Market Manipulation Goes Global – Project-Syndicate 07-27-15

Salient to Investors:

Stephen Roach at Yale writes:

Market manipulation a la China is now standard operating procedure in policy circles around the world – the West just dresses up their manipulation in different clothes.

QE is essentially an aggressive effort to manipulate asset prices: whether it has succeeded is debatable along with central banks’ unsubstantiated claim that things would have been much worse had they not pursued QE.

China appears less focused on systemic risks to the real economy because wealth effects are significantly smaller in China, where private consumption is 36% of GDP, half that in more wealth-dependent economies like the US. By keeping its benchmark rate well above zero, the PBOC is better positioned than other central banks to maintain control over monetary policy and avoid the open-ended liquidity that is so addictive for frothy markets. China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.

Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the 7 months following the Shanghai-Hong Kong Connect in November 2014, so speculators had little time to let the capital gains sink in. The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes. The development of stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform, so the equity collapse calls that effort into serious question.

Time and again, regulators, policymakers, and political leaders have condoned market excesses, a growth elixir when labor income is under constant global pressure. These bubbles always burst and the false prosperity is exposed.

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Did Soros Just Predict a China Crash? – Bloomberg 01-08-14

Salient to Investors:

William Pesek writes:

George Soros believes the main risk facing the world is a Chinese debt disaster that is unfolding in plain sight. Soros said China’s restarting of the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. Soros sees eerie resemblances with the US in the years preceding the crash of 2008, but with a significant difference. In the US, financial markets tend to dominate politics, but in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises, so how and when this contradiction will be resolved will have profound consequences for China and the world.

Michael Pettis at Peking University and Jim Chanos at Kynikos Associates have been warning of this for years. Patrick Chovanec at Silvercrest Asset Mgmt said the “shadow” Chinese balance sheet would worry policy makers around the globe but for China’s obsessive opacity concealing the problem. China’s shadow-banking entities is its answer to Enron.

JPMorgan Chase estimates shadow banking is 69 percent of China’s 2012 GDP and is a wildly conservative guess. China fudges trade and other run-of-the-mill data, so you can imagine the lengths it goes to hide the magnitude of its credit bubble.

Stephen Roach warns of China’s propensity for thinking that slogans are sufficient. China can either restructure its economy or grow rapidly, but not both. The higher China’s growth rate, the less retooling that is going on and the more debt the nation is amassing behind the scenes.

The way such regional leaders win Beijing’s attention is rapid growth, causing dozens of nascent super cities all borrowing like mad to deliver big GDP numbers.

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China 3% Growth Risk Seen by Barclays Signals Likonomics Anxiety – Bloomberg 07-28-13

Salient to Investors:

Sudakshina Unnikrishnan and Jian Chang at Barclays say should China’s growth dip to 3 percent in the next 3 years, copper would fall more than 60 percent, zinc by up to 50 percent, and oil to $70 a barrel. They cite risks of slowing industrial production and of financial stress due to debt of companies and local governments, and Likonomics inflicting short-term pain.

Zhang Zhiwei at Nomura sees a 1-in-3 chance of Chinese GDP dropping to below 5 percent for four consecutive quarters starting at or before Q4 2014, and says a growth rate of 5.9 percent in 2014 would lead metal prices to fall as much as 30 percent and oil prices as much as 20 percent. Nomura expects Chinese growth of 6.9 percent in 2014, but said a growth rate of 5.9 percent would trim 0.3 percent from world economic growth.

Societe Generale sees a non-negligible risk of less than 6 percent growth in 2013 and an outside chance of 3 percent average expansion for half2 2013 and half1 2014. In the event of a hard landing, Societe Generale said 1.5 percent would be shaved off global expansion in the first year, and would recommend selling copper call options and buy copper puts, buying the US dollar and Treasuries, and selling the Russian ruble, South African rand and the Chilean peso.

Andrew Polk at the Conference Board said trying to slow gradually is very difficult, partly because it’s a self-enforcing mechanism and can become a vicious cycle, and sees average growth in China of 5.5 percent over the next 5 years. Polk sees a distinct possibility that the slowdown could get out of control. Polk said Australians are overly reliant on China and the export trade, and have not done enough to diversify their own economy, so would be hurt.

Orville Schell at the Asia Society said he does not know if the world is ready for China’s growth below 7 percent – the Chinese economy is mortal and ultimately subject to the same kinds of cyclical growth as every other economy.

Stephen Roach at Yale said China wants enough growth to maintain social stability and prevent the economy from a more serious shortfall, so does not see a hard landing.

Jim O’Neill at Bloomberg said the notion of a soft or hard landing is simplistic, and China is adjusting in the right direction as gauged by the relationship between real retail sales and industrial production. O’Neill said 7.5 percent growth in 2013 and this decade is reasonable, and equivalent to the US growing by 4 percent in terms of world contribution – any further Chinese slowing would be big.

Barclays said quarterly growth dropping briefly to 3 percent within the next 3 years was increasingly likely, but expects 7.4 percent growth in 2013 and 2014. Barclays said even if growth slowed that much, China would bounce back rapidly afterwards.

Alaistair Chan at Moody’s Analytics said China is a gray swan, not a black one, because a hard landing won’t be totally unexpected and there may be a recession sooner or later, in which case it won’t be pretty for commodity exporters in the short run.

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Stephen Roach: Fiscal Cliff is a Publicity Stunt – Bloomberg 12-19-12

Salient to Investors:

Stephen Roach at Yale said:

  • The fiscal cliff is moonshine, designed to make the politicians look good  ‘saving’ America. We are not going to go over the cliff as even dysfunctional politicians know it would be political and economic suicide. Expect a phony deal of $10 trillion back loaded in years 8, 9 and 10, thus kicking the can down the road.
  • The US doesn’t have the political courage to solve the big problems.
  • We are still in a balance sheet recession.The economy will slog through and we are in the third innings of a nine innings paying down the debt – consumers were dealt a lethal blow by the bursting of the property and credit bubble
  • Jobless rate will be in low to mid 7s in 2013 and many Americans looking for work on a longer term basis 

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