We were meandering around thinking about something else to write about this afternoon without picking on China trade data again when we ran across this missive from Bloomberg’s Mark Cudmore (and this is the full text):
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The China doom-mongers don’t seem to have updated their models since January. Even allowing for today’s disappointing trade data, the economic reality is far more positive than the consensus narrative.
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Financial markets have spent the last year in a permanent state of fear about the impending disaster in China. The catalysts for the expected meltdown are smoothly rotated but the negativity is a constant
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Right now the worry-du-jour is the property market. Again. There’s inordinate focus on how growth may be hit if government policies successfully curb real-estate prices. In contrast, there’s been remarkably little commentary on how 2016 growth is currently much stronger than anticipated, partially due to tailwinds from the property boom
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Remember the Li Keqiang Index? It’s an alternative estimate of Chinese growth based on bank lending, rail freight and electricity consumption. When it was collapsing in 2014 and 2015, it was referred to on a weekly basis as clear evidence for the China hard-landing story
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In 2016, analysts suddenly don’t seem to value it as an economic indicator any more. Could that be because it’s showing the strongest uptick in Chinese growth since 2009? Maybe they can’t handle the truth? (see chart)
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Bears will retort: “What about yuan weakness?” What yuan weakness? Today, the yuan is trading at its strongest level in more than two months versus the China Foreign Exchange Trade System basket
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You wouldn’t know it from market talk but the currency bottomed-out in August. There’s a narrow-minded focus on USD/CNY which completely overlooks the fact that the dollar has been one of the strongest currencies in the world during the past two months
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September saw record inflows into China’s bond market at a pace more than three times the year’s monthly average. This suggests that the yuan’s inclusion in the IMF’s Special Drawing Rights’ basket may be the catalyst for a new trend of money coming in to China’s asset markets
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I remain concerned by the broader outlook for financial markets this month, but China is one of the good-news stories right now. No matter how commentators try to skew the narrative
Ok, so a couple of things here.
First, China is not a “good news” story. That’s a joke. It’s a centrally-controlled, smokestack economy that has for years served as the engine of global growth and trade and is now attempting to transition to some kind of amalgamation comprised of consumerism, communism, and industrialism while wrapping the whole thing with a big bow of Politburo patronage and censorship. That will never, ever, work. Sorry.
But that’s just the nice side of the story, believe it or not.
The real problem here is that the country has a bevy of elephantine SOEs that are basically insolvent by virtue of the fact that they are operating in overcapacity sectors. Just look at the amount of debt taken on last year for the sole purpose of servicing existing debt.
Spoiler alert: the number was almost $1.3 trillion.
That’s called a corporate ponzi scheme.
And it’s being perpetuated by the banks which are of course under pressure by Beijing to make it appear as though NPLs are below 2% when in fact, the number is probably in the triple-digits. And if you count all the cash being funneled to insolvent sectors through the shadow banking sector and thus being carried on bank balance sheets as “receivables,” well then who knows how much has actually been thrown at insolvent enterprises.
Is it some mystery why rich Chinese are buying up Canadian real estate like it’s going out of style?
Are Chinese silver-spoon children born with a natural affinity for Vancouver?
No. They are not.
They are moving their money out of the country because they expect a depreciating yuan and then they are playing the CAD/USD arbitrage to buy up expensive Canadian real estate on the cheap. It’s simple. It’s something any 10-year old would do if there were an international version of Monopoly they could understand.
I respect Mark Cudmore’s commentary, but I respect Kyle Bass and our own intuition a bit more. This thing is going to hell in a handbasket. You can count on it.
And the yuan is going to much, much lower.
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