Dr. Ed Yardeni Blog2016.2.12---China: Sleeping With the Fishes (excerpt)

Dr. Ed Yardeni Blog2016.2.12---China: Sleeping With the Fishes (excerpt)
Some very smart people are taking very big bets that China may be the subject of the sequel to “The Big Short,” the movie about how the subprime mortgage crisis triggered the housing and financial meltdown of 2008. That’s according to a 1/31 WSJ article titled “Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan.” Here is an interesting item from the piece:
Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar. It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years--a bet with billions of dollars on the line, including borrowed money. "When you talk about orders of magnitude, this is much larger than the subprime crisis," said Mr. Bass, who believes the yuan could fall as much as 40% in that period.
The Chinese government has taken note and has already sent George Soros a dead fish wrapped in newspaper. Actually, the warning to Soros and others not to start a currency “war” with China appeared in an opinion piece by a low-level government official in the 1/27 People’s Daily Online headlined “Think twice before declaring war on Chinese currency.” The official wrote: “Soros’ challenge to the RMB and Hong Kong dollar are doomed to fail, without any doubt.” We will see who wins. However, betting against China seems to be a very good bet these days. Consider the following:
(1) Depreciating currency. The yuan is already down 8.2% since it peaked on January 1, 2014. As Debbie and I have been monitoring since mid-2015, the problem is a big swing from capital inflows before last year to massive capital outflows, as shown by the 12-month sum of China’s trade surplus and the 12-month change in China’s non-gold international reserves. This proxy implied about $1.0 trillion in capital outflows last year. (See our China Capital Flows.) The author of the op-ed in China’s leading communist newspaper wrote, “But it is hard for the dollar to be strong against the RMB for the long run, since China is still maintaining an expanding trade surplus.” He didn’t mention the capital outflows.
(2) Dialing for dollars. Several factors triggered the capital flight. The Chinese government has stepped up an anti-corruption drive since it was first started during November 2012. Perhaps that caused wealthy Chinese to move funds abroad. More importantly, the tightening of US monetary policy with the termination of QE during October 2014 and the widely anticipated rate hike late last year caused Chinese companies that had borrowed in dollars to scramble to pay these loans. The resulting drop in the yuan accelerated the capital outflows. A 1/26 FT article by Gillian Tett covered this subject very well.
(3) Fewer opportunities. Of course, capital outflows may also reflect fewer profitable investment opportunities in China. Profits earned by Chinese industrial companies in November fell 1.4% y/y, marking a sixth consecutive month of decline. China’s official M-PMI dipped to 49.4 last month, the sixth consecutive reading below 50.0 and the weakest since August 2012.
On the other hand, the NM-PMI was 53.5, remaining solidly above its December 2008 low of 50.8. Still, there is no doubt that China’s economy is slowing, as evidenced by the 8.3% y/y decline in railways freight traffic through December. Last year, electricity output rose just 2.4%, the slowest pace since 2009.
The China Syndrome Again
Another movie that comes to mind, of course, is the “China Syndrome.” There is no shortage of doomsday scenarios with China as the epicenter of a global meltdown. For example, a 1/26 CNBC article is titled “A China bank contagion could blow up global markets.” While the headline is alarming, the story is actually relatively reassuring, at least relative to the headline. Here are a few of the key excerpts from this comprehensive and well done piece by Tim Mullaney:
(1) Low default risk among banks:
A measure of default risk used by Moody’s Investors Service puts the risk of any of the Big Four Chinese banks--Bank of China, the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China--defaulting in the next year at no more than 1.5 percent, and for some as little as 0.5 percent. (2) Government backed:
Even with nearly $11 trillion of assets and loans that reach into all sectors of China’s $10.3 trillion economy, for now, experts see little likelihood the banks themselves will be a problem; China’s largest banks are all controlled by a government that has the determination and resources to prop them up if necessary. And their ties to U.S. institutions are narrow enough that bond-rating agencies don’t foresee anything like the financial contagion of 2008, when liquidity problems quickly spread from bank to bank and nation to nation as the extent of the mortgage crisis became clear. …
China’s banks also benefit from the explicit backing of the government there, in contrast to the U.S., where bank bailouts remain controversial seven years after the crisis. China’s central bank also has much more room to lower interest rates than does the U.S. Federal Reserve, which has set the target range for its key policy rate at 0.25 percent. The current Chinese base interest rate is 4.35 percent.
(3) Credit growing:
To date, China’s banks have not experienced anything like the cataclysms that rumbled through U.S. and European institutions between 2007 and 2009. Neither have their problems resulted in any significant shortages of credit: Retail sales in China rose 11 percent in December 2015, and housing sales have begun to rebound from an earlier dip. …
China’s banks are mostly funded by deposits rather than the capital markets, said Grace Wu, an analyst for Hong Kong-based Fitch Ratings. That makes them less vulnerable to short-term twists in the mood of markets, she said. They also have loan-loss reserves, collectively, that are nearly twice as big as the amount of loans that are 90 or more days past due, according to Moody’s Investors Service.
(4) Some cracks:
That said, China’s banks are in worse shape than a year ago, by many measures. Reported loan delinquencies have risen to 1.59 percent of loans as of Sept. 30, up from 0.95 percent at the end of 2012, Moody’s Investor Service says. And critics have seized on banks’ decisions to classify fewer loans whose borrowers are more than 90 days late on their payments as non-performing, saying banks and the government are trying to paper over the extent of a fast-growing problem.
Moody’s Investor Service cut its outlook for China’s bank sector to negative from stable, on Dec. 11. It pointed to the loan-loss problems, as well as an increase in overall borrowing to 209 percent of gross domestic product, from 193 percent a year ago, that it says raises systemic risk.
But all four of China’s largest commercial banks, each majority-owned by the government, are still rated A1/Stable--six notches above speculative grade and higher than all six of the top U.S. banks, which are rated A2 or A3. Bigger problems lurk in smaller Chinese banks that are less systemically important, the ratings agency said.” (5) Conclusion: I know what you are thinking: Didn’t the rating agencies completely miss seeing the subprime mortgage disaster? We all know that they were actually part of the problem because they failed to rate junk credit as junk. Instead, they rated most of the junk that was sliced and diced into credit derivatives as investment grade, even AAA. It’s all in the movie.
The author of the CNBC article acknowledges the worries about a repeat of 2008. He notes: The problems China’s banks have are focused in manufacturing and wholesaling--and an increasing number of those borrowers are relatively small businesses, Moody’s said. That raises the risk that their problems are not well understood or that they could worsen.
However, it is true that China’s bank loans are funded entirely by deposits. The ratio of M2 to bank loans was 1.48 during December and has exceeded 1.28 since the start of the data in December 1999. Then again, in yuan terms, bank loans are up a whopping 210% since December 2008. In dollar terms, they are up $10.2 trillion, from $4.4 trillion during December 2008 to $14.6 trillion during December 2015. Yet despite all that credit, the economy has slowed significantly.


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Dr. Ed Yardeni Blog2016.2.12---中国：睡觉随着鱼（节选）
一些非常聪明的人正在非常大的赌注，中国可能成为续集的主题“大短”的电影，讲述次贷危机这是根据华尔街日报1/31引发怎样的住房和2008年金融危机文章题为“货币战争：美国对冲基金登上了中国的袁新的攻击”这是一块有趣的项目：
凯尔低音海曼资本管理公司已经出售了其大部分股票，大宗商品和债券投资，因此它可以专注于卖空亚洲货币，包括人民币和港币。这是最大的赌注集中自获利赌注年前的总部位于达拉斯的公司已经向美国住房市场。海曼Capital的投资组合的85％左右，现在投资于有望还清，如果人民币和港元在未来三年内贬值超过行业 - 数十亿美元就行了，包括借来的钱下注。 “当你谈论数量级，这比次贷危机要大得多，”巴斯先生，谁相信人民币会在那个时期下降多达40％的人说。
中国政府已经注意到，并已派出乔治·索罗斯死鱼用报纸包起来。其实，警告索罗斯和其他人不启动货币“战争”与中国出现在舆论一片由1/27人民网低级别的政府官员的标题“关于中国货币宣战之前三思而后行。”这位官员说：“索罗斯的挑战，人民币和港币，是注定要失败的，毫无疑问。”我们将看到谁赢了。然而，对赌中国似乎是一个非常不错的选择，这些天。考虑以下几点：
（1）货币贬值。人民币已经下跌8.2％，因为它在达到高峰2014年由于黛比1月1日，自2015年中期我一直在监测，问题是从资本流入大摆去年之前，大规模的资本外流，如图12 - 月中国贸易顺差的总和，在中国的非黄金国际储备了12个月的变化。这意味着代理约1.0万亿$在资本外流的最后一年。 （参见我们中国的资本流动。）在中国领先的共产主义的报纸写的专栏的作者，“但是，很难对美元将兑人民币从长远来看强烈，因为中国仍然维持贸易顺差扩大“他没有提及的资本外流。
（2）拨打了美元。有几个因素引发的资本外逃。中国政府已加大了反腐败斗争，因为它是2012年11月也许是造成中国富人到国外转移资金过程中第一次开始。更重要的是，美国的紧缩政策与量化宽松政策的2014年10月期间终止和普遍预期加息，去年年底货币政策造成的曾借入美元争夺支付这些贷款的中国企业。在元所产生的下跌加速了资本外流。一个1/26 FT文章阿娇莲•邰蒂涉及这个问题非常好。
（3）的机会更少。当然，资本外流也可能反映在中国少有利可图的投资机会。由中国工业企业在十一月赚利润同比下降1.4％Y / Y，标志着跌幅连续第六个月。中国官方的M-PMI比上月下滑至49.4，低于50.0的第六个连续读取并自2012年8月最弱。
在另一方面，NM-PMI为53.5，高于50.8的2008年12月低点剩余扎实。不过，毫无疑问，中国经济正在放缓，通过十二月铁路货运量的8.3％Y / Y下降就是明证。去年，发电量仅增长2.4％，最慢的速度自2009年以来。
中国综合症再次
我想到的另外一部电影，当然，是“中国综合症”。没有与中国没有末日景象短缺作为一个全球危机的中心。例如，一个1/26 CNBC文章题为“一个中国银行的传染可能打击全球市场。”虽然标题是惊人的，这个故事确实比较让人放心的，相对头条最少。这里有几个由蒂姆Mullaney这种全面而出色地完成一块关键的摘录：
（1）银行间低违约风险：
穆迪投资者服务公司所使用的违约风险的度量提出任何四大中国银行的风险 - 中国银行，兴业和中国工商银行，中国建设银行和中国农业银行 - 在明年违约在不超过1.5％，而对于一些低至0.5％。
（2）政府的支持：
即使有将近11万亿的$达到进入中国的$ 10.3万亿美元的经济的所有部门，现在的资产和贷款的，专家认为可能性不大，银行本身将是一个问题;中国最大的银行是由有决心，有资源，如果有必要扶植起来一个政府所有的控制。和他们的美国机构的联系足够狭窄，债券评级机构没有预见像2008年的金融危机蔓延，当流动性问题迅速从银行蔓延到银行，民族国家作为抵押贷款危机的程度变得清晰什么。
... 中国的银行也受益于政府存在的明确的支持，而相比之下，美国，在那里救助银行仍然存在争议危机七年之后。中国央行也有更多的空间来降低利率并不比美国联邦储备委员会，它已经为其关键政策利率目标区间在0.25％左右。目前中国基准利率是4.35％左右。
（3）信用成长：
到目前为止，中国的银行还没有经历过这样通过美国轰隆隆的灾难和欧洲的机构2007年至2009年间什么都没有导致信贷的任何显著短缺的问题：在中国的零售销售2015年12月上涨了11％，房屋销售已经开始从早期的探底反弹。 ...
，吴兆莆，为总部位于香港的惠誉评级分析师称，中国的银行受到存款，而不是资本市场的主要资助。这使得它们不太容易受到市场情绪短期的波折，她说。他们也有贷款损失准备金的统称，是近两倍大，是逾期90天或以上的贷款金额，根据穆迪投资者服务公司。
（4）一些裂痕：
这就是说，中国的银行在形状上不如一年前，许多措施。报道称贷款违约率已经上升到贷款的1.59％，因9月30日，从2012年底0.95个百分点，穆迪投资者服务公司说。批评人士抓住银行决定贷款较少的借款人迟到超过90天的付款为不良，称银行和政府在一个快速增长的问题的严重程度正在试图纸分类。
穆迪投资者服务公司下调了对中国的银行部门前景至负面由稳定，在12月11日据指出，贷​​款损失问题，以及对国内生产总值的209％的增长，整体借贷，从去年193％的以前，它说，引发系统性风险。
但是，中国最大的商业银行的全部四个，每个拥有多数股权由政府，仍然额定A1 /稳定 - 六缺口上方投机级和高于顶美国银行，这被评为A2或A3的所有六个。更大的问题在较小的中国的银行不那么具有系统重要性的潜伏，评级机构说。“
（5）结论：我知道你在想什么：未评级机构彻底无缘看到次贷灾难？我们都知道，他们实际上是问题的一部分，因为他们没有垃圾评级信用为垃圾邮件。相反，他们最额定被划破的垃圾，并切割成信用衍生品为投资级，甚至AAA级。这一切都在电影中。
CNBC的文章的作者承认，大约在2008年重演，他注意到担忧：
中国的银行主要集中在制造业和批发的问题 - 越来越多的借款人都比较小的企业，穆迪说。这就提出了自己的问题没有得到很好的理解，或者他们可能恶化的风险。
但是，这是事实，中国的银行贷款由存款全部资助。十二月份M2的银行贷款的比例为1.48，因为数据在1999年12月开始已经超过1.28话又说回来，在元计算，银行贷款是一个高达210％，是自2008年12月以美元计，它们是同比增长10.2 $万亿美元，从4.4万亿$在2008年12月至14.6万亿$ 2015年12月期间，然而，尽管所有的信贷，经济显著放缓。



资料来源 :
Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.

Dr. Ed Yardeni Blog2016.2.12---China: Sleeping With the Fishes (excerpt)
http://blog.yardeni.com/2016/02/china-sleeping-with-fishes-excerpt.html