Chinese corporate debt....120% of GDP

Standard & Poor's estimates 
Reported by Reuters
Total outstanding bank borrowing and bond debt of Chinese non-financial companies stood at about US$ 12 trillion at the end of 2013. That's 120% of China's GDP!

Chinese corporate debt has hit unsustainable levels.  
Rising debt restructuring and defaults could spell big trouble for the dragon economy.

World risks era of slow growth, high unemployment: OECD

(Reuters) - Sweeping reforms are urgently needed to boost productivity and lower barriers to trade if the world is to avoid a new era of slow growth and stubbornly high unemployment, the OECD warned on Friday.

The report echoed Australia's attempt to push an agenda for growth as it hosts finance ministers and central bank chiefs from the Group of 20 major economies in Sydney this weekend.

me : where is question of taper ???

IMF Warns Of 'Significant Downside Risks' To Global Economy Ahead of G20

The International Monetary Fund is still looking for global economic growth to pick up in 2014 but at the same time cautions that there are still “significant downside risks,” particularly the potential for more turmoil in emerging markets and deflation in the euro area.

“A new bout of financial volatility has affected emerging-market economies as markets reassess their fundamentals,” the IMF said. “While the pressures were relatively broad-based, emerging economies with relatively high inflation and high current-account deficits saw the largest asset price declines initially.

“Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities. A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity.”

The IMF called for “cooperation” to promote financial stability, in particular urging advanced economies to avoid “premature withdrawal” of accommodative monetary policy. The IMF also urged for “credible” macroeconomic policies in emerging-market economies, including tighter monetary policy to combat inflation where necessary, as well as certain structural changes, including fiscal policy credibility.

Yesterday its China, today Japan.......loose monetary policy

 

Asian Stocks Advance After China’s New Lending Climbs to Record

Asian stocks rose, with a regional benchmark index poised to advance for the eighth time in nine days, after China’s new credit increased to a record in January, boosting optimism the world’s second-largest economy can maintain its growth momentum.

Yesterday its China, today Japan

Japanese shares surged and the yen sagged on Tuesday after the

(i) BOJ maintained unprecedented asset purchases; and

(ii) BOJ doubled loan programs aimed at stimulating bank lending and economic growth

Shankar Sharma Interview

Q : Are we going towards secular bull market.

A. Skeptical, because bull markets are based on micro economic fraud, you just print money & keep interest rates way below market rates; give free money to speculate & create an asset bubble.

All this is not sustainable in long run and have unintended consequences.

http://www.moneycontrol.com/news/market-outlook/india-to-do-better-among-emsimproved-cad-says-sharma_1045552.html

 

China Shadow Banking......Deleveraging......Deflationary threat

World asleep as China tightens deflationary vice-Ambrose Evans-Pritchard

China’s Xi Jinping has cast the die. After weighing up the unappetising choice before him for a year, he has picked the lesser of two poisons.

The balance of evidence is that most powerful Chinese leader since Mao Zedong aims to prick China’s $24 trillion credit bubble early in his 10-year term, rather than putting off the day of reckoning for yet another cycle.

This may be well-advised for China, but the rest of the world seems remarkably nonchalant over the implications. Brazil, Russia, South Africa, and the commodity bloc are already in the cross-hairs.

“China is getting serious about deleveraging,” says Patrick Legland and Wei Yao from Societe Generale. “It is difficult to gently deflate a bubble. There is a very real possibility that this slow deflation may get out of control and lead to a hard landing.”

Zhang Yichen from CITIC Capital said the denouement will be a ratchet effect since China has capital controls and banks are an arm of the state, but that does not make it benign. “They are trying to deleverage without blowing the whole thing up. The US couldn’t contain Lehman contagion, but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We’ll see a slow deflating of the bubble ,” he said.

What is clear is that we are dealing with a credit expansion of unprecedented scale, equal in size to the US and Japanese banking systems combined. The outcome may matter more for the world than anything that the US Federal Reserve does over coming months under Janet Yellen, well signalled in any case.

Societe Generale has defined its hard landing as a fall in Chinese growth to a trough of 2pc, with two quarters of contraction. This would cause a 30pc slide in Chinese equities, a 50pc crash in copper prices, and a drop in Brent crude to $75. “Investors are still underestimating the risk. Chinese credit and, to a lesser extent, equity markets would be very vulnerable,” said the bank.

Such an outcome — not their base case — would send a deflationary impulse through the global system. This would come on top of the delayed fall-out from China’s $5 trillion investment in plant and fixed capital last year, matching the US and Europe together, and far too much for the world economy to absorb.

The effects of this on large parts of Latin America, Africa, the Middle East, and core Eurasia would hit before offsetting benefits accrued to consumers in the West. Such commodity shocks are “asymmetric” at first. Southern Europe would fall over the edge into deflation, pushing Italy, Portugal, and Spain deeper into a debt compound trap.

China did of course blink in January when the authorities stepped in to cover the $500m liabilities of the trust fund, “Credit Equals Gold No. 1”. It is the fifth trust rescue in opaque circumstances in recent weeks. Yet it would be hasty to conclude that President Xi is backing away from his Third Plenum vows to end to the bad old ways.

The central bank (PBOC) is tightening methodically, allowing the benchmark 7-day repo rate to ratchet up by 200 basis points to 5.21pc over the last year. It drained a further $50bn from the system this week.

Its latest quarterly report has turned hawkish, even though producer prices are in steep deflation, and the M2 money supply is slowing. It complains that “reliance on debt is still rising” and that “hidden risks in the financial sphere require attention”.

Zhiwei Zhang from Nomura says China has entered a “prolonged period of policy tightening” that will push up bank lending rates by as much as 90bp this quarter, leading to a chain of defaults.

The tell-tale signs are obvious in the central bank’s handling of reverse repos and maturing bills. The yield on corporate AA 1-year bonds has jumped 272 basis points to 7.15pc since June. “We think the PBOC intends to raise the whole spectrum of interest rates to push deleveraging,” he said.

This will be a rough ride. JP Morgan’s Haibin Zhu says the shadow banking system alone has jumped from $2.4 to $7.7 trillion since 2010, and is now 84pc of GDP. To put this in perspective, the total US subprime debacle was $1.2 trillion.

Haibin Zhu says there is mounting risk of “systemic spillover”. Two thirds of the $2 trillion of wealth products must be rolled over every three months. A third of trust funds mature this year. “The liquidity stress could evolve into a full-blown credit crisis,” he said.

Officials from the International Monetary Fund say privately that total credit in China has grown by almost 100pc of GDP to 230pc, once you include exotic instruments and off-shore dollar lending. The comparable jump in Japan over the five years before the Nikkei bubble burst was less than 50pc of GDP.

^{Source: People’s Bank of China, CEIC, BIS}

The transmission channel to the global banking system is through Hong Kong and Macao. Bejing’s credit squeeze is causing a scramble for off-shore dollar credit to plug the gap. It is this that keeps global regulators awake at night, for foreign currency loans to Chinese companies have jumped from $270bn to an estimated $1.1trillion since 2009.

The Bank for International Settlements says dollar loans have been growing “very rapidly and may give rise to substantial financial stability risks”, enough to send tremors across the world.

The BIS data shows that British-based banks — a broad-term, including branches of US and Mid-East outfits — are up to their necks in this. They hold a quarter of all cross-border bank exposure to China. By contrast, German, Dutch, French and other European banks have cut their share from 32pc to 14pc as they retrench to shore up capital ratios at home.

Foreign claims on China by bank nationality

This may be why the Bank of England’s Mark Carney warned before Christmas that the “parallel banking sector in the big developing countries” now poses the greatest risk to global finance. Officials at the Bank recently showed him an unsettling report by the Hong Kong Monetary Authority on China’s off-shore loan risks.

Charlene Chu, Fitch’s China veteran and now at Autonomous in Beijing, told The Telegraph last week that these dollar debts were large enough to set off a fresh global crisis if mishandled.

 They may be right, but bear in mind that the growth rate of America’s M2 money supply has halved over the last year. It might have contracted since April without $85bn of bond purchases by the Fed each month.

The European Central Bank is paralysed after the German constitutional court read the riot act last Friday, strongly suggesting that its bond rescue plan (OMT) is Ultra Vires and a violation of “monetary financing”.

The ECB cannot easily carry out quantitative easing to cushion a deflationary shock in the teeth of such a judgment, even if QE is a different tool. In German politics they are the same.

The decision came disguised as a referral to the European Court, but was in reality a warning shot, as former judge Udo di Fabio has more or less said. The German court cannot stop the ECB buying bonds but it can stop the Bundesbank from taking part, and must do so if actions are Ultra Vires. That is enough.

So we keep our fingers crossed as we glimpse the first foam of a deflationary Ch’ient’ang’kian coming our way from China. The world’s central banks have no margin for error.

Party is still on .......

House OKs 'clean' debt limit

WASHINGTON - The House of Representatives approved a one-year extension of federal borrowing authority after Republicans caved into President Barack Obama's demands to allow a debt limit increase without any conditions.

Janet Yellen in Her Testimony 

Her testimony reinforces the view that Janet Yellen is a dove – meaning she leans toward easy money policies to address low inflation and high unemployment. Most notably, she is very focused on the weak job market, which she turns to on page one of her testimony. “The recovery in the labor market is far from complete,” she says. She is looking beyond a 6.6% jobless rate in making this assessment. “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed,” she says, and “the number of people who are working part-time but would prefer a full-time job remains very high.”

DOESN’T ACCEPT BLAME FOR LATEST EMERGING MARKET SELLOFF: In a section in its official report to Congress, the Fed accepts that talk of pulling back on its bond-buying program last summer triggered stress in emerging markets. But officials don’t accept that the latest round of selling is due to the Fed. “Rather, a few adverse development – including a weaker-than-expected reading on Chinese manufacturing, a devaluation of the Argentine peso, and Turkey’s intervention to support its currency-triggered renewed turbulence in emerging markets, the Fed said. In her testimony, Ms. Yellen said this doesn’t yet look like a threat to the U.S. economy. But the Fed warns in its report that a number of emerging markets, “harbor significant economic and financial vulnerabilities.” An index of vulnerability presented in this report (Page 29) highlights Turkey, Brazil, India, Indonesia and South Africa as among the most vulnerable.

Germany out of Euro !!!!!!!!

Last week’s ‘thunderbolt’ ruling on eurozone rescue policies by Germany’s top court marks a serious escalation of Europe’s governance crisis and may ultimately force Germany to withdraw from the euro, the country’s most influential magazine has warned.

A sweeping report by Der Spiegel said the court ruling amounts to a full-blown showdown between Germany and the European Central Bank over the methods to shore up southern Europe’s debt markets.

“It is nothing less than a final reckoning with the crisis-management strategy pursued by the ECB. The German justices insist that the German constitution sets limits on the ECB’s crisis strategy. In a worst-case scenario, the Court could forbid Berlin from contributing to efforts to save the euro or even force Germany to leave the currency zone entirely,” it said.

The warning came as market analysts began to see the darker implications of the ruling, which was initially seen as a green light for the ECB’s bond operations.

10 Worst Cases -Hyperinflation

Inflation is hot property today, hyperinflation is even hotter! We think we are modern, contemporary, smart and ready to deal with anything. We’ve got that seen-it-all-before, been-there-done-it attitude. But, we are not a patch on what some countries have been through in the worst cases of hyperinflation in history. Here’s the top 10 list of worst cases in history. We’ll start with the worst first…let’s think positive!

Hungary 1946

Inflation at its peak reached a staggering figure of 13.6 quadrillion % per month! That’s 13, 600, 000, 000, 000, 000%. The largest denomination bill was a 100 Quintillion note. Prices ended up doubling every 15 hours at the time.

Zimbabwe 2008

Prices doubled here every 24.7 hours in November 2008 and inflation reached levels of 79 billion-odd %. They eventually stopped using the official currency and switched to the South African Rand or the $US. A loaf of bread ended up costing $35 million. This is the most recent case. It was Mugabe’s land-redistribution program that caused this.

Yugoslavia 1994

In just the one month of January 1994 inflation rose by 313 million %. Prices doubled every 34 hours (which is nothing compared to Hungary). The currency ended up getting revalued 5 times in all between 1993 and 1995, all to no avail. The cause? A recession triggered by overseas borrowing and an on-going political struggle in the 1980s and the following decade.

Germany 1923

Adolf Hitler rose to power as a consequence of hyperinflationary pressure (at least one of the reasons). Prices doubled every 3.7 days and inflation stood at 29, 500%. Germany was crippled with the reparation payments after the Treaty of Versailles and the end of World War I.

Greece 1944

Prices started rising by 13, 800% in October 1944 and they doubled every 4.3 days. The trouble was the debt incurred by World War II.

Poland 1921

Prices rose in 1921 by 251 times in comparison with those of 1914. They doubled every 19.5 days. The Zloty was introduced as the new currency in 1924 in an attempt to start afresh. Inflation stood at 988, 233% in 1924.

Mexico 1982

Mexico had a rate of inflation of 10, 000% in 1982 (due mainly to too much social expenditure).

Brazil 1994

Inflation was 2, 075.8% at its worst in 1994. The Real was adopted in 1994 and it managed to calm inflation down.

Argentina 1981

The highest denomination bill was the one million pesos note. The Peso was revalued three times.

Taiwan 1949

This was a knock-on effect from China and the Chinese Civil War. The New Taiwan Dollar was issued in June 1949. The monthly rate of inflation stood at 399%

Inflation can be creeping (mild or moderate inflation) or galloping. We can talk of Hyperinflation and stagflation (inflation and recession). Deflation is not better. We have so many names for it.

Hyperinflation means prices doubling in such a short space of time that we can’t keep up with it all. Hyperinflation comes about at times of trouble, war, conflict, upheaval, change on unprecedented levels. It comes about because we still haven’t learnt how to control it. History repeats itself, we hear people say. Thankfully, it doesn’t repeat itself too often. Fingers crossed.

World heading towards another major financial crisis? Only time will tell...

Just recently we saw panic sell-offs in emerging markets on the news of the US Fed taper. The flood of cheap money from the West has been one of the major drivers of asset prices in emerging markets. So now if the cheap money slows down, investors are worried that it would have a cascading effect on asset prices, albeit in the opposite direction.

If Mark Faber aka Dr Doom is to be believed, it is not just the Fed taper that is a matter of worry. One of the major reasons for the fast-faced economic growth in the previous decade was soaring asset prices. As per Faber, emerging markets have lost steam now and are not growing much. Moreover, the Chinese slowdown could have far more adverse repercussions than expected.

An interesting point that strikes us is that the world could be at the beginning of 'a vicious circle to the downside'. The thing is that when times are good, the economic growth enters a virtuous cycle. As it is said, money makes more money. But when the tide turns, the exact opposite tends to happen. So is the world heading towards another major financial crisis? Only time will tell...

Argentina Inflation........Bloomberg

Dad Can’t Buy Daughter Shoes as Argentine Currency Falls

Feb 3, 2014

 

Jorge Contrera checked a pair of soiled shoes from top to bottom, tried to buff them with his shirt sleeve, then paid 40 pesos ($5) for his 8-year-old daughter’s present. Before Argentina’s devaluation last month, he planned to surprise her with a new pair.
“Do you know how I feel buying my daughter used shoes?” said 29-year-old Contrera, a welder who’s currently working as a delivery man. “The new shoes just went up and I don’t have the cash.”
Like Contrera, many Argentines see their standard of living falling as the fastest pace of inflation in a decade erodes their purchasing power and confidence in President Cristina Fernandez de Kirchner’s economic policies. Last month’s 19 percent devaluation of the peso, which drove up prices on products from cars to refrigerators, highlights Fernandez’s dilemma.
If she adopts unpopular belt-tightening measures, she could face social unrest, said Mariel Fornoni, director of polling firm Management & Fit.
“It’s a critical moment for the government and there’s no reason to believe things will get better,” Fornoni said in an interview. “There’s a real risk of growing protests in coming months.”
Since Jan. 27 the government eased some currency restrictions and raised interest rates by more than six percentage points in an effort to reduce dollar demand that has drained central bank reserves by 34 percent to $28 billion over the past year.

Capital Flight

Real interest rates remain negative and unless the government cuts spending, including energy subsidies, Argentina’s vicious cycle of inflation, capital flight and devaluation will continue, Mark Mobius, chairman of San Mateo, California-based Templeton Emerging Markets Group, wrote in a note to clients on Jan. 30.

The peso’s plunge this year is the largest among 169 currencies tracked by Bloomberg, and investors have dumped government dollar bonds that have lost about 15 percent, according to data compiled by Bloomberg and JPMorgan Chase & Co.’s EMBIG index. The cost to protect the nation’s debt against non-payment over five years with credit-default swaps has jumped 11.7 percentage points to 28.2 percent, implying an 87 percent probability of default, the highest in the world.

Ricardo Villalba, a 37-year-old kitchen hand, came to buy meat and grapes at a market in the Constitucion neighborhood of Buenos Aires. After balking at the 30 pesos-per-kilo price of grapes and a jump in beef to 55 pesos, he changed his mind.
“Of course I’m unhappy, I’ll eat a fried egg tonight,” Villalba said.

Argentina’s annual wage bargaining period will be key for Fernandez to keep part of her base content. Police strikes over wages in December triggered violent looting in at least half of the country’s 23 provinces. Labor unions are preparing for wage negotiations in March

Attempts to contain inflation through price caps and subsidies, which have ensured some cost stability for basic foods, energy and transport, are becoming more expensive and less effective.

Government attempts at regulating prices on basic goods have a limited impact, with supermarkets agreeing to cap 194 of an estimated 40,000 products, said Cohan of Elypsis.

Empty Shelves

The specially-marked items from milk to sugar and beer are not always available, and many smaller grocery stores don’t participate.
At a Carrefour SA supermarket in the southern zone of the capital, only one bottle of “fixed price” vegetable oil was available at 7.54 pesos. Around the corner, a fully stocked grocery store sold the same oil at a 33 percent markup.
In December, half of Argentines said they expected their personal economic situation to worsen in the coming months, the highest percentage since August 2012, according to the latest survey by M&F.

Price increases and a tax  may particularly hit the auto industry.
Fiat SpA said it sees “double digit” declines in Argentina’s car market in 2014, according to a presentation on its fourth-quarter results posted on its website Jan. 29.
“After how prices increased for some of the cars, you’d have to be crazy to buy now,” said Ramon Herrera, who runs a car dealership named after his family. He expects sales to drop about 50 percent this year.


me......earlier Venezula;
Inflation, social unrest...............these will play in big way for big countries.

Deutsche Bank: "We've Created A Global Debt Monster"......ZeroHedge

Two observations on the latest thoughts by Jim Reid (DB's best strategist by orders of magnitude):

1. The money creation in China puts what all the other global central banks do to shame. Any slowdown in this credit creation and the wheels have no choice but to fall off, which also explains why even the tiniest default in this $9 trillion economy will be bailed out as it would risk an outright "flow" collapse.
   
2. The Fed came, saw, and after realizing the mess it created with tapering - which can never be priced in now that the market is terminally addicted to the Fed's liquidity injections - will soon do what we have said since the May 2013 "taper tantrum" would happen - untaper, and resume bailing out everyone.

Full note from Reid:

From all the stories that broke while I was away the most fascinating surely revolves around the Chinese Trust product that in the end wasn't allowed to be at the mercy of market forces. For me it’s a microcosm of the fragility still present in global financial markets that a $9.0 trillion dollar economy - that will be the biggest in the world within the time frame of most of our careers - struggles to allow a $500 million investment product to default without there being market fears of it igniting panic in financial markets. This has now been a theme for the best part of 10-15 years in global financial markets particularly in the developed world but more recently the EM world since the GFC. We've created a global debt monster that's now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences.
This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger.

This sounds negative but the reality is that for us it means that central banks have little option but to keep high levels of support for markets for as far as the eye can see and defaults will stay artificially low. As such we remain bullish for 2014. However it’s largely because we think the authorities are trapped for now rather than because the global financial system is healing rapidly