Diversion From My Daily Grind

While Mike Michelini thought that I, seeing as I have been doing the HK/China/Taiwan/Korea circuit for 30 years or so, could provide some interesting insights for an ‘occasional’ column, I never thought that I would be literally overwhelmed with raw data. I certainly didn’t (and still don’t) expect to get paid, but all that I was expecting was a modest diversion from my daily grind. But each issue gets to be more and more involved particularly as, in these days of fake news (ie. lies), I am anal in providing each and every source so that there is not a whiff of fulminous feces. So much is happening now that I am already writing the next issue before the pixels have left the screen for the last one.

In Global Gab #3, I wrote that the RMB would continue to depreciate and also intimated about some of the problems that would ensue as a direct and inescapable result. Just a few short months ago (August 2018), the talking heads at CNBC opined that the RMB would end the year at 6.7 to the US dollar ….. multiple pundits throughout 2018 were suggesting that the RMB could overtake the USD as a reserve currency within 5 years. The French were shedding dollars and stocking up on RMB (January 2018) – actually, when you look at how well (sic) the French economy has done in the last 50 years, one could make some support for doing the exact opposite as an investment strategy! Considering that the RMB opened January 1/18 at 6.4806 to the dollar and is trading today, Sunday, November 18/18, on the spot market at 6.938 (for a fall of 7.06% not counting brokerage), I’ll let you draw your own conclusions.

The point that I want to make is an offshoot of this – people are losing sight of the picture…in Global Gab #1, I mentioned that 3 French banks were massively negatively affected by the melt-down of the Turkish Lira….24 hours later, that was off the news cycle. The Lira ‘thing’ was around off and on for a few weeks more, but the banking issue was off the screens. People, it’s not like they were cured of cancer at some financial Lourdes – the payors of those bonds denominated in anything other than Turkish Lira are not going to be able to pay them back at par (not even discussing the outstanding interest). The lenders are going to be taking massive haircuts and no one is even apparently actively considering the issue, much less the ramifications.

Now, on November 16th/18, the South China Morning Post (SCMP – an excellent newspaper) reported that, “(Mainland Chinese) property developers and other mainland companies and investors that have borrowed dollar-denominated debt at low US interest rates (estimated at US$3 trillion) are now facing repayment problems due to Federal Reserve rate increase and stronger greenback”. Kevin Lai, one of the Chief Economists for Daiwa Capital Markets was quoted as saying, “if the yuan continues to depreciate then you will see a dollar debt crisis”. Andy Xie, one of those rare economists who calls it exactly as he sees it, stated on November 15th/18 that, “the unravelling of the US-China relationship that has sustained leveraged speculation will reverse trends that investors have become used to” and goes on to say that, “this is a structural bear market that could last for years. Not just stocks, but bonds, credit and property are vulnerable”. Already, as of August 9th/18 according to Reuters, there have been defaults on 34 corporate bonds in China with a total value of 37.5 billion yuan compared with ‘only’ 30 in all of 2017 with a value of RMB 26 billion (on August 9th/18, the exchange rate was 6.8205). All of these borrowers, ALL of them, are quasi-government entities – the asset class is referred to as LGFV (LocalGovernment Financing  Vehicle)…..work with me here, it means that the government is borrowing money from outside the banks and insurance companies (almost all of which are government controlled) because the government lending entities themselves either don’t have enough money and/or don’t want to accept the risk. So, if they (Chinese Government lending entities) don’t want it with all the observable and hidden guarantees available to a government lender, why would anyone else in their right mind even consider it? And the answer is, “greed” (which is part of the behavioural aberration group known as, ‘STUPIDITY’) …..if, at the end of the day, you don’t and can’t get paid, all you have left is paper and even the paper is useless as it’s not the right size or consistency to wipe up all the crud you’re in. But listen to what Andy Xie is saying – if the foundation on which you built your building has crumbled, so goes your building!

I think that the Trumpster has found out that, notwithstanding his tweet of March 2nd/18 that, “trade wars are easy to win”, he’d better do something and right quick – under his watch, the US lobster market has gotten totally pinched, the soy market has been effectively ploughed under, and the stock market has bared its bears. I think that this ‘China thing’ is going to be resolved within 2 weeks of G20 and that is why Navarro has been sidelined. But it may be too late.

“Mira, mira on the wall, who made the biggest underestimation of them all?” Mira Ricardel, please stand up and take a bow – did you really think that Melania, that same Melania who has managed to live with DT longer than any other woman, was going to put up with your antics? Oh, you did – well how is that working for ya? Don’t let the West Wing door hit you on your way out!

Lots of issues in China these days with school administrators diluting kids lunches with watered milk, mouldy vegetables, meats noted by their absence thereof etc…..one guess where the extra qian is going! And some of the willing perpetrators have been professional catering services, some of which are owned by western firms (eg: Compass UK) – think this scandal was confined to poor or outlying areas? Think again. And a subsidiary of Compass, Eurest, was found to have such unhygienic conditions that the police actually closed it.

More gloom – it’s no secret to anyone working in China that today’s modern girl doesn’t want a diamond, she wants a house. Then again, everyone wants a house. And the Chinese Government adroitly tapped into this latent sentiment by privatising certain real estate, thereby attracting funds from private would-be homeowners who had, previously, unbelievably high rates of savings. Who owned the land? – effectively the government. Who built the houses? – effectively the government. Who loaned the money for the mortgages? – effectively the government. But then supply outstripped demand but the government couldn’t wean itself off this economic crack….and they started to authorise and build ghost buildings and then ghost developments and then ghost cities. Nine or so years ago or so, there were an estimated 70 million unoccupied houses, with “unoccupied” being defined as “no electricity use for 6 continuous months”. This report was published in Chinese only and was out for one day and then the report and the writer were gone from view. Now there is supposed to be a report being published that shows 50 million unoccupied. It was supposed to be out “soon” as of November 8th/18 (Bloomberg News) – we’re still waiting. I wonder what parameter was used to determine ‘emptiness’ and where the generated figures came from? I know that the person 9 years ago was totally diligent and sifted through all records, from the local to the federal. But in China the Federal Statistics Bureau often ignores/overlooks/forgets information from ‘lower’ bureaus, and so on down the line – China is the only major country in the world where “wishful thinking” seems to be employed as an analytical tool. So let’s assume the 50 million figure is right – that’s about 1 out of every 5 houses in China (again, according to Bloomberg).

You may recall that Xi Jinping many months ago stated that banks had to “properly account” for bad debts (on their books). That sounded good for WTO and foreign investors but, the fact is, the Chinese banks have so much bad debt that they cannot afford to declare their true actual value and keep them on their books as much as possible at full face value. Previously, as state-owned entities, they just carried them at full value as they had no compelling reason to do otherwise…..declaring losses would make people lose face. So what are they going to do now when people walk away from their purchases and when developers cannot sell out their projects? This is not future “what if” – it’s already happening.  50 million at an average mortgage of US$50,000….that US$2.5 trillion doesn’t count the US$3 trillion mentioned earlier and, to reiterate, it doesn’t count the bad debt that they already have on their books that they haven’t declared as such.

Want a sure thing? – buy red ink futures. As the girl said in the KTV, “I love you long time but you pay me now, okay? And you give me USD, not want RMB.”



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