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Signs China is about to Pop

cpwill said:
The Japanese citizens who were purchasing JPG bonds are about to start selling them instead.
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Cpwill, you know I like you, right?

But selling a Yen bond will still leave the debt Yen-denominated. Meaning it is susceptible to real depreciation from inflation.

The problem with external debt is that it is written in currencies a government can't intentionally inflate, and thus shrink.

Investment income tax-ability and welll.... income domestically will be the only major hit. Theoretically, the Government could provide tax incentives to re-sell bonds in-country. Theoretically, of course.
 
Buddha C said:
Cpwill, you know I like you, right?
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:) Thanks Buddha.

But selling a Yen bond will still leave the debt Yen-denominated. Meaning it is susceptible to real depreciation from inflation.
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Yes. So if inflation becomes an explicit government policy, as it is under the Abe administration, then real depreciation is guaranteed as long as they are successful.

The problem with external debt is that it is written in currencies a government can't intentionally inflate, and thus shrink.
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:raises eyebrow When you buy a U.S. Bond, you have to have the dollars to do so. We don't borrow in international currency, and neither do the Japanese. The Chinese borrow in dollars, I'm pretty sure.

Investment income tax-ability and welll.... income domestically will be the only major hit. Theoretically, the Government could provide tax incentives to re-sell bonds in-country. Theoretically, of course.
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To whom? When the major holders of JGB are all trying to sell at the same time?
 
cpwill said:
:) Thanks Buddha.



Yes. So if inflation becomes an explicit government policy, as it is under the Abe administration, then real depreciation is guaranteed as long as they are successful.



:raises eyebrow When you buy a U.S. Bond, you have to have the dollars to do so. We don't borrow in international currency, and neither do the Japanese. The Chinese borrow in dollars, I'm pretty sure.



To whom? When the major holders of JGB are all trying to sell at the same time?
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The Chinese would tend to borrow internally, the majority of debt in China is domestic from domestic companies or provincial/local governments, I would expect that most foreigners would be very reluctant to lend money to any government level in china but federal. Also given the large USD currency reserves the Chinese government can lend any USD requirement for loans. Last but not least, the Chinese people are exceptional savers, saving if I recall correctly 30-40% of income. With that large amount of domestic savings, the Chinese governments would not have to look elsewhere for lending requirements. Add the currency swaps being made the need for USDs in Chinese trade is being reduced drastically
 
Lord Tammerlain said:
The Chinese would tend to borrow internally, the majority of debt in China is domestic from domestic companies or provincial/local governments, I would expect that most foreigners would be very reluctant to lend money to any government level in china but federal. Also given the large USD currency reserves the Chinese government can lend any USD requirement for loans. Last but not least, the Chinese people are exceptional savers, saving if I recall correctly 30-40% of income. With that large amount of domestic savings, the Chinese governments would not have to look elsewhere for lending requirements. Add the currency swaps being made the need for USDs in Chinese trade is being reduced drastically
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You are correct that the majority of Chinese debt is internal - what I was referencing was that some Chinese companies have begun to issue dollar-denominated bonds. Yuan has been growing harder to get.

As for Chinese Savings.... the vast majority of that savings is in housing and education, both of which are bubble assets in China. China's middle class "savings" are about to see serious depreciation (And won't that be fun for ole Xi. Mind you, if he wanted to avoid serious public instability over that kind of thing, he'd probably have to ramp up nationalism - hey, have the Chinese made any really, odd, sudden, semi-destabilizing moves that would give Xi's administration post-3rd-Plenum "Nationalism Street Cred" lately?). They simply don't have the M1 supply that they are going to need.

It's going to be a lot harder to see, because the ole CCP is cracking down on those evil imperialist foreign media running dogs that dare to publish negative news about the Chinese Dream. Maybe we will get a real test of their ability to plug all their social media holes. :shrug: :) Going to be Interesting Times in Asia, the next few years.
 
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China exports up 12.7% for 2013
 
cpwill said:
Well then you do the math. A 1% nominal return plus 2% deflation equals what real return rate?
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It's not a matter of arithmetic. Deflation has only touched 2% one time (global financial crisis) since 1988. Secondly, the benchmark interest rate -the 10 year JGB- is still less than 1%. Meaning that when inflation in Japan hits 1% (as it is today), the real rate of return is actually negative.

Which is the problem with your logic; it has a limited basis with respect to reality.

japan yield curve.JPG
 
Kushinator said:
It's not a matter of arithmetic. Deflation has only touched 2% one time (global financial crisis) since 1988. Secondly, the benchmark interest rate -the 10 year JGB- is still less than 1%. Meaning that when inflation in Japan hits 1% (as it is today), the real rate of return is actually negative.
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1. Yes - as stated, the Abe Administration is pursuing a deliberately inflationist policy. They intend to double that figure to 2%. Which is going to carry interest rates along with it. Which is going to increase the cost of rolling over Japan's massive debt, even as the funds that have been coming from Japanese savers dry up, and those savers become sellers, reducing the price (and prices and rates in bonds move in which direction?) of JGB.

2. You are correct that deflation has only hit 2% once in recent Japanese economic history. Which does not mean that it was not deflationary for the majority of the last 15 years. As you have deliberately cut out the rest and focused in on a single factor that had the potential to exacerbate the crisis rather than a cause it, I accept your implicit admission that the rest of my basic claims are correct.

Japan15YearsofDeflation_fmt.png


This is a currency that is not driving higher government borrowing costs. But it is about to.
 
cpwill said:
1. Yes - as stated, the Abe Administration is pursuing a deliberately inflationist policy. They intend to double that figure to 2%. Which is going to carry interest rates along with it. Which is going to increase the cost of rolling over Japan's massive debt, even as the funds that have been coming from Japanese savers dry up, and those savers become sellers, reducing the price (and prices and rates in bonds move in which direction?) of JGB.
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And as stated, interest rates will not move forward without the requisite economic growth. Part of the problem with borrowing in Yen is the reverse interest rate risk posed to the borrower; repaying in stronger purchasing power.

Which does not mean that it was not deflationary for the majority of the last 15 years.
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Which means returns are likely to have been negative for the majority of the past 15 years, a concept you seem unwilling to comprehend.

As you have deliberately cut out the rest and focused in on a single factor that had the potential to exacerbate the crisis rather than a cause it, I accept your implicit admission that the rest of my basic claims are correct.
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Your data blows.

fredgraph.png


This is a currency that is not driving higher government borrowing costs. But it is about to.
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:lamo

You should stick to guarding embassies.
 
FWIW, the 10 year JGB yield minus inflation, since 1989:

fredgraph.png
 
I like the thread, but I have heard China was going to burst for at least 3 years now.

I think it might...but not for at least several years....minimum.

A lot depends, imo, on when the US/EU debt bubble bursts.
 
Agreeably it's Gordon Chang, but the event itself is notable.

On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.

The Industrial and Commercial Bank of China sold the China Credit Trust product to its customers in inland Shanxi province. This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC will assume the main responsibility.”..

The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole. CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP. An investment marketed by ICBC’s Suzhou branch was similarly repaid.

There has never been a default—other than one of timing—of a WMP, so the Credit Equals Gold product could be the first. If it is, it will edge out the WMP that invested in loans to Liansheng Resources Group, another Shanxi coal miner. Jilin Trust packaged Liansheng’s loans into a wealth management product sold by China Construction Bank , the country’s second-largest lender by assets, to its customers. Liansheng is in bankruptcy, and it looks like the WMP holders will not be repaid in full.

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s....

Even if Beijing makes sure there is no default on January 31, we should not feel relief. Just as Zhenfu followed Liansheng, there will be another WMP borrower on the edge of disaster after Zhenfu. And there are many Lianshengs and Zhenfus out there. There may have been 11 trillion yuan in WMPs at the end of last year....
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China's First Default Is Coming: Here's What To Expect

'As we first reported one week ago, the first shadow default in Chinese history, the "Credit Equals Gold #1 Collective Trust Product" issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books.'

China's First Default Is Coming: Here's What To Expect | Zero Hedge
 
China factory contraction shows weak start for economy in 2014

'(Reuters) - Activity in China's factory sector contracted in January for the first time in six months, a preliminary survey showed on Thursday, pointing to a weak start for the economy in 2014 as policymakers seek to curb high debt levels to head off financial risks.

Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PM) fell to 49.6 in January from December's final reading of 50.5, dropping below the 50 line which separates expansion of activity from contraction.

The data is the first indication of sentiment in the 56.9 trillion yuan ($9.4 trillion) economy, the world's second-largest, for the new year.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.'

China factory contraction shows weak start for economy in 2014 | Reuters
 
The Chinese Dominoes Are About To Fall: Complete List Of Upcoming Trust Defaults

'As has been widely reported on these pages in the past month, after a near-reality experience almost claimed the first material Chinese shadow banking default, the Chinese government and central bank did what they do best: a mysterious "white knight" emerged out of nowhere, and bailed out the Credit Equals Gold #1 Trust. A few days later, we reported that China Development Bank lent 2 billion yuan to coal company Shanxi Liansheng, which owes almost 30b yuan to lenders including banks, trusts and asset management firms. And while we know how "difficult" it was for China to do the wrong thing and encourage moral hazard, despite repeated assurances by one after another PBOC director that this time the central bank means business, we have good news: these two narrowly averted Trust defaults are just the beginning - it is all downhill from here.

As Bank of America reports in an analysis by David Cui, the Trust defaults are about to get hot and heavy. To wit:

We believe that during April to July the market may see many trust products threatening to default, especially those related to coal mines. By our estimate, the first real default most likely could happen in May with a Sichuan lead/zinc trust product worth Rmb140mn. This is because the product is relatively small (so the government may use it as a test case), the underlying asset is not attractive (so little chance of 3rd parties taking it over) and we also have heard very little on parties involved trying to work things out. Whether this will trigger an avalanche of future trust defaults remains to be seen and this presents a key risk to the market in our opinion.

... it’s still possible that many of the upcoming cases in Apr-July may get worked out one way or the other. Nevertheless, as we believe that many of the underlying assets of the trust products are insolvent, it’s a matter of time that many products will ultimately default, in our view. Various bail-outs will only delay the inevitable.
From BofA's David Cui'


The Chinese Dominoes Are About To Fall: Complete List Of Upcoming Trust Defaults | Zero Hedge
 
:confused: what in the world makes you think they can't already buy it? They aren't under sanction.
 
This thread is almost a year old now. At what point do we consider this tread mindless fear mongering?
 
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