the people feeling secure about their futures, removed the burden of risk, compelled them to go out and foolishly spend, buying up all of the elite’s products. Yeah, how’d that turn out for the American people? Got them feeling secure that the amount they would receive in old age would actually buy something? Not.

    Had the American people not relied on this system, had they foregone extravagant spending, instead saved a good deal of their hard-earned money, they would have been better off. BUT the corporations would not have been better off. Who would have bought their planned-obsolescence products up the wazoo? Who would have turned their CEO’s into billionaires?

    The elite in China are no different than the elite everywhere else. They have made out like the bandits that they are. Corruption Inc. And now they want the people to start spending? Ha! Hopefully the people are smarter than that and that they realize that whatever programs the elite put in place, they are never – ever – put there to “help” the common man. Only to help vested interests get richer.


    I agree completely. My point was more about them making this transition than the wisdom of doing so.

    I do not see the path to materialism as positive. I should feel much happier to see a moral and spiritual revival. An economic crash can direct people’s attention back to what really matters… family, friends, a connection with nature instead of a desire to conquer it. How satisfying it would be to see moral and ethical foundations thrive once again.

    Many fear this deflationary conflagration; I see good in it. There is opportunity for localization to take place. Perhaps some will grow gardens on their soil instead of turf, and in turn will find joy in reconnecting with the land. People will learn they must depend on each other, resulting in local relationships where once the dollar was the impersonal binding force. Those who seek success sans relationships will fail; those who embrace others and enable their communities will thrive. People will have to do with much less, yes, materially. Balance will be found in all the immaterial that is restored to their lives.

    This is the future I prepare for, one where we live in harmony with others and our environment. I believe it far better than the one we’ve been experiencing.


    Ishkabibble – Well said.

    Dr. Diablo

    China now has factories, workers, infrastructure, and demand. What do they lack to have a grand economy? If they woke one morning and found themselves in a pre-built city, filled with supplies and tools to accomplish human tasks, wouldn’t they feel themselves the luckiest people of all? That is what they have, yet like the U.S. in 1931, somehow having all the tools to make life–the same tools that made everything hum in 1928 or 1921–suddenly don’t work? Did the people stop wanting things? Did all the people who knew how to make those things die? Did they run out of materials to create the things people wanted? No. In fact they had more things cheaper than ever. So what’s the real problem?

    The problem is the signals telling them HOW to work were curtailed, stopped, like a sort of financial leprosy. The system doesn’t know how to respond, focus, heal itself. How can that happen? Well if you hijack the signals to make your personal fortune, rig and lie and bend and twist until no truth is left in the signals, then yes, you’re going to have enormous problems, here as well as there. That’s the hazard of command economies, ours as well as theirs. If there is no incentive for truth –bankruptcy, shame, ridicule–and instead well-rewarded incentives to lie, where anyone peddling fraud, illusion, falsehood, and spin get control of the resources of the entire system, then of course very shortly the system no longer knows what’s true or false, what’s real or unreal, and therefore where to apply itself productively. Like the leper, it will rot and die not because leprosy itself is harmful, but for lack of honest signals about what the national body is doing and needs. There’s another way to name this: there is no feedback in the system. Voices, objections are not heard, pain in the outer members is ignored. There is no “or else”, no arrests, no bankruptcies, and so the body dies.

    As a command economy, China’s one party *could* just re-distribute the wealth, erase the counters, and re-set the clock. Erase the debt (which is almost all internal), so all the old signals hanging like a millstone allow the Chinese people to respond to today’s challenges, not to debt and poor planning from decades ago. Problem is, power structures are always the same: they get control of the system, then inefficiently and unjustly allocate themselves goods they don’t deserve. On a fair field most would then lose their fortunes, so they must prevent justice, truth, and order which would rectify this wrong. So they use the full resources of the state to perpetuate the lies, frauds, and prevent true signals at all costs.

    But if the problem is really lies and the acquiescence to them, don’t we really have a moral problem, not an economic, resource, or population problem? And isn’t this what Ilargi has said? That we don’t have an economic problem but a political one? A moral one? Any suggestions on how to solve a world-wide moral collapse?


    Morals erased through wanton pleasures are restored with pain. The world must experience the fruits of their collective poor choices. We’ve fallen far, and so much pain will be required for a lasting restoration of values to ensue.

    Your answer is atonement. There is no short circuiting this process. Mankind must change. The pain will purge as fire. It won’t be comfortable, but it is necessary, right, and good.


    I admire James Howard Kunstler’s definition of money as a “narrative construct. In other words, a story explaining why we behave the way we do around certain things.” Everybody trying to massage the story to suit their ends. Ultimately, we gotta eat, stay warm, and get around.

    John Day

    I think China has a very good historical understanding of the collapse of fiat monetary systems. Chinese study Chinese history hard (I hear).
    Gold is the antidote. China is accumulating gold. So is Russia. Oil and minerals are essential, too, and Russia, China, Iran and even central Asian Republics can coordinate those.
    China has built a hundred years of stuff that’s in mothballs. Maybe this was the best time to do that for the next hundred years. Maybe it was intentional.
    The middle kingdom may have regained it’s traditional “long view” of the unfolding of history.
    The revaluing of the yuan/renmenbi must be used as an attack, not a surrender.
    Obvious, right?

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