China Raids Bank and Investor Accounts

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China manufacturing PMI for June is out. Output ticked up to 51.2 as finished inventories were cleared with discount pricing in Apr. and May. Input prices increased broadly but output prices increased moderately in June, continuing the pressure on margins further. As a result, companies are continuing to trim workers and did not rehire laid off employees. That has been the post CV19 state for 3 months. The unemployed, including migrants would then be worse than the 205 million reported for April, perhaps in the 210 million range, about 25%. Few employers indicated any intention of hiring back workers, while many reported a need for reduced costs.

Domestic demand has rebounded finally after falling back after the pent up demand shopping spike in March. Caixin terms it "modest" but indicates a rising demand. Export demand continues shrinking.

New orders are rising for the first time since  Jan. Backlogs are up slightly after having been worked off in April and drawn down.

Since returning to work in March, industries continue reporting persistent pressure on margins as costs stabilized and rebounded upwards, but output prices consistently dropped relative to input prices whether on the way down or on the way up.

With the separate report of a rise in China auto sales amid steep discounts and a tax rebate from the government must be driving sales, it is not producing profits. Coming out of the lockdown, China's used car lots were raided by a public unwilling to go back on public transport. The situation will get worse as foreign car companies continue expanding production for the Chinese market  while sales remain far down from their peak in 2018.

I am afraid that the Chinese auto buying will only increase on lower prices -steeper discounts and will eventually fall below production costs, The demand expectation is not supported by demographics as the number of 30 year olds (1st car buying age) is headed down considerably (nearly by half by 2050).

I am still surprised at companies so desperate for growth that they dump into a market destined to shrink sharply, where total factor productivity is declining for a decade and had only picked up slightly over the 20 years of China's wild economic growth, thus threatening any possible advance in real incomes once mass retirements reduce the current torrent of investment this decade.

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On 7/1/2020 at 7:55 AM, 0R0 said:

This is similar to the US PPP and small business lending facilities that the banks in the US are administering on a for profit basis, meaning that they provide the loans using their best judgement to make a profit or at least break even, with the Fed standing behind them to buy the loans with a leveraged fund capitalized by the Exchange Stabilization Fund money.

The big difference here is that the banks in the US are making profitable decisions and the risk is at the Fed and the Federal government. In China the risk for the losses is loaded on the depositors and shareholders.The other difference is that the banks are making "social financing" decisions rather than profitable ones.

This is very different from what China was attempting to do before with the wave of bank insolvencies around Baoshang bank and others where they attempted to give the depositors haircuts like Cyprus etc. had done. They started at 30% haircuts but ended it with 10% haircuts due to the fact that the largest depositors were SOE and CCP connected companies  that would have run into operational problems with that kind of cash loss.

The banks in China are SOE banks. The big 4 being at the center of the system, where the smaller banks obtain liquidity from the big 4. The Baoshang debacle led to a breakdown of the interbank liquidity system and overnight rates were persistently spiking into the 18% range on repos, which leaked into the dollar market via HK and the big 4 banks seeking liquidity in the dollar market.

The Baoshang case is going to go viral as these loss inducing lending programs forced by the CCP are going to spread through the bank system as a whole while NPLs grow from their 4.5% annual run rate or more up to the 12% range or worse.

This is from Charlene Chu, June 2019


It was already bad. It is going to get far worse. But they extended the automatic rollover of defaulted debt from the SOE  sector that has been aggressively rolling over NPLs since 2013, to the private economy. So that if you have employees you can borrow and forget about paying it back, even if you don't have anything to post for collateral. 

By next year the losses should have gone far enough to press the banks into cash flow problems as their "investments" don't produce a cash flow and the stream of savings from Chinese boomer savers is peaking now. Those will be declining and turning into retirement draws over the next 4 years. The deficit will have to be covered with something. That will most likely be fresh money printing from the PBOC buying garbage NPL bonds and loans from the banks at near face value, in order to meet their cash liabilities. That would have to cause another bout of food price inflation or unemployment, or both.

The May PMI reports were still pointing to declining output prices and stable input prices, as opposed to declining both input and output pricing falling in Apr. The June reports should be out next week and will show whether this trend of continued margin compression continues. The fact that nobody was hiring yet in May was already a bad sign of expectations as domestic orders did recover some.


Isn't it strange that none of the mainstream business media want anybody to know any of this? Not that our own Western economies will fare any better, but at least most of us are aware of the depth of our problems.

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On 6/28/2020 at 7:06 PM, ronwagn said:

$212 billion?? Isn't that a similar amount of gold that Russia had before they and the EURO currency started this oil/currency war with the US dollar and petrodollar?

Which came first the virus or the currency/oil war? Hmm...

Definately the currency war in oct of 2019 when Russia threatened to leave the petrodollar and join the Euro by selling in euros against the US dollar.

March, just before any corona-virus hits, Russia refuses to lower output so the Saudis increase output to kill the price of oil in the dead of winter.

Russia responds by saying they can survive on @25/brl for a long time since they have over $200 billion in gold.

The US/Saudis raise the Russians bet by killing not only the price of oil, but demand as well. Then we saw oil fall to -$20/brl for the first time in history.

Why would they do that?

Could it have something to do with the currency monopoly and world oil pricing monopoly that the US and fed reserve are trying to hold onto?

When Russia blinks is when they run out of gold or the oligarchs if the world pressure them to blink.

Oligarchs hate long term economic instability because its the one thing that brings about regime change and that could be bad for any oligarch. Heads roll during regime changes... And the Fed and US know it...


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On 7/3/2020 at 3:19 AM, Wombat said:

Isn't it strange that none of the mainstream business media want anybody to know any of this? Not that our own Western economies will fare any better, but at least most of us are aware of the depth of our problems.

It's a slow slog to change the direction of this economic relationship. The rudder is slowly doing it's job though, going to take a few more years of this type of reporting to get popular perceptions to change about the CCP kingdom.

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