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Mike Holt

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  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? [View article]
    I see it now. Thanks.

    After identifying this time period, it would be interesting to see how performance over this time period would be affected:

    [a] if entry price risk had been addressed through a dollar cost averaging strategy; and

    [b] if the investor didn't withdraw the entire balance at a severe market bottom, possibly due to capitulation.

    If the portfolio was being relied upon for cash flow needs, its more likely that funds would have been withdrawn incrementally over a period of years, and its possible that liquidations of equities under adverse market conditions could have been avoided altogether if the portfolio was diversified to include other investments besides just the S&P 500, such as a laddered muni bond portfolio with maturities matched to the expected dates when cash flow would be required. Maintaining a cash balance sufficient to cover a portion of the investors anticipated cash flow needs over the next six months or more would also mitigate the risk of having to liquidate the portfolio during adverse market conditions and allow the investor to maintain a longer investment time horizon.

    It would also be interesting to identify the performance of the portfolio during the intervening years. Was it always down? And, how would that performance be affected if the investment in the S&P 500 was part of a simple 60/40 equity/fixed income portfolio that was rebalanced at least annually?

    Hedging, in addition to research, diversification, and portfolio rebalancing, can also be a very effective risk management technique but is often overlooked, even by professional money managers. This may be due to the fact that the other risk management techniques are so effective, but knowing how to use all of the clubs in the golf bag, and avoiding the traps, may be a better way to keep the ball heading in the right direction along the fairway.
    Nov 18, 2015. 07:24 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? [View article]
    Prices for many commodities have been driven by variations in demand from China, whose rapid economic growth and even more rapid debt accumulation has also had a profound impact upon global economic growth and capital markets.

    To put this into perspective, China's GDP was less than $4 Trillion in 2007 and has grown to more than $10 Trillion today, of which almost half represents Fixed Asset Investment spending. In other words, Fixed Asset Investment spending is larger than the entire Chinese economy was in 2007.

    And, according to Russell Napier, money created by the PBoC accounts for over 40% of the increase in the global money supply over this same time period.

    Just as this growth had a huge impact on commodity prices, global trade, and capital markets on the way up, it has, and will continue to have a significant impact on commodity prices, global trade and capital markets on the way down.

    But, rather than merely monitoring only commodity prices that represent a shadow of this underlying activity, look to the source of this economic activity and understand both its internal and external drivers. Debt and demographics are not destiny, but they are certainly important even if their importance has been temporarily shrouded by China's extremely rapid, debt-fueled, supply-oriented economic growth since the 2007-2009 GFC.

    And, don't let export figures alone deceive you. For example, on the way up, reference was generally made to the fact that while US exports are relatively small as a percentage of US GDP, over 40% of revenues from S&P companies are generated overseas. But, now references are more often made to the fact that US exports represent only a small percentage of US GDP, and little attention is given to how important foreign revenues are to multi-national corporations including those headquartered in the US.
    Nov 17, 2015. 07:34 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? [View article]
    Can you identify the 30-year period you're referring to, and the market? Thanks.
    Nov 17, 2015. 06:56 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? [View article]
    According to the 16th Annual Geneva Report published last year,

    the Fed decided that deleveraging would not be possible until the balance sheets of banks were shored up and the flow of credit was restored.

    European government leaders, on the other hand, attempted to implement fiscal austerity measures right out of the gate and learned the hard way that restoring the health of the banking system must precede fiscal austerity measures.

    This is supposedly why the EU has now gone back to square one and is seeking to ease monetary policy while the US Fed is now seeking a less accommodative monetary policy.

    While the theoretical construct makes sense--i.e., that the sequence of steps necessary to implement the promised decades-long orderly deleveraging process matters--the practical reality is that politicians lack the political will to implement measures necessary to restore fiscal health if it involves any near-term pain. They would much prefer to continue relying on more debt to paper over the cracks in the economic foundation.

    So, it remains to be seen whether the US will now implement measures to reduce government debt. With surprisingly little fanfare, some very significant changes were made to rules regarding social security retirement benefits last month. But, turmoil in the Middle East threatens to embroil the US in another costly military campaign, and the majority of Americans may be swayed to vote for whichever Presidential candidate promises them the most things that the government can't afford.

    And, an enormous surge in debt-fueled Fixed Asset Investment spending in China that has helped swell global debt from $150 Trillion in 2007 to over $200 Trillion today--so much for an orderly DE-leveraging process--has temporarily served as an engine of economic growth that may have convinced some that debt doesn't matter after all, so that the initial plan to rein in debt is no longer necessary. In fact, since the surge in China's fixed asset investment spending has served primarily to increase productive capacity and hence the supply of goods when what the world needed was new sources of demand to restore the dwindling demand on the part of aging, over-indebted consumers in developed countries, the resulting exacerbation of global supply/demand imbalances is likely to place further stress on the cracks in the economic foundation of the US and other developed countries that politicians will then attempt to address through government programs that, in their view, will require even more government debt.

    Since Fixed Asset Investment spending within China has already led to tremendous overcapacity in many industries as well as a mountain of non-performing loans that are now choking their banking system--but not written off because they are "guaranteed" [but not being repaid] by the government--one might expect the music to stop very soon as this construction activity which, by definition, is only temporary in nature, grinds to a halt. In fact, we have already seen plunging commodity prices over the past few years.

    But, after Xi Jinping encountered fierce resistance from entrenched interests who don't want to relinquish their control over the commanding heights of the Chinese economy so that opportunities to start new companies will become available to a broader segment of the population--potential consumers--Xi Jinping has used every speaking opportunity over the past year to promote China's One Road, One Belt ["Silk Road"] initiative that is intended to maintain China's economic growth through a continuation of infrastructure spending, overseas now. If successful, that debt-fueled economic activity may be enough to offset the shortfall that should have been expected solely from a rebalancing of the Chinese economy under any scenario since domestic consumer spending is a much smaller base than domestic fixed asset investment spending. So far, prospects for the Silk Road Initiative are looking up since many other countries are desperate for economic growth, most have become founding members of the Asian Infrastructure Investment Bank so they can hopefully share in that supply-oriented economic growth activity.

    If China is successful in spurring an additional round of debt-fueled infrastructure spending in Central Asian countries and in those countries along the shorelines of the Indian Ocean, the author may be right, falling commodity prices--and trade contagion from China--may be only temporary, All that is required is a tolerance for even higher levels of debt, even though the disorderly deleveraging process that rocked financial markets during the 2007-2009 GFC should have made the need for an orderly deleveraging process painfully clear.
    Nov 16, 2015. 08:26 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? [View article]
    The market is a barometer of the future, not a thermometer of the present. So, the question that should have been asked a few years ago was

    "What impact will attempts by the new leaders of the CCP to reign in debt-fueled Fixed Asset Investment Spending have on commodity prices."

    Then, about two years ago, it might have made sense to ask,

    "What is the message from falling commodity prices?"

    Now, the question better asked is,

    "What is the message from plunging Fx rates?" (Or, "If the Yen falls in the middle of a forest, does anybody hear it?")
    Nov 15, 2015. 10:38 PM | 2 Likes Like |Link to Comment
  • Why China's Renminbi Rate Will Be Going Down... And Down [View article]
    Ben Gee, are you suggesting that all of the empty cities and bridges to nowhere could simply be destroyed and rebuilt, over and over again, in order to perpetuate the debt-fueled Fixed Asset Investment spending that has served to double China's GDP over the past several years?

    I know this has been tried at the local level many times, and that its a common practice in China to experiment with new ideas at the provincial level before rolling them out on a national basis, but so far I think this activity was temporarily possible [i.e., free market forces that would consider this to be pure folly were ignored] only because it was believed that the debt incurred to perpetuate these capital misallocations would somehow take care of itself. That myth has been perpetuated because the mountain of debt that has been issued in record time was guaranteed by the central government, and some believe that there is still tremendous capacity for additional debt, regardless of the quality of that debt, due to China's lower government debt-to-GDP ratio relative to other countries [if you exclude local government debt and debt issued by state-owned corporations], and regardless of the fact that the world is already struggling with an excessive global debt burden of over $200 Trillion--relative to global GDP of just over $70 Trillion.

    Now that the Chinese banking system is suffering from a lack of liquidity due to all the loans on its books that pay no interest but continue to be carried at their full face value since they are supposedly "guaranteed" by the government, there are signs that the enduring forces of economic gravity that have been only temporarily suspended through hubris and the largest, most rapid expansion of debt in the history of the world are already beginning to set in.

    Xi Jinping has not been able to convince entrenched interests, consisting mostly of high ranking members of the "old" CCP to relinquish their power so that economic reality can be reintroduced in a gradual manner that could serve to avert a debt/banking crisis in China and a resulting hard landing for the Chinese economy. It's as if the old guard has become addicted to debt, power, and special privileges so is unwilling to undergo rehab. So, Xi Jinping has resorted to promoting an external continuation of the debt-fueled Fixed Asset Investment spending that better lends itself to the command-and-control structure that these entrenched interests seek to maintain. Huge, long-term infrastructure projects awarded to the SOE's that they control also facilitate graft and corruption because there are no near-term profitability measures that would require an immediate need to justify, or account, for the huge expenditures involved.

    But, China will need to internationalize the RMB in order to borrow the additional funds needed to finance this external infrastructure spending, and that, in turn, will require a strong and stable RMB absent the heavy intervention on the part of the PBoC that has been relied upon for support in the past.

    When the PBoC loosened the trading band on the RMB earlier this year in an effort to move closer to the "freely tradable" requirement that must be met in order for the RMB to be included in the IMF's basket of currencies known as Special Drawing Rights, it was expected that the currency would rise, but instead it repeatedly fell to the lower bound of the widened trading band that the PBoC had introduced. This led to intervention on the part of the PBoC, and this policy reversal has actually served to diminish, rather than increase the chances that the RMB will qualify as a freely tradable currency eligible for inclusion in the IMF's SDR basket. Bungling this attempt, after bungling the stock market bubble that the CCP had attempted to orchestrate earlier, has greatly diminished the CCP's credibility, and revealed that a decline in the value of the RMB is a real possibility. Anticipation of such a decline could prompt even more wealthy Chinese to find ways to move their wealth out of the country, and seems to have already resulted in the unwinding of the huge carry trade that was based in part upon the expectation of a strengthening RMB while arbitragers hoped to milk the difference between the historically low borrowing costs available in many parts of the world and the dramatically high interest rates on Wealth Management Products [i.e., money market accounts bearing interest rates of over 10%] that have been used to finance long-term infrastructure projects in China, and that Chinese banks rely upon as a source of liquidity in lieu of the interest that is not being paid on all the non-performing "government guaranteed" loans clogging their balance sheets.

    We have already witnessed $457 billion of capital flight from China so far this year, and if the PBoC continues to liquidate Fx Reserves in an effort to defend the currency, their purchases of RMB being sold will still result in RMB being removed from the money supply, which would further aggravate the liquidity squeezes being felt by Chinese banks as they attempt to roll over 1 to 3 month Wealth Management Products at the end of each month.

    The choice between a decline in the RMB that could derail the CCP's hope for an external continuation of their debt-fueled Fixed Asset Investment spending that has served to conceal the weaknesses in China's banking system, and a liquidity squeeze that could cause a Chinese banking crisis in a manner similar to that experienced by many banks during the 2008 GFC is not an attractive one to make. Either way, when the tide goes out, the world will see who has been swimming naked, and its possible that the Emperor may have no clothes.
    Oct 30, 2015. 08:20 AM | 2 Likes Like |Link to Comment
  • China To Save The World Economy? [View article]
    I read your other article "The Big Chinese Transformation" and enjoyed it. You seem to have a good grasp of both the positive and negative factors that could affect the trajectory of China's economy.

    After reading this, I think your view that there is a surplus of savings over investment was true of conditions in China, but I don't think this is true globally, in large part because excessive levels of investment in China have discouraged investment activity elsewhere.

    And, even within China, I think it would be more accurate to say that investment opportunities for those without guanxi are limited and they therefore direct much of their savings into bank accounts whose yields are considered to represent a cheap source of financing for Chinese corporations even though they are much higher than yields on bank savings accounts in the US.

    The views expressed regarding the potential benefits to be derived from infrastructure investments elsewhere are conditional upon assumptions regarding what types of investments would be made and by whom. If that infrastructure led to wealth accumulation opportunities in other countries, those countries might benefit. But if that activity accrues primarily to the benefit of China, and those benefits are concentrated in the hands of elite members of the CCP, that's a different story.

    As for whether increased domestic consumption in China will "save the world economy" as you put it, this likewise depends upon how that is achieved. For example, if Chinese authorities promote theft of intellectual property and use the country's higher capacity to accumulate debt to subsidize Chinese corporations at the expense of foreign competitors so that citizens of the PRC can enjoy higher wages that will allow increased domestic consumer spending, then the rest of the world will hardly be rescued.
    Oct 25, 2015. 08:32 PM | 1 Like Like |Link to Comment
  • China To Save The World Economy? [View article]
    I say that what ails the global economy is too much investment in capacity that worsens the imbalance of supply in excess of demand, and you say that this is the same as your view that there is a shortage of investment.

    I don't think so.

    While there has been a shortage of investment in some countries, this is partially attributed to an excess of investment in other countries, particularly China that is believed to have a higher capacity for additional debt versus the US, for example. And, when viewed in the aggregate, there has been excess investment and this has been fueled by a $50 Trillion increase in debt since 2007, not by a surplus of savings.

    Drilling down into the economies of many Emerging Market countries, I agree that there is a need for investments in infrastructure, but those countries won't necessarily benefit if the nature of that infrastructure investment comes in the form of roads and ports designed to facilitate the more rapid removal of natural resources from those countries to fuel China's appetite for resources. Granted, a palace and an impressive City Hall for the corrupt leaders of those countries, and a soccer stadium to appease their broader populations may make them happy for awhile, but that's not going to benefit these countries very much on a net basis.

    Creating artificial islands off the coastlines of its Asian neighbors so that China can lay claim to their offshore oil resources and expand its intimidating naval presence in the region is likewise not likely to benefit those countries. But, it will empower high ranking members of the CCP who are intent to identify and control strategically important industries.
    Oct 25, 2015. 03:11 PM | 4 Likes Like |Link to Comment
  • China To Save The World Economy? [View article]
    Although you argue that what ails the global economy is an excess of savings over investment, the reality is that what ails the global economy is an excess of supply over demand, coupled with too much debt.

    And, China's massive, debt-fueled, fixed asset investment spending has only worsened this imbalance.

    Although you still managed to recognize what most people already recognize, namely that a rebalancing of China's economy toward increased domestic consumer spending is necessary in order to correct this imbalance, what I think you have failed to recognize is:

    1. China's Fixed Asset Investment Spending has grown so large over the past several years that it has diluted domestic consumer spending to a much smaller percentage of China's GDP. [At almost 50% of China's $10.5 Trillion GDP, Fixed Asset Investment Spending now exceeds China's total $3.5 Trillion GDP in 2007.] So, it will be difficult, if not impossible, to grow this much smaller base of domestic consumer spending at a rate that will equal or exceed the decline in Fixed Asset Investment Spending. At best, the result will be slower total GDP growth, while China's debt continues to grow at about 15%. And, the quality of that debt is very suspect. Yet, I have yet to see a projection of China's GDP growth that factors in a potential debt crisis along the way.

    2. Xi Jinping has encountered much stiffer resistance from other Communist Party leaders in response to his efforts to convince them to relinquish their control over the Commanding Heights of the Chinese economy so that more opportunities will be created for the rest of the Chinese population to accumulate wealth through means other than investing in real estate, high-yield money-market accounts known as Wealth Management Products, or a rigged stock market. Absent those opportunities which have been limited to those with strong connections to the Chinese Communist Party [there are now more billionaires in China than in the US even though per capita GDP in the US is many times greater], it will be difficult to achieve more broad based increases in disposable income that can sustain aggregate domestic consumer demand growth in China.

    In fact, in response to the fierce resistance from entrenched interests to relinquish some of their economic control as part of a rebalancing effort, Xi Jinping has used every opportunity to hype China's One Belt, One Road initiative, which essentially represents an effort to sustain China's debt-fueled Fixed Asset Investment spending outside China instead. He has also announced steps to bolster State Owned Enterprises so they can continue to take advantage of these large scale projects that lend themselves to graft and corruption. There are even plans for a special Silk Road Fund that will provide subsidized financing for these SOE's so they can also gain a competitive edge over foreign corporations if China can keep its banking system from falling apart before they are able to obtain funding for the Asian Infrastructure Investment Bank.

    More debt, more surplus capacity, and more capital flowing into the hands of a concentrated group of elite CCP members, is hardly the solution to the real imbalances that ail the global economy.
    Oct 25, 2015. 11:35 AM | 4 Likes Like |Link to Comment
  • China's Slowdown Could Have Much Further To Go [View article]
    China does need more funds, and one of the ways they are proposing to get it is through the imposition of a property tax.

    This would also rationalize the market for real estate. But, the CCP is concerned that rationalizing the real estate market could lead to a rapid bursting of the real estate bubble similar to the recent initiation of a bust in the stock market.

    In fact, averting a bursting of the real estate bubble was one of the reasons why the CCP chose to orchestrate a rising stock market instead. The plan was to allow Chinese corporations to use new equity investments to pay down the huge debt they have accumulated over the past several years -- far more debt than the debt accumulated by local governments, by the way.

    The dilemma is that orchestrating a stock market bubble failed so they will have to find some other way to raise funds, but the lesson learned is that relying on a property tax could similarly threaten their already weak banking system.

    But, you're right, the CCP is obviously scrambling for alternatives in a desperate attempt to avert a debt crisis so we should stay tuned for what they may try next. I would also keep an eye on what wealthy Chinese and carry trade investors may decide to do with their money, even though we've gotten so used to policy makers controlling the economy that many of us have forgotten about this thing called the market.

    $450 billion of capital has already left China year-to-date on a net basis, and the PBoC may not want to entirely deplete its Fx Reserves in an attempt to defend the currency.

    The OBOR initiative will require access to even more debt, obtaining that debt financing will depend upon internationalizing the RMB through the IMF and the Asian Infrastructure Investment Bank, and internationalizing the RMB will require the RMB to remain strong and stable. But, that may not be possible without continued heavy intervention on the part of the PBoC, and not only does that intervention hurt the chances of the RMB being included in the IMF's basket of currencies known as Special Drawing Rights, it also requires removing liquidity from China's banking system at a time when banks are already feeling squeezed--especially at the end of each month when they attempt to roll over 1 to 3 month money market accounts known as Wealth Management Products that were popular with wealthy Chinese and carry trade investors until they realized that the RMB may not continue to strengthen as it has over the past several years.

    The CCP may hope that a sixth round of easing of bank capital requirements, etc. announced this week will offset the tightening of liquidity caused by capital flight, but it also reveals that there is a problem and $3.5 Trillion of Fx Reserves is no match for a $22 Trillion M2 money supply that, by definition, is very liquid so could exit the country very quickly. In fact, at less than 20% of M2, China's Fx Reserves are less than the Fx Reserves held by many Asian countries that experienced the negative consequences of capital flight in 1997 and 1998.
    Oct 25, 2015. 10:44 AM | 1 Like Like |Link to Comment
  • Will China's Debt Problems Destabilize Global Markets? [View article]
    The article linked below describes the uncertainty regarding the health of Chinese bank balance sheets and the reasons why analysts at large investment firms believe that non-performing loans could represent 10% to 12% of their total $31 Trillion loans outstanding.

    Arguably, China's $3.5 Trillion Fx Reserves would be large enough to inject capital into these banks large enough to prop them up as the PBoC has done in the past, but its possible that revelation of concealed losses of this magnitude would call into question China's qualifications to control the Asian Infrastructure Investment Bank [AIIB] and other International Financial Institutions that China seeks to create as alternatives to the IMF.

    In fact, even if it is merely revealed that the manner in which China's banks have been operated mirrors the way that the CCP has mismanaged their stock market--which has already reduced foreign investors' interest in Chinese "A" shares, especially since funds packaging those shares are now being labeled to warn investors of the risk that the Chinese government may similarly restrict access to their funds in the future--it's possible that the chances that the People's Republic of China will be trusted to manage "Other People's Money" [those without ["guanxi"] would be greatly diminished.

    The AIIB is one of the pillars that the Chinese Communist Party intends to rely upon to fund their "One Belt, One Road" initiative [a fancy new title added in 2013 to describe an expansion of their existing overseas Fixed Asset Investment spending campaigns]. Absent this outlet to perpetuate China's debt-fueled growth, it may be revealed that "the Emperor has no clothes" and, as Warren Buffet put it, "we'll find out who [else] has been swimming naked." After all, a $50 Trillion increase in global debt since 2007--from $150 Trillion to over $200 Trillion--sure doesn't resemble the orderly deleveraging process that government leaders and central bankers promised after the 2008 GFC.
    Oct 5, 2015. 08:45 AM | 3 Likes Like |Link to Comment
  • Will China's Debt Problems Destabilize Global Markets? [View article]
    When the new CCP leaders took control in 2012-13, they pledged to:

    1. Rein in China's debt-fueled Fixed Asset Investment spending; and

    2. Develop a Silk Road Economic Belt and a 21st Century Maritime Silk Road which was part of Xi Jinping's China Vision of a revived Middle Kingdom empire.

    These two pledges are inconsistent, so investors must ask themselves which path the CCP will pursue.

    Recent developments suggest the latter, since the extend and pretend tactics that the CCP has used to conceal its debt problems in the past are much easier to implement when debt continues to grow. But, this is a high stakes gamble that could magnify the impact of a potential Chinese banking crisis.

    Despite the many levers that the CCP supposedly has at its disposal to avert a Chinese banking crisis and to contain any associated financial contagion risks, if the recent surge in capital outflows continues to pick up steam, this capital flight could serve to both reduce liquidity in the Chinese banking system and weaken the value of the RMB even if the PBoC sought to strengthen the RMB as part of China's efforts to internationalize the currency.

    So, investors should pay close attention to capital flows to/from China.
    Oct 4, 2015. 10:34 PM | 1 Like Like |Link to Comment
  • China's Slowdown Could Have Much Further To Go [View article]
    China's One Belt One Road initiative has already been experiencing funding shortages.
    Oct 3, 2015. 08:48 PM | 1 Like Like |Link to Comment
  • China's Slowdown Could Have Much Further To Go [View article]
    China's economic growth is constrained by a number of factors:

    1. Its current growth has been driven by debt-fueled Fixed Asset Investment spending and this has grown to a much larger percentage of their GDP than domestic consumer spending. So, it will be difficult to walk the talk of "rebalancing" the Chinese economy toward increased domestic consumer spending without resulting in a slowdown of aggregate GDP growth since its unlikely that the smaller base of consumer spending will grow at the same 18% to 20% rate at which Fixed Asset Investment spending--now equal to almost 50% of China's GDP--has been growing.

    2. Rebalancing the Chinese economy toward increased domestic consumer spending will require entrenched interests that hold high positions of power within the Chinese Communist Party to accept cutbacks in funding for the industries that they control and from which they profit handsomely.

    3. China's banking system is clogged with non-performing loans that are not written down because they are guaranteed by the government, as is just about everything else in China which helps to explain why so much activity has little or no economic merit. Although some may believe that this debt can continue to grow in an unconstrained manner because China's one-party system has given PRC government leaders "more levers to pull" and in the past these extend and pretend tactics employed have allowed the CCP to minimize loan defaults and the risk of a banking crisis, the true non-payment status for loans far in excess of the 1% reported to be non-performing is subjecting Chinese banks to increasing liquidity pressures as they struggle for other means to generate needed cash flow.

    4. China's interior is much less developed than the coastal areas largely because China's economy remains heavily dependent upon trade and foreign investment, which generally does not penetrate into the inland areas. And, unlike the United States, for example, China has only one coastline, so attempts to develop the interior are met by less available foreign direct investment and higher transportation costs that make exports from those locations less economical.

    In light of the above, many have come to expect slowing economic growth in China as the new leaders of the CCP attempt to rebalance the Chinese economy toward more sustainable domestic consumer spending and, in the process, rein in debt, and crack down on corruption.

    However, more recently, Xi Jinping has been using every opportunity possible to promote China's One Belt, One Road "vision" which for now essentially represents an external extension of China's massive debt-fueled infrastructure spending programs with a longer-term hope that financing and developing trade links with other countries will result in new markets for all of the excess capacity that has also been developed in many industries as a result of all the frenetic, unchecked Fixed Asset Investment spending that has boosted China's GDP from less than $4 trillion in 2007 to more than $9 trillion today.

    So, investors questioning China's future economic growth must wait and see whether:

    1. China's economy will slow if efforts to rebalance its economy are pursued; or

    2. Even more massive levels of debt can be accumulated to finance China's external spending on its One Road One Belt [OROR] scheme.

    These developments may also alter expectations of an eventual increase in the freedoms to be enjoyed by PRC citizens. A rebalancing of the Chinese economy was originally expected to result in increased freedom for PRC citizens since this would naturally be accompanied by a diffusion of economic activity away from the existing structure that is dominated by central planning and financing by the large state-owned banks under tight control of the CCP.

    However, after encountering an unexpectedly high level of resistance from entrenched interests, Xi Jinping seems to have altered his course to favor a strengthening of state owned corporations that would also be the primary beneficiaries of China's IBOR initiative. But, this strategy could backfire if citizens of the PRC tire of waiting for their day to come, and investors who are becoming more aware of the true health of the Chinese banking system decide to pull even more of their capital out of China. If so, a third outcome may be possible, namely:

    3. A significant decline in the value of the RMB and/or a liquidity-induced Chinese banking crisis due to capital flight from China--on the part of both wealthy PRC citizens and foreign carry trade investors.

    Attempts on the part of the PBoC to avoid a devaluation of the RMB would require purchases of the RMB being sold, but funding those purchases would remove liquidity from China's banking system which could have even more severe consequences. But, if the RMB were to fall, this could hurt the chances of an IMF decision in six months to include the RMB among the basket of currencies making up the IMF's Special Drawing Rights. And that, in turn, could make it more difficult for China to borrow the additional funds it needs to finance its One Belt One Road initiative.
    Oct 3, 2015. 08:10 PM | 2 Likes Like |Link to Comment
  • China's Slowdown Could Have Much Further To Go [View article]
    The fourth graph in this article illustrating loan growth in China deserves more attention than it receives.

    As you can see, after loan growth surged to almost 35% in 2010, the ~15% rate at which it has settled is still at least twice China's supposed 7% GDP growth rate if this so called "man made number" [in the words of China's Communist Party Premier Li Keqiang] can be believed.

    But, I very rarely hear reference being made to China's loan growth rate. This may be due to the fact that global debt levels are a problem throughout the rest of the world as well, and this has become the new "Third Rail" of politics, and economics, that policy makers prefer not to discuss.
    Oct 3, 2015. 12:59 PM | 2 Likes Like |Link to Comment