Category Archives: China P.O.

P.O. (BBG) China Handed First Moody’s Downgrade Since 1989 on Debt Risk

P.O.

On China

As per my numerous Personal Opinions watch China carefully.

The future of the World will be shaped according to what happens in China and nearby Countries.

And one should not only watch political developments but also the economic ones.

FCMP

(BBG) Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth.

Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3 on Wednesday, with markets paring losses in the afternoon. Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative.

It’s “absolutely groundless” for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to a response released by the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said.

It wouldn’t be the first time a rating company was behind the curve, nor is such pushback unique — U.S. Treasury officials questioned the credibility of a 2011 downgrade from Standard & Poor’s. Still, the move underscores broader doubts over whether President Xi Jinping’s government can simultaneously cut excessive leverage and steady growth, all with a twice a decade reshuffle of top party posts looming later this year.

“It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. That said, “it doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”

The Aussie dollar slumped and iron ore led a decline in industrial commodities. Stocks were mixed, while oil rose.

Debt Holdings

Total outstanding credit climbed to about 260 percent of GDP by the end of 2016, up from 160 percent in 2008, according to Bloomberg Intelligence. At the same time, China’s external debt is low by international standards, at around 12 percent of gross domestic product, according to the International Monetary Fund, meaning that a downgrade isn’t likely to be as disruptive as it would be for nations more reliant on international funding.

Overseas institutions’ holdings of onshore bonds dropped to 830 billion yuan ($121 billion) as of the end of March, from 853 billion yuan three months earlier, People’s Bank of China data show. That’s less than 1.5 percent of 63.7 trillion yuan of outstanding notes, according to Bloomberg calculations based on the central bank data.

Moody’s last cut China’s sovereign rating in 1989, when it downgraded the sovereign to Baa2 from Baa1, according to spokesperson, Manvela Yeung.

Rating Warnings

Moody’s lowered China’s credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and uncertainty over authorities’ ability to carry out reforms. About a month later, S&P Global Ratings also warned that rising local debt was pressuring the nation’s rating.

S&P currently rates China’s foreign and local-currency long-term debt at AA- with a negative outlook, and Fitch places an A+ rating on both foreign and local currency long-term debt with a stable outlook. Moody’s move puts China parallel in their rankings with countries including Japan, Saudi Arabia and Estonia.

Those ratings contrast with home-grown Dagong Global Credit Rating Co.’s AA+ on China’s sovereign debt in local currency terms and AAA in foreign currency terms, the highest level. By contrast, Dagong rates the U.S. as A- in both currency terms, below Russia and France.

Risks Balanced

Still, Moody’s isn’t hitting the panic button.

“The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced,” Moody’s said in the statement Wednesday. “The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.”

While China’s debt risks have been swelling for years, the cut by Moody’s comes as some of those pressures ease. Nominal economic growth in the first quarter rose at the fastest pace since 2012 — 11.8 percent in current-price terms — making the problem of excess leverage a little more manageable, while the return of factory price inflation is beefing up profits for indebted state-owned industries, helping them service and repay loans.

With the economic structure improving and government debt under control, the economy will continue to expand at a medium-to-fast pace, helping prevent debt risks, the finance ministry said in its statement Wednesday.

“This cut is not solidly grounded,” said Wen Bin, chief analyst at Minsheng Securities in Beijing. “Policy makers have been well aware of the debt and leverage issues, and actions have been taken. It is a smart move if no one sees the problem and you are the first to flag it. But less so if it has already been noticed and addressed.”

The move may still discomfort China investors in that it highlights the risks to the economy rather than the ability of the government to control them.

“The downgrade comes at a bad time,” said Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, adding that it will make it more expensive to open the country’s bond market. “China’s leaders from President Xi Jinping down have said that structural reform and financial stability are priorities. Still, progress remains faltering and in some respects movement is in the wrong direction.”

P.O. (NYT) China Warns of Arms Race After U.S. Deploys Missile Defense in South Korea

As per my Personal Opinion:

If China wanted they could have easely provoked the downfall of the North Korea regime.

But they never wanted that…

It just suits them fine, even if they are officially a strong critical voice of that regime.

Please revisit my +++ P.O./V.V.I. (BBG) Kim Jong Un’s Estranged Brother Murdered in Malaysia

FCMP

(NYT) HONG KONG — The United States said on Tuesday that it had begun deploying an advanced and contentious missile defense system in South Korea, prompting China to warn of a new atomic arms race in a region increasingly on edge over North Korea’s drive to build a nuclear arsenal.

The American announcement came a day after the simultaneous launch of four missiles by North Korea into waters off the Japanese coast, which Pyongyang said was a drill for striking American bases in Japan. The feat, footage of which was broadcast on state television, raised concern about the North’s ability to overwhelm the new defense systembeing deployed.

Hours later, North Korea further unnerved the region by declaring it was blocking all Malaysians from leaving its soil, sharply escalating a dispute over last month’s assassination of Kim Jong-nam, the half brother of North Korea’s dictator, Kim Jong-un.

Malaysia has accused several North Korean citizens of using VX nerve agent to kill Mr. Kim in a case that has reminded the world of Pyongyang’s access to a stockpile of banned chemical weapons on top of its nuclear program — and its willingness to take extreme measures.

The flurry of developments heightened anxiety in Asia over signs that Pyongyang is closing in on its goal of developing an intercontinental missile that can deliver a nuclear payload to the United States — and what the new Trump administration might do to prevent it. And they came as the United States and South Korea participated in large-scale military exercises that North Korea has condemned.

The New York Times reported Sunday that President Trump’s national security deputies have discussed both the possibility of pre-emptive strikes that would almost certainly provoke an attack on South Korea and a reintroduction of nuclear weapons to the South. Intelligence officials say North Korea is already able to hit much of South Korea and Japan with a nuclear-tipped missile.

A spokesman for the Chinese Ministry of Foreign Affairs, Geng Shuang, denounced the United States’ decision to deploy the Terminal High Altitude Area Defense system, or Thaad, and vowed that Beijing would “take the necessary steps to safeguard our own security interests.”

“The consequences will be shouldered by the United States and South Korea,” Mr. Geng added, warning that the two countries should not “go further and further down the wrong road.”

For days, the official Chinese news media has warned that deployment of Thaad could lead to a “de facto” break in relations with South Korea and urged consumers to boycott South Korean products. The Chinese authorities recently forced the closing of 23 stores owned by Lotte, a South Korean conglomerate that agreed to turn over land that it owned for use in the Thaad deployment, and hundreds of Chinese protested at Lotte stores over the weekend, some holding banners that read, “Get out of China.”

Xinhua, the official Chinese news agency, warned that Thaad “will bring an arms race in the region,” likening the defensive system to a shield that would prompt the development of new spears. “More missile shields of one side inevitably bring more nuclear missiles of the opposing side that can break through the missile shield,” it said.

But in another article, the news agency rebuked North Korea, saying it must “face the reality that it can neither thwart Washington and Seoul nor consolidate its security in a breeze with its immature nuclear technology.”

The United States’ decision to deploy the missile technology brought new scrutiny to China’s policies toward North and South Korea and suggested that its attempts to please both countries in hopes of averting a crisis had fallen short.

“To put it bluntly using a common Chinese expression, it has wanted to have a foot in two boats,” said Deng Yuwen, a current affairs commentator in Beijing who has sharply criticized North Korea.

Yang Xiyu, a former senior Chinese official who once oversaw talks with North Korea, said China was worried that the deployment of the system would open the door to a broader American network of antimissile systems in the region, possibly in places like Japan and the Philippines, to counter China’s growing military as much as North Korea.

“China can see benefits only for a U.S. regional plan, not for South Korea’s national security interest,” he said.

The developments come as South Korea is consumed by turmoil over the impeachment of PresidentPark Geun-hye, whose administration agreed to the Thaad deployment. But with the president facingpossible removal from office over a corruption scandal, the fate of the system has been in doubt. Its accelerated deployment could make it harder, if not impossible, for her successor to head off its installation.

Moon Jae-in, an opposition leader who is the front-runner in the race to replace President Park, acknowledged that it would be difficult to overturn South Korea’s agreement to deploy the system. But he has insisted that the next South Korean government should have the final say on the matter, saying that Ms. Park’s government never allowed a full debate on it.

Under its deal with Washington, South Korea is providing the land for the missile system and will build the base, but the United States will pay for the system, to be built by Lockheed Martin, as well as its operational costs.

A C-17 cargo plane landed at the United States military’s Osan Air Base, about 40 miles south of Seoul, on Monday evening, carrying two trucks, each mounted with a Thaad launchpad. More equipment and personnel will start arriving in the coming weeks, South Korean military officials said.

The South Korean Defense Ministry declined to specify when the system would be operational. But the South Korean news agency Yonhap reported that the deployment was likely to be completed in one or two months, with the system ready for use by April.

Paul Haenle, director of the Carnegie-Tsinghua Center at Tsinghua University in Beijing, said that policy makers in China had failed to grasp how Washington and its allies regarded North Korea’s nuclear program as getting closer to a dangerous threshold of being able to place a warhead on an intercontinental ballistic missile that could hit American cities.

“That’s a game-changer,” said Mr. Haenle, who was director for China on the National Security Council under Presidents George W. Bush and Barack Obama.

China has long opposed American missile defenses, in part because of fears that they might embolden American decision-makers to consider a first strike to destroy China’s relatively small nuclear arsenal. Chinese strategists warn that the United States might consider such an attack if it was confident a defense system could intercept Chinese weapons that escaped destruction.

China is believed to have already embarked on a program to modernize its arsenal and develop new weapons designed to avoid missile defenses, and analysts said the deployment of Thaad could prompt it to accelerate those efforts.

Takashi Kawakami, a professor of international politics and security at Takushoku University in Tokyo, said the deployment of Thaad could put the United States in a stronger position to consider a pre-emptive strike on North Korea. If the United States took such action, he said, “North Korea is going to make a counterattack on the U.S. or Japan or another place, so in this case they will use Thaad” to defend against the North’s missiles.

The Japanese prime minister, Shinzo Abe, said he spoke for 25 minutes on Tuesday with Mr. Trump, who reiterated his pledge to stand by Japan “100 percent,” according to the public broadcaster NHK. “I appreciate that the United States is showing that all the options are on the table,” Mr. Abe said, adding that Japan was “ready to fulfill larger roles and responsibilities” to deter North Korea.

 

 

+++ P.O./V.I. (BBG) Trump Chooses the Wrong Way to Stand Up to China: Editorial

Dear All

Please be so kind and revisit my Personal Opinions on China.

One should never take our eyes off developments in China and the Countries around.

The future of the World is at stake there.

Francisco (Abouaf) de Curiel Marques Pereira

(BBG) Aides to President-elect Donald Trump say that his precedent-shattering phone call with Taiwanese leader Tsai Ing-wen on Friday was not a diplomatic blunder but a deliberate move to signal resolve against China. If so, he needs to rethink his strategy.

There are valid arguments for the U.S. to be more assertive toward China, and Trump has even articulated some of them. China’s island-building efforts in the South China Sea, and its harassment of Japan in the East China Sea, are destabilizing. In many ways, the Chinese economy remains unfriendly to foreign competition, with certain areas closed off entirely. On North Korea, China has not done nearly enough to temper the regime’s bellicose instincts.

Any successful strategy to change China’s calculations and behavior, however, requires several elements — chief among them clarity and consistency. This Trump has not provided. After news broke of the call, the first between a U.S. president or president-elect and Taiwan’s leader since the U.S. established diplomatic relations with Communist China in 1979, Trump initially seemed to suggest it hadn’t been his idea. Then he protested that critics were overreacting. Then he lashed out at China for its supposed hypocrisy. Claims that he was challenging conventional State Department thinking won’t impress leaders in Beijing. The incoming administration now stands to lose credibility if it fails to follow through.

Moreover, any attempt to reorder the chessboard in Asia requires buy-in from allies. Chinese leaders weren’t the only ones left wondering what exactly Trump intends or how he plans to pursue his goals. America’s friends in the region are already worried about the president-elect’s isolationist impulses and frustrated with his sinking of the Trans-Pacific Partnership trade agreement. Several were hedging toward China even before Trump’s victory, and now more will be reluctant to participate in any attempt to pressure the Chinese regime. That knowledge is sure to stiffen rather than weaken Chinese resolve.

The new U.S. administration will have more luck if it calibrates the pressure it places on China rather than engages in showy gambits. The Barack Obama administration did actually manage to alter Chinese behavior with specific threats on some issues — cyberspying and on land reclamation at Scarborough Shoal in the South China Sea, for example. By contrast, Taiwan’s status remains the foremost of China’s core interests, and pressing further there will make compromise in other areas virtually impossible.

And advancing U.S. interests does require cooperation with China. It might seem silly, as Trump tweeted, for the U.S. to sellbillions of dollars’ worth of weaponry to Taiwan but not accept a phone call from its legitimately elected leader. Yet the U.S. position on the island has enabled decades of peace and relative stability across the Taiwan Strait — not to mention trade and economic development that’s benefited Taiwan as well as the U.S. and China. It’s also allowed for cooperation between Washington and Beijing — not as much as one might like, but crucial nonetheless — on fighting global warming, limiting Iran’s nuclear ambitions and sanctioning North Korea. Such deals make the U.S. stronger — and a President Trump may find he needs to strike more of them.

+++ P.O. (BBG) CHINA INSIGHT: Zombie Firms, Monster Bad Loans – Horrific Charts

P.O.   

As per my numerous P.O. and warnings on China and on China’s financial situation.

FCMP

(Bloomberg Intelligence) — For many investors, the scariest thing in the world economy right now is China. Trick-or-treating neighborhood kids can be bought off with candy.
China’s problems – from ghost towns of unsold property, to zombie firms with high debts and no profits, to what lies beneath banks’ rosy non-performing loan figures – won’t be so
easily solved. In the Halloween spirit, here are four of Bloomberg Intelligence Economics’ scariest charts on China’s economy:

What Lies Beneath China’s Non-Performing Loan Data?

Non Performing Loans Vs ‘At Risk’ Loans

How many bad loans are there in China? Based on the official data, the non-performing loan ratio is a very manageable 1.75%. A dive into the balance sheets of listed Chinese firms provides a different answer. At the end of 1H, some 8.4% of loans were to firms without enough earnings to cover their interest payments. To give a sense of scale, 8.4% of
corporate borrowing is 9.6 trillion yuan – bad loans about equal to the GDP of Korea.
Read BI Economics comprehensive analysis on China financial risks.

Will Zombie Borrowers Ever be Able to Repay their Debts?

Return on Assets – Private, State, Local Government Firms

One reason to suspect China’s non-performing loans could be higher than reported is because a lot of credit has been allocated to low-performing borrowers. Average return on assets for state owned firms is just 4%. For the local government financing vehicles that borrow to pay for infrastructure projects, it’s 3%. Given the one year benchmark loan rate is 4.35%, it’s not clear that even average firms in those sectors – let along poor performers – will be able to repay their borrowing.
Read BI Economics assessment of risks from local government debt.

Will Turn in Property Cycle Leave Ghost Towns Unpopulated?

Property Supply and Demand

China’s property cycle is turning again. Policy is shifting from all-out stimulus to a differentiated approach, with controls on speculators in major cities. The result, a few
months down the line, will be a downturn in sales and prices. Based on BI Economics’ calculations, China already has about 10 million empty apartments. The fear is that by stoking a fresh round of building, without doing anything to alter underlying supply-demand dynamics, the latest cycle has added to that store.

Who Will Reform China’s Monster State Sector?

SOE Revenue vs GDP of Major Economies

It’s common knowledge that reform of the lumbering state sector is the biggest unfinished business for China’s government. But pause for a moment to consider the scale and complexity of that challenge. China’s state owned enterprises have revenue only slightly shy of the Japan’s GDP. The biggest firms employee hundreds of thousands of staff, sprawl across numerous provinces, and operate in multiple sectors. Small wonder reform remains more discussed than delivered.

P.O./V.V.I. (BBG) Shoal May Become Military Line in Sand on South China Sea

P.O.  

The South China Seas dispute is getting nastier by the day.

And there is no end in sight for this dispute.

Unfortunately, and for various reasons, and I refer you to my Personal Opinions on China, all things are arranged and set in a way that makes a peaceful ending of this whole affair less and less likely.

Please see my +++ M.P.O./V.V.I. (FT) Chinese fighter jets intercept US spy plane over South China Sea, May 19, 2016.

It has most of the links to my previous P.O. on China.

Prepare for trouble.

At least…

Francisco (Abouaf) de Curiel Marques Pereira

(BBG) Global defense chiefs meeting in a plush hotel in Singapore on the weekend were faced with one of Asia’s biggest looming security challenges, but left without any tangible sense of how to tackle it.

The elephant in the room at the Shangri-La security forum was a uninhabited shoal about 230 kilometers (143 miles) from the Philippine coast, a triangle of reef and rocks that barely stretches above high tide. Occupied by China since 2012, the Scarborough Shoal threatens to become the biggest flash point in disputes over the South China Sea.

 

U.S. Admiral John Richardson raised the prospect of China building on the shoal in March and the following month the U.S. sent air force planes into its vicinity. An airstrip there would add to China’s network of runways and surveillance sites that U.S. Pacific Command chief Harry Harris said last year would create “a mechanism by which China would have de facto control over the South China Sea in any scenario short of war.”

The potential motivation for China to build on the shoal is a coming international arbitration ruling on a case brought by the Philippines against its South China Sea claims. China didn’t take part in the hearings, arguing the tribunal lacks jurisdiction.

If the non-binding ruling is unfavorable to China, it might respond by putting structures on the shoal to give it a military outpost right on the Philippines’ door. Chinese Admiral Sun Jianguo said on Sunday Chinawill not accept the tribunal’s ruling, expected by mid year.

While countries including the U.S. have warned China against doing so, it’s unclear how they might respond if it it did. Speaking at the Singapore forum, U.S. Defense Secretary Ash Carter said the U.S. as an ally of the Philippines would take action, without elaborating on the consequences of a Chinese move.

Carter said on Saturday he had nothing new to say on any Chinese activities in the area around the shoal, but “any actions there would be provocative and destabilizing.” Southeast Asian defense chiefs avoided commenting on the possibility.

China contests more than 80 percent of the South China Sea, through which more than $5 trillion in seaborne trade passes every year, overlapping claims from the likes of Vietnam and Malaysia. It has reclaimed 3,200 acres of land on seven features in the Spratly Islands and added some military infrastructure.

Carter “was very careful to choose his words to leave the impression that there would be some action taken, but not to draw any red lines,” said Bonnie Glaser, a senior adviser for Asia at the Washington-based Center for Strategic and International Studies. “This is a critically important question,” she said. “I believe they want to restrict U.S. access over time.”

The U.S. has been wary of setting red lines after the Obama administration promised in 2012 that if Syrian President Bashar al-Assad used chemical weapons against his people he would cross one. After his regime killed at least six people and injured dozens in a chlorine gas attack, the U.S. failed to act, undermining its credibility.

Air Zone

The U.S. says it doesn’t take sides on the South China Sea claims, but its officials have sought to deter China from consolidating its hold over the waters. Secretary of State John Kerry said Sunday in Mongolia the U.S. would consider the establishment of an air defense identification zone over the area to be “provocative and destabilizing,” repeating Carter’s phrase.

China declared an ADIZ over part of the East China Sea in 2013, where it claims islands contested by Japan. Analysts consider China as yet unequipped to patrol such a zone over the South China Sea, but the possibility it might one day do so has spooked countries that border the waters.

To deter China from installing more military equipment on the Spratlys, the U.S. since October has sent warships three times within the 12 nautical mile zone around several artificial islands China has created, to demonstrate the right to transit what it considers international territory.

“The South China Sea’s freedom of navigation hasn’t been impeded because of the territorial disputes,” Admiral Sun said in a speech Sunday. “If freedom of navigation is undermined then China would not be to blame.”

‘Exclusion Zone’

China’s foreign ministry says it has the right to build on the features because they are its “indisputable” territory and it’s mainly to provide civilian services like search and rescue. Still, security analysts are concerned China will continue taking actions that are too minor to prompt a response, but which over time equate to substantial change.

“The question is whether we should allow China to establish an exclusion zone in the South China Sea, which would effectively turn it into a Chinese lake,” Richard Heydarian, a professor of political science at De La Salle University in Manila, said on the sidelines of the forum. “Who knows what happens down the road,” he said. “China may impose restrictions on other countries, depending on what is its whim.”

For the moment, it isn’t likely that China will rush to build on Scarborough, according to Luo Yuan, a retired PLA major general and deputy general secretary of the China Society of Military Science in Beijing.

“For the time being China is trying to maintain the status quo, mainly because of the size of the project, the investment required, and the sensitivity of the issue,” Luo said on the sidelines of the meeting.

But the question that remains is, should China decide to proceed, how can the U.S. and others prevent it from going ahead without risking setting off a full-scale conflict.

“I would like to think that what Carter said was a polite way of publicly alluding to a red line that has been privately communicated,” Rory Medcalf, head of the National Security College at the Australian National University, said on the sidelines of the forum.

“Nothing will roll back their physical presence but if China doesn’t achieve some kind of de facto extension of authority as a consequence of the island building, then that is still a significant effect that the international community has achieved.”

+++ M.P.O./V.V.I. (FT) Chinese fighter jets intercept US spy plane over South China Sea

M.P.O.

If you have read my Personal Opinions on China, you wouldn’t be surprised…

+++ P.O. V.V.I. (FT) China deploys missiles on disputed island

+++ P.O./V.V.I. (FT) China builds ties as well as airstrips in South China Sea

+++ P.O. and V.V.I. (FT) China must learn how to be a great power

+++ V.V.I. (FT) Chinese activity on disputed islands raises doubt over halt claim

+++ (BBG) Slimmed Down Chinese Military to Help Xi Counter U.S. Dominance 

+++ M.P.O./V.V.I. (FT) US warships to challenge Chinese claims in South China Sea

+++ P.O./ V.V.I. (FT) Pomp, circumstance and combat vehicles at Beijing parade

+++ P.O./V.V.I. (FT) Chinese navy sails off Alaska coast as Obama visits Arctic 

+++ P.O./V.V.I. (FT) China parades ‘carrier-killer’ missile through Beijing

+++ V.I. (FT) China set to parade its ‘carrier-killer’ missile through Beijing 

+++ (BBG) China Military Parade Sets Spin Machine Into Overdrive

+++ V.I. (FT) Militarism is a risky temptation for Beijing
This incident is described by the FT:

“Two Chinese fighter jets carried out an “unsafe” intercept of a US military aircraft that was flying over the South China Sea, the Pentagon said on Wednesday.”

With the correspondent US response also in the FT:

“US defence officials said a US maritime reconnaissance aircraft was flying a “routine patrol” and was in international airspace on Tuesday when it was intercepted by two Chinese tactical fighters.”

*“Initial reports characterised the incident as unsafe,” a Pentagon statement said.*

In my opinion, this incident marks an escalation in the “conflict” between the US and China, which is claiming vast areas in the South China Sea.

Please see the very good article in the FT:

“US warship sails near Chinese-claimed reef in South China Sea”

In the FT:

“An American warship on Tuesday morning sailed close to Fiery Cross Reef, a contested feature in the South China Sea, in the latest US pushback against Chinese claims in the disputed maritime region.”

The Pentagon said the USS William P Lawrence had conducted a “routine freedom of navigation operation” near Fiery Cross, a feature in the Spratly island chain that is claimed by the Philippines, Taiwan and Vietnam.

Beijing slammed the move as endangering its staff, facilities and the prospect for regional peace.

The reef is one of several features on which China has constructed runways as part of its effort to boost its ability to project military power in regional waters.

“This operation challenged attempts by China, Taiwan and Vietnam to restrict navigation rights around the features they claim, specifically that these three claimants purport to require prior permission or notification of transits through the territorial sea, contrary to international law,” said Commander Bill Urban, a Pentagon spokesman. “This operation demonstrates, as President Obama has stated, that the United States will fly, sail and operate wherever international law allows.”

The move comes as the Obama administration takes a tougher stance on China over its activities in the South China Sea.

The White House has until recently been reluctant to take aggressive action in the region that could antagonise China and jeopardise other facets of the Sino-US relationship. But as China has ramped up construction of man-made islands, the US navy has had more success in convincing the White House of the need for a more aggressive response.

A spokesperson for the Chinese foreign ministry said the US vessel had been warned for illegally entering Chinese waters.

“This action by the US side threatened China’s sovereignty and security interests, endangered the staff and facilities on the reef and damaged regional peace and stability,” Lu Kang told reporters.

The naval manoeuvre, which was first reported by the Wall Street Journal, came less than two weeks after Beijing denied the USS Stennis — an aircraft carrier that had been on patrol in the region — permission to dock in Hong Kong.

US naval vessels routinely make port calls in the semi-autonomous Chinese territory, although Beijing has on occasion blocked visits during periods of increased friction.

Before the decision by Beijing, Ashton Carter, the US secretary of defence, had flown out to the Stennis in the South China Sea alongside his Philippines counterpart. On board, he reiterated the US opposition to claimants “changing the status quo unilaterally”, a jibe at Beijing.

Tensions between Beijing and Manila have also risen in recent months as an international tribunal at The Hague prepares to rule on a case brought against China by the Philippines.

However, Philippine president-elect Rodrigo Duterte on Monday struck a conciliatory note, emphasising multilateral diplomacy and telling reporters that if China backed away from it claims, Manila would follow suit.

The comments are a marked departure from his previous rhetoric, in which he pledged to personally ride a jet ski to a disputed island to stake the Philippines’ claims.

And is it happening now…?

Because of China’s build up in the zone, and unilaterally claiming vast disputed areas,entering in challenges/”conflicts” with almost every State in the zone.

The whole “adventure” by Beijing is a smoke screen to disguise it’s very serious internal problems, on which I have been extensively writing about.

I refer you to my various Personal Opinions on China and particularly to M.P.O. The exhaustion of the Chinese Model

All the reasons and my forecasts are in there.

And it also happens now, because, and I quote the FT again:

“The incident comes at a time of increased tensions in the South China Sea ahead of a trip to the region next week by US President Barack Obama when he will visit Vietnam, which is becoming a closer American partner, and Japan.”

“It also comes weeks ahead of an expected ruling by an international court that could question some of the expansive territorial claims that China has made in the South China Sea.”

And China is becoming unfriendly with any Country in the area that is becoming closer to the US.

This is precisely what I meant when I wrote in the above mentioned M.P.O.

“Let’s hope it stays peaceful.”

Francisco (Abouaf) de Curiel Marques Pereira

(FT) Pentagon reports ‘unsafe’ incident during ‘routine patrol’ this week in international airspace.

The Republic of China Air Force fighter jets fly next to a chartered China Airline aircraft carrying Ma Ying-jeou, Taiwan's president, as he heads to Singapore for a summit in Taiwan on Saturday, Nov. 7, 2015. The leaders of China and Taiwan started a carefully managed meeting in Singapore that marks the first summit since the two sides clashed in a civil war seven decades ago. Photographer: Tomohiro Ohsumi/Bloomberg
© Bloomberg
Two Chinese fighter jets carried out an “unsafe” intercept of a US military aircraft that was flying over the South China Sea, the Pentagon said on Wednesday.

US defence officials said a US maritime reconnaissance aircraft was flying a “routine patrol” and was in international airspace on Tuesday when it was intercepted by two Chinese tactical fighters.

“Initial reports characterised the incident as unsafe,” a Pentagon statement said.

The incident comes at a time of increased tensions in the South China Sea ahead of a trip to the region next week by US President Barack Obama when he will visit Vietnam, which is becoming a closer American partner, and Japan.

A spokesman for China’s foreign ministry on Thursday rejected the US version of events, saying the US aircraft was close to China’s island province of Hainan and that the Chinese aircraft had acted both safely and professionally.

“We demand that the US immediately cease this type of close reconnaissance activity to avoid having this sort of incident happening again,” he said.

The intercept came within weeks of an expected ruling by an international court that could question some of the expansive territorial claims that China has made in the South China Sea.

The US says it is neutral on specific Chinese claims in the South China Sea but is using an increased presence in the area to push back against efforts by China to claim control of the seas surrounding many of the small islands and land features.

As Chinese and American aircraft and ships come into more regular contact with each other in the South China Sea, the risk is that an accident or miscalculation by an overly aggressive pilot could prompt some form of confrontation.

A 2001 attempted intercept of a US surveillance plane by a Chinese fighter jet led to a collision that killed the Chinese pilot and forced the American aircraft to make an emergency landing on China’s Hainan island.

Last week China scrambled fighter jets after a US warship sailed close to a land feature claimed by China that has been part of its extensive land-reclamation project over the past two years.

The Pentagon said it was addressing the latest incident through diplomatic and military channels. It also said that over the past year, after the US and China signed an agreement about how to deal with air-to-air encounters, there had been “improvements” in the professionalism of Chinese pilots.

China claims control over most of the South China Sea and has territorial disputes with Vietnam, the Philippines, Taiwan, Malaysia and Brunei. On a visit to the White House last year, Chinese President Xi Jinping said Beijing did not intend to “militarise” the Spratly Islands, one of the disputed areas of the South China Sea.dddjjklyynggtnnjrrtyuwqsd1

+++ P.O. (BBG) Fears of China Unrest See Investment Firms Evicted to Preempt It

P.O.

It looks like the worst scenario is taking shape, as I have written many times.

One can see signs everywhere.

The fear of unrest,the crackdown on data sales,the closing down of casa Míddis

Please revisit the China archive in this site.

Francisco (Abouaf) de Curiel Marques Pereira

(BBG) China’s authorities, seeking to forestall potential social unrest due to growing failures of investment firms and online lenders, are ordering many to break leases and close their storefronts on busy streets — lest they become magnets for protesters.

And that’s not all. Registration of all new companies with finance-related names was suspended nationwide in April, according to people familiar with the matter who asked not to be identified because they’re not authorized to speak publicly. In Shenzhen, office building management now must submit contact information for employees of all finance industry-related tenants to the local security bureau. Local governments from Shanghai to central Henan province have put up new signs outside residential compounds to warn the public against illicit fundraising activities.

Chinese investors gather outside Wealthroll office in Shanghai on April 6.
Chinese investors gather outside Wealthroll office in Shanghai on April 6.
Photographer: Imaginechina

The government, which had been encouraging theflourishing of investment firms and online lenders in the past two years to give small businesses that can’t get bank loans alternative funding — and to expand investing options for millions of Chinese — had largely failed to put regulations in place that would have prevented failures. The burgeoning ranks of peer-to-peer online lenders, or P2Ps, began opening storefronts on busy streets or in luxury office buildings to garner investment from the general public, hiring thousands of staff to sell products promising extraordinary returns. Other bricks-and-mortar firms sprang up offering wealth-management products with big payoffs, and many of those moved online, too, giving visibility to what was previously the nebulous and hidden world of shadow banking.

Now, with almost 1,000 online lenders having collapsed in the past year and fraud becoming more prevalent at China’s countless wealth management firms, authorities are acting to curb their growth and head off potential instability.

“The tightening control against P2P lenders highlights the growing concerns of the government that such operations can get hairy and out of their control,” said Hu Xingdou, an economics professor at the Beijing Institute of ­Technology. “Such P2P operations could involve hundreds of thousands of people, and could easily cause social unease if the companies run out of cash.”

Private wealth manager Credit Hengchang, which operates branches in more than 30 Chinese cities, had to close three offices in Hangzhou at short notice on government orders, said a person familiar with the matter. Its operation in southern Guangdong province was probed by local police, while its offices in central Henan province received tighter auditing and more frequent visits from the government, the person said. A representative of Hengchang didn’t respond to a request to comment on the measures.

Visible Remains

All over Hangzhou, a relatively wealthy city 100 miles (175 kilometers) from Shanghai, evidence of the crackdown is visible. In the downtown central business district, only financial institutions that need regulatory approval, such as banks and brokerages, can stay. At Golden Plaza, a high-end office tower on Hangzhou’s financial street, investment and wealth-management companies had snapped up almost 30 percent of the 26-floor building and pushed up its rents by about 15 percent in a year through last June, according to commercial real estate agent Tao Libin, whose office is on the ground floor.

Then things started to unravel as angry investors, mostly the elderly, started showing up to demand their money back from some failed firms, and police visits became more frequent, Tao said. The district government forced the companies to break leases and leave the downtown area late last year for fear that more failures would stoke social unrest and hurt the image of the city where the G-20 summit is to be held in September, he said. Now all those finance startups are gone, leaving massive vacant space and the rent plummeting, Tao said.

Citywide Extension

At Golden Plaza, its was local police who served notice late last year that all non-regulated finance industry tenants must move out, regardless of the terms of their leases, according to a building manager there. The eviction was later extended citywide, according to several building managers in different districts and local police. Any investment firm wanting to keep a physical presence must move to the outskirts of the city. An officer at Hangzhou’s Public Security Bureau said police were conducting an investigation of such firms and declined to give further details.

Investigations by the police, as opposed to financial regulators, are an indicator that authorities now fear demonstrations against investment firms could turn into anti-government sentiment. In Guangdong province’s Foshan, the city’s vice mayor Huang Zhihao said in an interview in April that police were taking the lead role and working with local governments to head off instability.

“We feel a strong sense of urgency to solve the problem,” he said.

Heightened Monitoring

In Shanghai, the city government required heightened monitoring of firms engaging in investment, wealth management and online lending, and said office buildings, technology parks and business centers will be held responsible for the tenants they brought in, in order to “curb risks from their origin.”

In China, wealth-management products offer high short-term interest rates and aren’t officially guaranteed. The range of products offered by the unregulated collection of P2Ps, investment firms and wealth managers can include anything from an engaged couple directly seeking online funding for a wedding on guarantee of repayment after cash gifts are received, to high-yield loans for risky property or mining projects that used to be offered as part of what was known as the shadow banking world in cities such as Wenzhou, Shanghai, Beijing and elsewhere.

Spreading Risk

Now that much of the shadow banking business has moved online, the risk has grown and geographic scope has spread. Often the firms themselves don’t reveal the underlying investments, simply offering returns that typically range from 8 percent to 24 percent — and sometimes higher.

“China’s Internet finance industry has strayed too far from the mandate set by the government,” said Yang Dong, a professor at Renmin Law School in Beijing. “With its high funding and operating costs, yet barely existing risk control, the model to copy banks under the disguise of financial innovation and inclusive finance is fundamentally flawed and unsustainable. It’s a shame that the government didn’t act earlier.”

In the past, investment firms could easily obtain operating licenses from the local business administration for engaging in financial activities without approvals from the nation’s banking or securities regulators.

Wealthroll Shutdown

Shanghai-based Wealthroll Asset Management Co. was shut down by police on April 6 after raising more than 30 billion yuan ($4.6 billion) from more than 130,000 investors. Wealthroll, a seller of wealth management products nationwide, is being probed for allegedly raising public funds illegally by defrauding investors with fake investment projects and allegedly inflating revenue since it began operating in 2012, according to the official Xinhua News Agency. Among its products, one promised a 40 percent return every year on condition that the principal can never be redeemed, according to its brochure.

Protesters took to the street after the shutdown, gathering near the People’s Square, the base of the Shanghai government, and the Bund, the city’s most popular tourist street, holding signs calling for the government to repay their “blood-and-sweat money.” They were later dispersed by police. Some investors blamed the government for shutting down a “legitimate and solid” enterprise because it has never missed a payment, according to postings and videos in one of the WeChat instant messaging groups formed by the victims.

“We should make this big because social unrest has political fallout,” wrote an investor under the pseudonym “Give Me a Way to Live” in the message group, urging fellow victims to keep gathering and exerting pressure on the government. “That’s the way to strike their nerve and get our money back.”

Fraud Susceptible

Unlike the shadow banking crisis that hit the eastern Chinese city of Wenzhou in 2012, where most victims of failed shadow lenders were local, the collapse of Internet-based financing platforms is far more wide-reaching in terms of the number of people affected and the amounts involved.

Chinese consumers are more susceptible to fraud as only one-third of formal savers in the nation are financially literate and 48 percent don’t understand the concept of interest payments, according to a December survey by S&P Global Ratings.

In December, China’s biggest-ever Ponzi scheme was exposed after Internet lender Ezubo defrauded more than 900,000 people out of the equivalent of $7.6 billion in 18 months. The founders squandered the money on luxury items including cars and a pink diamond ring worth 12 million yuan, according to Xinhua.

Locked office of Ezubo in Hangzhou on Dec. 17, 2015.
Locked office of Ezubo in Hangzhou on Dec. 17, 2015.
Photographer: Imaginechina

Wake-up Call

Lu Xiaomin, a finance director in the Huizhou city government in southern Guangdong province, said in April that the Ezubo scandal was a wake-up call, and that the local government is taking action.

“We will pay more attention to the financing companies, to strengthen the monitoring and guidance to the firms,” he said at a press conference in April. “We will also work with associated parties to study the guidance of the central government to prohibit financial risks from happening.”

China’s cabinet on April 14 started its first campaign to clean up illicit activities in Internet finance, with the focus on areas such as third-party payments, peer-to-peer lending, crowdfunding and online insurance. The China Banking Regulatory Commission in December laid out restrictions for the first time, banning such firms from taking public deposits, pooling investors’ money or guaranteeing returns.

Too Late?

It may be too late. More than 90 percent of China’s almost 4,000 remaining lending platforms were promising their 2.9 million investors annual returns ranging from 8 percent to 24 percent in March, according to Yingcan Group, which tracks the data. That compares with China’s official deposit rate of 1.5 percent, and comes a time when the economy grew at the slowest pace in a quarter century, while corporate borrowers’ ability to service their debt has dropped to the weakest on record.

Such high returns are unrealistic in an economic downturn, and more platforms are bound to fail, Renmin Law School’s Yang said.

“Who in the world can generate 24 percent? It’s impossible,” said Soul Htite, founder and chief executive officer of Shanghai-based online lender Dianrong.com, who foresees only about 20 P2Ps ultimately becoming successful, based on his experience in Silicon Valley and co-founding the LendingClub Corp. in the U.S. “Companies disappear for multiple reasons. One of them is they’re criminals, and they’re caught. For others, they have a non-realistic business model.”

Back in Hangzhou’s new central business district, 16pu.com, an Internet-based wealth manager established last year that is marketing a three- to 15-day product with an annualized yield of 16 percent, was told by the police it must leave Dicara International Center, where it had rented 900 square meters (9,700 square feet), by May. Its lavish reception area is decorated with statues representing traditional Chinese symbols of wealth and a large altar to worship the three Chinese gods of status, prosperity and longevity.

“We plan to move to another district,” said a company executive, who would only give her surname as Tong. “But I don’t know exactly where.”

+++ P.O./V.V.I. (FT) China builds ties as well as airstrips in South China Sea

P.O./V.V.I.   

China is pursuing a very dangerous policy.

Please revisit my P.O. on China including M.P.O. The exhaustion of the Chinese Model:

«M.P.O.

On China, the anti-corruption drive, and the latest developments.

The World was surprised by the sudden disappearance and the following reappearance of Mr Guo Guangchang the Chairman of Fosun, China’s self styled Warren Buffett.

Fosun has been on an acquisition spree abroad, and owns  quite a number of very well known companies in the West, and has substantial investments in Portugal.

The official explanation for the four days absence , and a face saving one, was ” four days out of sight while assisting a judicial investigation” (Financial Times).

Even if it is not uncommon in China for public and private officials to assist an investigation, no one is buying that version of the events.

Because Mr Guangchan was not charged of any wrongdoing, and Fosun said that the investigations had nothing to do with the Company.

This bizarre situation comes after Mr Guangchang having been advised, more than a year ago,  to get a second, and of different Country, passport.

But he said he did not need one because he had been “behaving well”…

A lot of private entrepreneurs have been “pested” by the various authorities since the Communist Party General Secretary Xi Jinping announced his anti-corruption campaign following the 18th National Congress which was held in November 2012.

And recently, in another article in this site, Mr Xu Ming, a former business ally of disgraced Chinese politician Bo Xilai has died in prison of illness, months before he was due to be released.

Probably he knew too much…

From The FT:

“The death of Xu Ming, founder of property conglomerate Dalian Shide Group, who testified against Bo’s wife Gu Kailai in 2013, is the second high-profile death in recent months of a person involved in the downfall of Bo and Gu, the biggest political scandal in China since the trial of the Gang of Four more than three decades ago.”

Then you have the military confrontation with the US, clearly provocative, the interference in Taiwan’s elections, with the “meeting of two gentlemen, the admission, (finally), that there is a serious pollution problem, the trial of lawyers including the famous and prominent Mr Pu Zhiqiang , the massive capital flight, the persecution of financial market players, blaming them because he market went down, etc, etc, etc.

The statement by Fosun saying that from now on , the Company was going to focus on China, clearly is in response to pressure by the authorities, that have been trying to control the massive capital flight.

And that have been pesting the companies that try to list abroad, because it is an obvious way to expatriate capital.

President Xi Jinping is a very astute person, and reportedly the most powerful Chinese leader since Mao Tse Tung.

Or even more powerful,some people say.

He knows that the growth model based on exports with  cheap labour and highly polluting factories is no more.

He also knows that the clean up is going to take decades.

He also knows that China , traditionally, has been a corrupt society, in part due to the very low wages.

He knows that his currency is devaluating and that he can do very little about it.

He wants to keep the power in the Communist Party.

And in consequence, and as usual in these kind of Countries (vidé Russia), he has to crackdown on anything that resembles power, and promote everything else that distracts the people’s attention from the fact that China is not growing what it used to in the past.

And that past growth was the people’s excuse to tolerate the system.

Which is under more and more scrutiny.

This is what all this is about, in my opinion.

Let’s hope it stays peaceful.»

And also +++ P.O. V.V.I. (FT) China deploys missiles on disputed island:

«P.O.

V.V.I.

This issue is has important as it gets.

To understand on what we are talking about, I refer you to my P.O. on China.

To start with, I call your attention to this M.P.O. that lays out the “scenery” for it all.

But please use the link and go to the M.P.O. itself , and use the links provided there.

And then please visit the older P.O. on the military confrontation itself.

Please go through the articles and P.O. with the links below.

This issue is as important as it gets.

Francisco (Abouaf) de Curiel Marques Pereira

Links:

+++ P.O. and V.V.I. (FT) China must learn how to be a great power

+++ V.V.I. (FT) Chinese activity on disputed islands raises doubt over halt claim

+++ (BBG) Slimmed Down Chinese Military to Help Xi Counter U.S. Dominance 

+++ M.P.O./V.V.I. (FT) US warships to challenge Chinese claims in South China Sea

+++ P.O./ V.V.I. (FT) Pomp, circumstance and combat vehicles at Beijing parade

+++ P.O./V.V.I. (FT) Chinese navy sails off Alaska coast as Obama visits Arctic 

+++ P.O./V.V.I. (FT) China parades ‘carrier-killer’ missile through Beijing

+++ V.I. (FT) China set to parade its ‘carrier-killer’ missile through Beijing 

+++ (BBG) China Military Parade Sets Spin Machine Into Overdrive

+++ V.I. (FT) Militarism is a risky temptation for Beijing»

(FT)

What do the governments of Belarus, Brunei, Cambodia, Laos and Russia have in common, apart from their lack of enthusiasm for participatory democracy?

Beijing claims they have all recently come out in support of its position on the South China Sea. It says they back its arguments, either that maritime disputes should be resolved bilaterally or that the arbitration case brought by the Philippines against Beijing’s claims is illegitimate.

This is no accident. A judgment on the Philippines case is expected within months. Beijing is working hard to persuade other countries that the court of arbitration in The Hague has no right to adjudicate on its claims.

During recent weeks, Wang Yi, the wily Chinese foreign minister, has been courting counterparts with renewed vigour, with visits to Brunei, Cambodia and Laos designed to keep Southeast Asia divided in its approach to China.

Sergei Lavrov, the Russian foreign minister, last week became the latest senior diplomat to side with China’s opposition to external interference — read the US — in the South China Sea.

China has drawn huge attention — and criticism — for its construction of islands and military facilities on contested reefs. But diplomacy is an equally important part of its strategy for dominating these waters, which contain rich fisheries, vast oil and gas reserves and key global trade routes.

The unfolding public relations battle over the Philippines arbitration case shows that policymakers in Beijing are worried China will look like a rogue international rule-breaker because of its defiance of The Hague tribunal.

The Philippines contends that China’s claim to “historic rights” over almost the entire South China Sea — based on its “nine-dash line” map — has no basis in international law. Manila also claims large parts of these waters, as does Brunei, Malaysia, Taiwan and Vietnam.

Although the judges are not considering overt questions of sovereignty, if they rule in the Philippines’ favour on this issue, it would significantly undermine China’s claims.

The US and the EU, which are concerned about China’s increasingly strident behaviour, have thrown their weight behind Manila, arguing that Beijing should respect the outcome of the case.

China is lining up its own team of supporters and is neutralising potential opponents with the promise of big infrastructure investments for those who play ball.

Beijing wants to ensure that the Association of Southeast Asian Nations, the only regional body that regularly discusses security issues, remains divided and weak when it comes to the South China Sea.

Regional diplomats fear that it is succeeding.

Mr Wang claimed after the visit to Brunei, Laos and Cambodia that Beijing had reached a “consensus” with these nations to oppose “unilateral” actions, a euphemism for the Philippines case.

Laos and Cambodia, which rely heavily on Chinese investment, have long done Beijing’s bidding by preventing Asean from taking a harder line on the maritime disputes. But oil-rich Brunei, which is feeling the pressure of lower crude prices, has not previously sided so openly with China.

Meanwhile, Southeast Asia’s biggest nation, Indonesia, is trying hard to stay out of the disputes, insisting that a recent clash with China’s coastguard over illegal fishing has nothing to do with China’s geostrategic ambitions.

This is music to Beijing’s ears.

Donald Weatherbee, a visiting fellow at Singapore’s Institute of Southeast Asian Studies, says that “Indonesia and the other four targets of China’s South China Sea policy are in the same boat, but there is no captain or sailing directions”.

Divisions among China’s Southeast Asian neighbours have left the way open for it to alter the “facts on the water” by building military installations from runways to radar stations in the South China Sea.

Ashley Townshend, a research fellow at the University of Sydney, compares Beijing’s actions to those of a rebel group trying to amass as much bargaining power as possible before being forced eventually to agree a ceasefire.

The next test of Beijing’s appetite for risk could come at the Scarborough Shoal, which it snatched from Philippines control in 2012. It is rumoured to be the next destination for China’s island-building barges.

If China does try to build up a reef that lies not far from Manila, the US would come under pressure to respond with more freedom of navigation operations or some other show of military force.

But Beijing is hoping it can continue to get away with incrementally changing the status quo and neutralising opposition.ddbntyuiohgf

+++ A.O./V.I. (BBG) Global Stocks Rally Sputters as Crude Slides, China Shares

Anchor Opinion

…Watch China…

…It is the most important thing to watch, in my opinion.

…If the Chinese markets collapse, the destruction of money will be of such proportions that it will cause major deflationary head winds around the globe.

…And of an unimaginable scale.

…I personally doubt, that if events would turn out that way, and let’s hope they don’t, that it would be possible to control events.

…Just think…

…If Japan has not been able to get rid of deflation for more years than I can    remember, how could deflationary head winds of a much greater scale be tamed?

   But China is not a democracy like Japan.
   Consensus decision-making is not exactly what is usual in China…
   So the government has more powers to control events.

   Anyway, let’s hope that nothing of this happens.

Francisco (Abouaf) de Curiel Marques Pereira

Post Scriptum: As a suggestion please read the superb book by David Graeber
“Debt: The First 5000 Years”

(BBG) The global stocks rally stumbled as Chinese equities dropped by the most since February and oil sank toward $40 a barrel, while demand for haven assets lifted sovereign bonds.

The Stoxx Europe 600 Index failed to extend a three-month high and the Shanghai Composite Index fell more than 2 percent as the People’s Bank of China signaled a reduced appetite for monetary easing. Crude oil also weighed on equities after Kuwait workers said they would end a strike and Japanese government bond yields fell to records. BHP Billiton Ltd. and Rio Tinto Group paced miners higher after BHP cut its iron ore production forecast for its Australian operations, spurring gains in the material’s price.

Global equities have climbed more than 15 percent from this year’s low, spurred by signs of stabilization in China’s economy and oil prices, after a sliding yuan and tumbling crude costs drove a $7 trillion selloff in the first half of January. Wednesday’s pullback in Shanghai shares came after PBOC research bureau chief economist Ma Jun said late Tuesday that future policy operations, while observing the need to continue supporting growth, will pay attention to heading off macroeconomic risks. Also casting a chill on global financial markets was an end to aworker strike in Kuwait, which had propped up oil prices after major producers failed to agree to output curbs at weekend talks in Doha.

“It’s difficult to find a major positive trigger from here,” said Otto Waser, chief investment officer at R&A Research & Asset Management. “Central banks are done so we don’t expect anything positive from them anymore. Earnings trends are not positive enough in Europe to support a major positive market.”

The MSCI All-Country Index was little changed at 7:01 a.m. New York time after falling as much as 0.2 percent. West Texas Intermediate crude dropped 2 percent to $40.26 a barrel.

Turkey’s central bank to cut its overnight lending rate in line with economist forecasts. U.S. companies including Coca-Cola Co. and American Express Co. are releasing earnings on Wednesday. A U.K. jobs report Wednesday showed unemployment rose for the first time in seven months and pay-growth excluding bonuses was unchanged.

Stocks

The Stoxx 600 fell 0.1 percent with health care and retail companies posting the biggest losses. BHP Billiton and Rio Tinto added more than 2 percent.

Despite recent gains, the European gauge has still tumbled 16 percent since reaching a record a year ago, and optimism over European Central Bank stimulus has given way to skepticism about its ability to boost growth.

Investors are also awaiting the ECB’s next meeting on Thursday for clues about the path of monetary policy. While economists are virtually certain ECB President Mario Draghi won’t touch interest rates, recent history shows that increased stock volatility is still likely. Intraday swings for the Euro Stoxx 50 Index averaged 4.1 percent during the ECB President’s past four policy updates, or about double that for all meetings since 2010.

Futures on the Standard & Poor’s 500 Index were little changed after the gauge closed above 2,100 for the first time since since Dec. 1. Of the benchmark’s 60 members to have reported first-quarter earnings by Tuesday, 77 percent have beaten profit estimates, according to data compiled by Bloomberg.

Intel Corp. dropped 2.4 percent in premarket trading after its first-quarter revenue and forecast for the next three months missedanalysts’ estimates. U.S. Bancorp slid 2 percent after its quarterly profit fell.

Benchmark share gauges fell across Asia’s developing economies and the MSCI Emerging Markets Index retreated from a five-month high. Japan’s Topix index closed up 0.2 percent, after earlier climbing as much as 1.3 percent. Mitsubishi Motors Corp. tumbled 15 percent, its biggest loss in more than a decade, after the company said it would brief media on “improper fuel economy” tests. It subsequently admitted to manipulating test data involving 625,000 vehicles in order to improve fuel-economy claims.

The Shanghai Composite Index posted its lowest close this month and Hong Kong’s Hang Seng Index was down 1.2 percent.

Currencies

The yen was little changed at 109.22 per dollar after strengthening as much as 0.4 percent following comments by Bank of Japan Governor Haruhiko Kuroda that monetary easing is not a promise of a weaker currency or stronger equities. Japanese exports dropped 6.8 percent from a year earlier in March, while imports declined 14.9 percent, data showed Wednesday.

The New Zealand dollar retreated from its strongest level since June. The kiwi weakened 0.6 percent to 70.04 U.S. cents after breaching the 70-cent mark on Tuesday for the first time since June.

The won rose as much as 0.7 percent to a five-month high, before closing 0.1 percent higher in Seoul. China’s yuan weakened for the first time in four days.

The MSCI Emerging Markets Currency Index rose 0.3 percent to the highest since July.
India’s rupee climbed 0.6 percent, the most in a month, after the nation’s trade deficit narrowed to a five-year low. Malaysia’s ringgit rose 0.6 percent.

Turkey’s lira rose 0.6 percent. Policy makers, who met for the first time under their new central bank chief, Murat Cetinkaya, cut the upper band of a three-pronged rate corridor by 50 basis points to 10 percent.

Commodities

West Texas Intermediate crude oil was lower after rising 3.3 percent on Tuesday amid a three-day labor strike that reduced Kuwait’s output by as much as 1.7 million barrels a day. The country is OPEC’s fourth-largest producer.

“The size of the disruption, had the strike persisted, would have been quite significant,” Ric Spooner, a chief market analyst at CMC Markets in Sydney, said by phone. “It took quite a lot of oil out of production.”

Silver gained as much as 1.8 percent, before trimming its advance to 0.4 percent. The metal surged 22 percent this year and entered a bull market on Tuesday after money managers last week increased their net-long positions by 30 percent to a record.

Iron ore futures traded on the Dalian Commodity Exchange climbed as much as 5.9 percent to the highest level since June 2015 on BHP Billiton’s production forecast cut. Rio de Janeiro-based Vale SA, the largest iron-ore miner, is expected to report record output for the first quarter on Wednesday.

Bonds

Treasuries rose as demand for the safest assets was fed by declines in stocks and oil. The yield on 10-year U.S. Treasuries fell one basis point to 1.77 percent. It may drop to a never-before-seen 1.25 percent in 2016 as investors seek alternatives to lower-yielding securities elsewhere in the world, according to Robert Tipp, the head of global bonds and foreign exchange for the fixed-income division of Prudential Financial Inc.

While the yield on 10-year Treasuries was less than half a percentage point from its record low reached in 2012, the securities offered a yield pick-up of 160 basis points over similar-maturity German bonds and about 188 basis points over Japanese government debt.

Japan’s 40-year bond yield fell to a record low, meaning all the nation’s sovereign bonds yield less than 0.3 percent, as investors rush for securities with positive income.

The cost of insuring corporate debt against default rose for the first time this week. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies climbed one basis point to 72 basis points. A measure of swaps on junk-rated businesses rose two basis points to 305 basis points. Both indexes remain near the lowest in about a month.

Malaysia is moving closer to selling global Islamic bonds. It may price the 10- and 30-year dollar notes at 150 and 165 basis points over U.S. Treasuries, according to a person familiar with the matter who isn’t authorized to speak publicly. Based on current market yields, that would suggest a coupon rate of 3.27 percent for the shorter-maturity notes and 4.23 percent for the longer-term debt.

+++ P.O. V.I (BBG) Investors Are in Denial About China’s Slump: Christopher Balding

P.O. 

I have been saying this for a very long time.

The numbers did not, and do not add up.

Here are a few P.O. on China:

M.P.O. The exhaustion of the Chinese Model

+++ P.O. V.V.I. (BBG) Is China’s Economy Growing ? – China Cement Demand

+++ P.O. V.I (BBG) China Carry Trade Outflows Won’t Overwhelm FX Reserves

In my opinion there is no way China is growing what the government claims it is.

And that’s it.

Francisco (Abouaf) de Curiel Marques Pereira

(BBG) As you’ve no doubt noticed, companies and investors around the world are feeling the pain of China’s economic slowdown. They’re worried about all the layoffs, cuts to surplus capacity and deleveraging to come on the mainland, which will further depress demand. The natural temptation is to blame China for the world’s woes. But outsiders should focus just as much on their own missteps — starting with the widespread misperception that “this time” would be different.

Back in 2009, as China unleashed a massive fiscal stimulus and investment spree in response to the global financial crisis, the rest of the world was all too willing to believe the impossible. Aided byconsultant research predicting decades of explosive growth, companies placed huge bets on China and expected to ride the never-ending boom to riches.

Amid the gold rush, they bulked up to sell China t-shirts or tons of iron ore. They urged their governments to sign free-trade deals with Beijing. Commodity producers heedlessly expanded capacity, believing that 10 percent growth would continue indefinitely. Consumer brands rushed to set up flagships in third-tier Chinese cities. Shipping companies scrambled to build new fleets to meet an expected explosion in global trade.

However, as with so many previous bouts of irrational exuberance, this time wasn’t really different. The ruthless rules of supply and demand still applied. And now, the longer that painful decisions are delayed, the harder they’ll become.

Commodities firms, in particular, are learning that lesson the hard way. As prices rose with Chinese demand, they made large upfront investments financed by borrowing — often on a 20-year timeline, in the expectation that growth would last and last. Now, with China’s economy slowing and the prices of everything from oil to metals plummeting, the bills are coming due.

Major iron ore firms, which had predicted that Chinese steel demand would keep rising until about 2030, are now looking at substantial overinvestment and deteriorating credit. Dairy farmers, who increased their herds with future Chinese consumer demand in mind, are feeling the pinch as milk prices plunge.

After years of ramping up production to fuel China’s expected growth, oil-producing countries from Saudi Arabia to Norway are facing grim decisions about their public finances. Russia is rapidly draining its sovereign wealth fund. Venezuela is pleading with China for loans — on top of the nearly $60 billion already doled out — to stave off collapse. Pundits are warning that the large debt load of U.S. shale-gas and oil producers could pose greater risks than sub-prime lending did a decade ago.

No less so than China, the rest of the world needs to face up to some new realities.

First, the golden age of Chinese construction is over. There’s now enormous surplus capacity in virtually every industry that requires fixed-asset investment. Companies can no longer rely on the “Beijing put” of new government stimulus to boost growth. Iron ore producers and copper miners all need to begin a painful process of downsizingand deleveraging — just as China’s bloated state-owned enterprises do. Producers around the world haven’t faced up to the new normal.

Second, companies of all stripes have to put in the effort to understand China better. Expectations of double-digit growth, regardless of how poor the performance, have vanished. Luxury brands that once hoped their Beijing flagships would smooth the balance sheets at European headquarters need to recognize that different markets require different strategies, and that shops in China won’t run on autopilot. They need to compete.

Third, companies and countries alike need to face up to their own irrational exuberance. Whether it’s failing to diversify, spending recklessly on the back of high prices, or taking on too much debt, fundamental mistakes can’t be blamed on China. Doing so only delays the inevitable.

Few investors seem to fully appreciate the balance-sheet reckoning that is coming. Failing to address the global supply glut only increases the risk of a larger correction. We know that because this time isn’t different: The bill always comes due.

+++ P.O. V.I (BBG) China Carry Trade Outflows Won’t Overwhelm FX Reserves

P.O.

China has one trillion USD of foreign debt due for repayment in 2016.

And a gigantic capital flight has to to be added to this.

People say, that in 2015 capital flight was also one trillion USD, and that a similar figure could be expected for 2016.

Please note that people are using all sorts of unconventional ways for capital flight in China.

This issue has to be monitored very carefully.

I call your attention to this fantastic FT Video, here in this site.

A Must See: +++ (FT) The end of the Chinese miracle (VIDEO)

And please revisit my M.P.O. The exhaustion of the Chinese Model

Francisco (Abouaf) de Curiel Marques Pereira

(Bloomberg Intelligence) — A major factor driving the drop in China’s foreign exchange reserves is the unwinding of the carry trade. With foreign debt levels manageable and incentives shifting away from rapid outflows, that is unlikely to exhaust China’s $3.2 trillion in FX reserves.

In past years, China’s high interest rates and expectations of yuan appreciation looked like a winning bet. The result has been a lucrative carry trade, with substantial offshore
borrowing in dollars and funds parked in China. In 2014, that changed. Expectations of a shrinking interest rate differential, combined with fears of yuan depreciation, made the trade less appealing. Funds that were flowing in started to flow out.

How much foreign debt did China accumulate on the way up, and how much has already been paid off on the way down? Answering that question is made more difficult by breaks in the statistical series and the likelihood that not all overseas borrowing is captured in China’s data. With that in mind, it makes sense to look at low- and high-end estimates:

Estimates of China’s Foreign Borrowing

* The low-end estimate is based on People’s Bank of China data
on foreign debt, with historical numbers adjusted to take
account of a break in the series. The peak was about $2 trillion
in 3Q 2014 and foreign debt fell to $1.5 trillion in September
2015, the latest data available. Since then, about $495 billion
has flown out of China, based on Bloomberg Intelligence
Economics’ estimates. Assuming that went mainly to repay foreign
debt, the total could have dropped to $1.0 trillion.

* The high-end estimate is based on the same PBOC data, but adds
in an estimate of overseas borrowing by Chinese firms that might
not be captured in the official numbers. That could happen if,
for example, borrowed funds came onshore illegally through the
trade account. Assuming 50% of lending by Hong Kong banks ended
up in the mainland, and holding all the other elements of the
calculation unchanged, China’s foreign debt would be $1.3
trillion.

Neither of those estimates are particularly alarming. In
both cases, China’s capital outflows likely have some distance
still to run. But in both cases also, even if the entire
quantity of foreign debt flowed out, China would still be left
with substantial FX reserves.

There are additional reasons to steer clear of excess
alarm:

* Since the middle of January, the yuan has stabilized and
expectations of U.S. rate increases have been reduced. That
tamps down incentives for moving funds out of China.

* Not all overseas borrowing is a short-term play on rate
differentials and yuan appreciation. Some — perhaps most — is
invested in stickier long-term projects.

* Not all overseas borrowing is in dollars. With negative rates
in Europe and Japan, anyone borrowing in euro or yen will
probably be content to leave it in China.

China’s capital outflows are unnerving and uncertainty
remains. The carry trade is not the entire story and an outflow
in foreign portfolio funds or (worse) domestic household funds
would add to the alarm.

But based on evidence from the size of China’s overseas
borrowing, and the shift in incentives as the yuan stabilizes,
carry trade outflows should slow and ultimately end long before
China’s FX reserves are exhausted. February’s reduced drop in
reserves — $29 billion versus $99 billion in January — may
prove to be the shape of things to come.

+++ P.O. V.V.I. (BBG) Is China’s Economy Growing ? – China Cement Demand

P.O.  

…Is China’s Economy Growing…?

…Or Growing what the Government claims…?

…One thing we think we know…

…An economy cannot grow without increases in sales of electricity, cement and steel.

…Because of changes in cement quality used the data is not clear.

…And the current cement glut in China, and also the current excess cement capacity, which at the end of 2015 was of 400 million tons or 15 % of the total, make any assessment very difficult.

…And, anyway, all data from China is everything but clear…

…But I still would argue that the odds are that China is not growing at all.

…And certainly not what Beijing claims it is growing.

…Additionally data released yesterday shows an export slump that deepened in     February,with overseas shipments that tumbled 25.4 percent in U.S. dollar terms from a year earlier.

…And imports felt for the sixteenth month in a row, an estimated 13.8 percent.

…In conclusion,and has I have said in previous occasions, I am of the opinion that China’s economy is not growing at all.

…And this is very dangerous.

    Francisco (Abouaf) de Curiel Marques Pereira

(BBG) DFGHH

+++ P.O. V.V.I. (FT) China deploys missiles on disputed island

P.O.

V.V.I.

This issue is has important as it gets.

To understand on what we are talking about, I refer you to my P.O. on China.

To start with, I call your attention to this M.P.O. that lays out the “scenery” for it all.

But please use the link and go to the M.P.O. itself , and use the links provided there.

And then please visit the older P.O. on the military confrontation itself.

M.P.O. The exhaustion of the Chinese Model:

«M.P.O.

On China, the anti-corruption drive, and the latest developments.

The World was surprised by the sudden disappearance and the following reappearance of Mr Guo Guangchang the Chairman of Fosun, China’s self styled Warren Buffett.

Fosun has been on an acquisition spree abroad, and owns  quite a number of very well known companies in the West, and has substantial investments in Portugal.

The official explanation for the four days absence , and a face saving one, was ” four days out of sight while assisting a judicial investigation” (Financial Times).

Even if it is not uncommon in China for public and private officials to assist an investigation, no one is buying that version of the events.

Because Mr Guangchan was not charged of any wrongdoing, and Fosun said that the investigations had nothing to do with the Company.

This bizarre situation comes after Mr Guangchang having been advised, more than a year ago,  to get a second, and of different Country, passport.

But he said he did not need one because he had been “behaving well”…

A lot of private entrepreneurs have been “pested” by the various authorities since the Communist Party General Secretary Xi Jinping announced his anti-corruption campaign following the 18th National Congress which was held in November 2012.

And recently, in another article in this site, Mr Xu Ming, a former business ally of disgraced Chinese politician Bo Xilai has died in prison of illness, months before he was due to be released.

Probably he knew too much…

From The FT:

“The death of Xu Ming, founder of property conglomerate Dalian Shide Group, who testified against Bo’s wife Gu Kailai in 2013, is the second high-profile death in recent months of a person involved in the downfall of Bo and Gu, the biggest political scandal in China since the trial of the Gang of Four more than three decades ago.”

Then you have the military confrontation with the US, clearly provocative, the interference in Taiwan’s elections, with the “meeting of two gentlemen, the admission, (finally), that there is a serious pollution problem, the trial of lawyers including the famous and prominent Mr Pu Zhiqiang , the massive capital flight, the persecution of financial market players, blaming them because he market went down, etc, etc, etc.

The statement by Fosun saying that from now on , the Company was going to focus on China, clearly is in response to pressure by the authorities, that have been trying to control the massive capital flight.

And that have been pesting the companies that try to list abroad, because it is an obvious way to expatriate capital.

President Xi Jinping is a very astute person, and reportedly the most powerful Chinese leader since Mao Tse Tung.

Or even more powerful,some people say.

He knows that the growth model based on exports with  cheap labour and highly polluting factories is no more.

He also knows that the clean up is going to take decades.

He also knows that China , traditionally, has been a corrupt society, in part due to the very low wages.

He knows that his currency is devaluating and that he can do very little about it.

He wants to keep the power in the Communist Party.

And in consequence, and as usual in these kind of Countries (vidé Russia), he has to crackdown on anything that resembles power, and promote everything else that distracts the people’s attention from the fact that China is not growing what it used to in the past.

And that past growth was the people’s excuse to tolerate the system.

Which is under more and more scrutiny.

This is what all this is about, in my opinion.

Let’s hope it stays peaceful.»

Please see the links below:

 

+++ P.O. and V.V.I. (FT) China must learn how to be a great power

 

+++ V.V.I. (FT) Chinese activity on disputed islands raises doubt over halt claim (Click to see)

+++ (BBG) Slimmed Down Chinese Military to Help Xi Counter U.S. Dominance (Click to see)

+++ M.P.O./V.V.I. (FT) US warships to challenge Chinese claims in South China Sea (click to see):

+++ P.O./ V.V.I. (FT) Pomp, circumstance and combat vehicles at Beijing parade (Click to see)

+++ P.O./V.V.I. (FT) Chinese navy sails off Alaska coast as Obama visits Arctic (Click to see)

+++ P.O./V.V.I. (FT) China parades ‘carrier-killer’ missile through Beijing (Click to see)

+++ V.I. (FT) China set to parade its ‘carrier-killer’ missile through Beijing (Click to see)

+++ (BBG) China Military Parade Sets Spin Machine Into Overdrive (Click to see)

+++ V.I. (FT) Militarism is a risky temptation for Beijing (Click to see)

 

 

Francisco (Abouaf) de Curiel Marques Pereira

(FT) 

China has deployed anti-aircraft missiles to a disputed island in the South China Sea, according to satellite images and the Taiwan government, increasing tensions just as US President Barack Obama sought regional support to push back against Beijing’s assertive territorial stance.

Taiwan’s ministry of defence said on Wednesday that China had stationed the missiles on Woody island, which is controlled by Beijing but also claimed by Taiwan and Vietnam. The revelations came as Mr Obama concluded a summit with Southeast Asian leaders in which he aimed to corral their support in territorial disputes.

During a September visit to the White House, Chinese President Xi Jinping said Beijing did not intend to militarise the facilities it had built in the South China Sea. However, it was not clear whether he was referring to both the Paracel and Spratly Islands, or just the Spratlys — which China calls the Nansha islands.

The Taiwanese comments confirmed a report by Fox News, which on Tuesday published civilian satellite images showing several mobile missile batteries had been deployed on the island, part of the contested Paracel chain, between February 3 and February 14.

It said an unnamed US defence official had confirmed the accuracy of the photographs.

China and the US have blamed each other for militarising the long-running disputes in the South China Sea, parts or all of which are claimed by China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei.

Beijing’s intensifying programme of reclamation on reefs in the contested waters, and the construction of airfields and other military facilities, has sparked concern in Southeast Asian capitals as well as Washington. The US has responded with so-called freedom of navigation operations, sending military vessels and aircraft near some disputed islands without warning Beijing. The most recent such operation, by a US Navy guided-missile destroyer, came just over a fortnight ago.

Taiwan’s defence ministry said in a statement on Wednesday that it would “watch further developments closely” and called on all parties to “maintain peace and stability together in the South China Sea and avoid adopting any unilateral measures that would increase tensions”.

No one from the Pentagon or the Chinese foreign ministry was immediately available to comment.

The missiles are the latest in a series of steps by Beijing to beef up its military presence on Woody island. Last year China renovated the airstrip, while in October a number of Chinese J-11 fighter planes were briefly based there during exercises. In December China’s state oil company Sinopec announced it would build a large refuelling facility on the island.

“If you put that all together, China is demonstrating that it can harden this into a much more viable strategic outpost,” said Ashley Townshend, an expert on the South China Sea from the US Studies Centre at Sydney University who is a visiting fellow at Fudan University in China. “Beijing is showing how it can increase the cost and risk that it can impose on other countries testing its claims in the region.”

Woody Island is about 300km south-east of China’s Hainan island and north of the disputed Spratly chain, where much of Beijing’s hotly contested reclamation work has been conducted.

Map: South China Sea, Woody Island

News of the missile deployment came after Mr Obama on Tuesday ended the first-ever US-based summit with the leaders of the Association of Southeast Asian Nations, where China’s construction activities in the South China Sea was one of the principal topics of conversation.

The joint statement released after the event called for the maintenance of freedom of navigation and for disputes in the region to be resolved amicably. However, it did not make specific mention of China, a sign of the divisions within the region between China’s allies such as Cambodia and Laos and those locked in simmering disputes with Beijing, including Vietnam and the Philippines.

Speaking on Tuesday, Mr Obama said that the US military would “continue to fly, sail and operate wherever international law allows”. He also said the Asean leaders had “discussed the need for tangible steps in the South China Sea to lower tensions, including a halt to further reclamation, new construction and militarisation of disputed areas”.China-deploys-missiles-on-disputed-island-FT

+++ P.O. (BBG) China Stumbles in Race to Pass U.S. as World’s Biggest Economy

P.O.

…Is that so…?

…What a coincidence…

…And they thought they could pass the U.S. just like that…?

…no comment…
(used in refusing to answer a question, especially in a sensitive situation).

Francisco (Abouaf) de Curiel Marques Pereira

(BBG – click to see) For the first time in almost a decade, China has lost ground in catching up with the U.S. economy, when output is measured in dollars.

U.S. gross domestic product increased $590 billion in 2015 from a year earlier, according to data released Friday. China’s economy, while reporting 6.9 percent growth for the year, added $439 billion, as a weaker yuan sapped the value of output gains in dollar terms, according to data compiled by Bloomberg.

“The U.S. has come back from the financial crisis with robust technology innovation leading the recovery, while China’s economy is heading down,” said Niu Jun, an international-relations professor at Peking University. “The number itself isn’t a specific reason for being either too optimistic or pessimistic, but if China can’t successfully reform its economy, the real gap between the two will expand, and it will take longer for China to catch up.”

Last year was the first time since 2006 that China made no progress in closing the gap with the world’s largest economy. While the U.S. economy expanded 2.4 percent for a second straight year, China slowed to the weakest expansion pace in a quarter-century as old growth drivers like heavy industry and exports slow.

As for 2016, China’s economy is forecast to expand 6.5 percent in real terms, while the yuan is projected to depreciate to 6.79 against the dollar, down more than 7 percent from the average level in 2015.

“Whether China can catch up the U.S. in dollar terms is not important, but whether China can sustain its development is,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. “As long as China can expand 5 percent a year in the next decade, it’s only a matter of time until it surpassed the U.S.”

P.O. (FT) Martin Wolf on China capital controls

P.O.

The adjustment in China has not even started yet.

China has an economy with huge structural in balances, and the excess savings, (five trillion) are a major problem.

China has lost 20 % of it’s foreign exchange over the last year.

And we are talking about the largest foreign currency reserves in the World…

This is a very important issue, and that has to be monitored closely.

Please see my P.O.

FCMP

(FT) FT chief economics commentator Martin Wolf on whether China should tighten its capital controls to stem huge outflows of money, and the challenges posed by market turmoil and its slowing economy.

 

 

+++ M.P.O. (FT) Osborne warns of ‘cocktail of risks’ from China and slump in oil

M.P.O.

In my opinion the First Secretary of State and Chancellor of the Exchequer is absolutely right. And he is not being overly pessimistic at all.

Mr George Osborne is a very intelligent man, and has certainly proven to be so. Personally, I am even more pessimistic than Mr Osborne.

If one looks carefully, there is not a single region in the World without troubles. The civilization confrontations, the infighting inside religions, the deflation,the low price of raw materials, the low and probably even lower price of oil, the excess of supply of natural gas, the exhaustion of the Chinese model, and of the Brazil one,the tensions with Russia, are all destabilizing facts, that are hitting  all Countries.

In my opinion, the low price of raw materials, oil and natural gas, will negatively impact a lot of Countries, and I expect quite a number of them to go bust, and ask the IMF for help.

Martin Wolf of the Financial Times expects that at least one of the G20 Countries will ask for help to the IMF in 2016. A lot of Companies, whose activities relate to the price of oil, will go bankrupt. The impact of all this in the financial system will be severe. Mr George Soros said he expected a crisis, and that it felt like 2008.

I Francisco expect a crisis like the World has never seen.

Francisco (Abouaf) de Curiel Marques Pereira

(FT)

Chart: Brent crude, $ per barrel

George Osborne is warning that 2016 could mark “the beginning of the decline” for Britain unless the country sticks to tough economic reforms, citing the Chinese slowdown and plummeting oil prices among “a dangerous cocktail of new threats”.

The pace of China’s falling currency, now at its lowest level in nearly five years, has put investors on notice that the Chinese economy, an engine of global growth, may be slowing at a faster pace than previously forecast.

The chancellor has also warned that the Bank of England and ministers need to be wary of asset bubbles in the economy and the risk to stability when interest rates in the UK eventually start to rise.

Mr Osborne, speaking on the BBC on Thursday morning, mentioned buy-to-let mortgages as one area of concern but said he was not attempting to interfere with the BoE’s independence.

“We have got to be ready but and when interest rates go up, that will be a sign of a stronger economy,” he said.

Later on Thursday, the chancellor will argue that a “creeping complacency” is entering the political debate in Britain, with some believing it is now safe for the government to ease back on austerity.

But he will warn that economic problems in China, Brazil and Russia, combined with sharp falls in commodity prices and the crisis in the Middle East, were all menacing the global economy.

“Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake,” he will say in a speech in Cardiff.

His speech comes as it emerged that the Treasury has approached banking advisers on preparing for privatisation a £17bn portfolio of loans from Bradford & Bingley, a symbolic moment in Britain’s recovery.

Mr Osborne has already ordered the sale of the government’s stakes in Lloyds Banking Group, Royal Bank of Scotland and the Northern Rock loan book; the sale of the B&B loans would signal the end of a chapter of state intervention in the banking sector.

But the chancellor fears that fading memories of the 2008 crash and of the fiscal emergency that followed has lulled Britain into a false sense of security at a time when new dangers are emerging.

The sharp decline of China’s currency has raised the prospect of renewed intervention by the central bank as Beijing seeks to control its fragile exchange rate policy. Investors around the world are worried that an unexpectedly fast depreciation will further destabilise China’s economy. Some also fear it could trigger a wave of competitive devaluations across the region.

“During our investor meetings in December, the most significant risk that investors were worried about was a substantial devaluation of the renminbi,” wrote Timothy Moe, Goldman Sachs’ chief Asia-Pacific equity strategist, in a research note on Wednesday.

Mr Osborne will say in his speech that 2016 “is the year we can get down to work and make the lasting changes Britain so badly needs. Or it will be the year we look back at as the beginning of the decline.”

His comments have a strong political purpose, notably reminding his critics — including Tory MPs who opposed his £4.4bn cut in tax credits — that the public finances remain in a fragile state.

Nevertheless, his economic assessment for the year ahead is notably gloomy. “Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats,” he will say.

He will argue that political developments in Saudi Arabia and Iran in recent days have only added to the dangers.

[This] is the year we can get down to work and make the lasting changes Britain so badly needs. Or it will be the year we look back at as the beginning of the decline– George Osborne

The chancellor already had cause for concern for Britain’s prospects after a series of weak economic data just before Christmas had already effectively ruined many of the forecasts in his November Autumn Statement.

Instead of the 2.4 per cent growth Mr Osborne expected for 2015, downward revisions already announced are likely to bring the figure down towards 2 per cent when data for the final quarter is released later this month.

Michael Saunders of Citi was early to cut his forecast on Wednesday, saying he now expected growth of 2 per cent in 2016 because the economy faces “major headwinds from fiscal restraint and external trade”.

Weakness in inflation is limiting growth of the size of the cash economy and tax receipts are falling short of expectations, potentially giving the chancellor a difficult Budget to present on 18 March.f2a286f4-b494-11e5-8358-9a82b43f6b2f

+++ P.O. (BBG) China Halts Stock Trading After 7% Tumble in Worst Start to Year

P.O.

In the cards, as per my various P.O. on China, but particularly this one M.P.O. The exhaustion of the Chinese Model.

Quoting myself from the above mentioned article:

“President Xi Jinping is a very astute person, and reportedly the most powerful Chinese leader since Mao Tse Tung.

Or even more powerful,some people say.

He knows that the growth model based on exports with  cheap labour and highly polluting factories is no more.

He also knows that the clean up is going to take decades.

He also knows that China , traditionally, has been a corrupt society, in part due to the very low wages.

He knows that his currency, has and is in a pre-devaluation  and that he can do very little about it.

He wants to keep the power in the Communist Party.

And in consequence, and as usual in these kind of Countries (vidé Russia), he has to crackdown on anything that resembles power, and promote everything else that distracts the people’s attention from the fact that China is not growing what it used to in the past.

And that past growth was the people’s excuse to tolerate the system.”

End of quote.

And were there is no growth, people become less tolerant…

And with this came the massive sell orders .

Francisco (Abouaf) de Curiel Marques Pereira

(BBG – click to see) The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.

Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent. An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened. Traders said the halts took effect as anticipated without any major technical problems.

The world’s second-largest stock market began the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of this week. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.

“This is a pretty dramatic start of trading for the year,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which manages about $45 billion. “Some investors may have been unwinding their positions when trading volumes were light. That could have exaggerated the moves. The market has been very difficult to predict.”

Ripple Effect

Monday’s selloff rippled through regional equity markets, with Asian shares and U.S. equity-index futures extending losses. Chinese stocks’ influence on global markets has increased after the nation’s $5 trillion equity market rout, from mid-June through August, rattled investor confidence in the world’s second-largest economy.

Brokerages were prepared for the circuit breakers after conducting tests on the new mechanism last month, according to William Wong, the head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Herd Behavior

Under the circuit breaker rules finalized last month, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02 percent before trading was suspended. The Shanghai Composite Index lost 6.9 percent.

Individual investors in China, who drive more than 80 percent of trading, may have rushed to sell after the first circuit breaker took effect to avoid getting stuck in positions by the 7 percent suspension, according to Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong. It took just seven minutes for the second halt to come into effect as shares tumbled after the first suspension ended, according to data compiled by Bloomberg.

Chinese shares listed in Hong Kong, which aren’t affected by the circuit breakers, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated as much as 4.4 percent, before closing 3.6 percent lower.

Selling Overhang

“Investors are using Hong Kong to hedge their positions,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “The circuit breaker may increase selling pressure further.”

China’s first economic reports of 2016 showed a series of interest-rate cuts and increased fiscal stimulus have failed to boost flagging growth by the nation’s manufacturers. The private Caixin China Manufacturing purchasing managers’ index decreased to 48.2 last month, down from a five-month high of 48.6 in November. An official PMI reading released on Friday also showed a contraction, while a gauge of services rose to the highest since August 2014.

Traders are “bearish” after the manufacturing index readings, Wong said. “Investors are also concerned that a removal of major shareholders’ selling ban would weigh on indexes.”

Vulnerable Stocks

Goldman Sachs Group Inc. estimates the sales ban — imposed at the height of last year’s equity rout — kept $185 billion of shares off the market. Technology companies are the most vulnerable to a sell-off once the restriction is removed after they led a rebound since the benchmark index’s August low, according to Baptized Capital.

The China Securities Regulatory Commission announced July 8 that investors with holdings exceeding 5 percent, along with corporate executives and directors, would be prohibited from selling stakes for six months. The rule, which followed the suspension of initial public offerings and curbs on short-selling, was intended to stabilize capital markets amid an “unreasonable plunge” in share prices, according to the securities regulator. The CSRC hasn’t yet specified whether the ban will be lifted.

“There will be greater pressure from institutional investors once the ban on share sales is lifted,” Pang said. The government probably didn’t intervene to prop up shares today “as it needs to see how the market will cope with new changes in trading system.”

+++ P.O/V.I. (FT) Fosun chairman Guo Guangchang visits US after China probe

P.O.

This strange affair is getting more weird by the minute…

I refer you to my M.P.O. The exhaustion of the Chinese Model, 2015-12-14

and to my +++ M.P.O. (FT) Wealth comes with health warning in China, 2015-12-15.

Let’s carefully watch the next developments.

They will tell us a lot…

Francisco (Abouaf) de Curiel Marques Pereira

(FT) Guo Guangchang, the Chinese tycoon who went missing last week while assisting Chinese authorities with an unspecified investigation, has been allowed to travel overseas, according to Fosun, the conglomerate he heads.

In a statement posted on its official WeChat social media account, the company said Mr Guo would attend a performance of Cirque du Soleil in Montreal on Monday. Fosun owns a 25 per cent stake in the Canadian entertainment group, as well as owning the French resort group Club Med.

Two people with knowledge of his plans said he was already in New York on the first leg of a business trip. Pictures of Mr Guo, known as “China’s Warren Buffett”, dining in a restaurant in New York’s Midtown area on Thursday night were widely circulated on Chinese social media.

“It all appears to have been a storm in a teacup,” said Rupert Hoogewerf of the Hurun Report, a Shanghai-based publication. “Chinese entrepreneurs breathed a collective sigh of relief when he appeared at a company conference on Monday and now they will be further relieved that he’s been allowed to travel overseas.”

Mr Guo is the highest-profile private sector businessman to have been ensnared in the Chinese government’s anti-corruption campaign. He went missing last Thursday and reappeared on Monday at an internal company conference, where he was greeted with a standing ovation. Neither he nor the company has commented publicly on what the investigation was about, nor whether Mr Guo himself was a target or helping the authorities gather evidence about someone else.

The suggestion that the Chinese Communist party and government investigators might be turning their attention to the mainland private sector, largely spared up to now in the anti-corruption drive, has sent shockwaves through China’s business and investment community.

Fosun, China’s largest private conglomerate, is one of the mainland’s most aggressively acquisitive companies, especially overseas. In 2013 it bought one of Manhattan’s most famous office blocks, One Chase Manhattan Plaza, for $725m.

Fosun has reassured investors since Mr Guo’s disappearance last Thursday, which caused the share price of the Hong Kong-listed flagship Fosun International to fall 9 per cent. The company told foreign partners privately this week that Mr Guo’s participation in the investigation had ended and that he had not been a target. No government official has commented on why he was detained.

An overseas trip may be designed to demonstrate that he is free to move around and is not considered a flight risk, one business analyst said, adding that at the very least it showed he had resumed his normal duties at the head of the company.

However, it remains unclear how his brief disappearance last week will affect some acquisitions that remain in progress.

Fosun is poised to complete a €210m purchase of Frankfurt-based Hauck & Aufhauser, a private bank established in the 18th century, pending approval from Germany’s financial regulator and the European Central Bank. In a separate bidding war for BHF Kleinwort Benson, the London merchant bank, Fosun is likely to lose out to French private bank Oddo & Cie.

The ECB had previously deemed Fosun a “fit and proper” potential owner of BHF but with conditions attached, according to people familiar with the transaction. These include a requirement that BHF remains a member of Germany’s deposit guarantee scheme for private sector banks, which is administered by the country’s main banking association.Fosun-chairman-Guo-Guangchang-visits-US-after-China-probe-FT.

+++ M.P.O. (FT) Wealth comes with health warning in China

 M.P.O.

A Capitalist economy is absolutely not compatible with a Communist Government.

And that’s China’s number one problem.

When growth was very strong, people tolerated the excesses of the various officials and the ones of the government.

And the government was more easy going.

Now that growth is not what it used to be, no tycoon is safe, no prominent lawyer is safe also, or anyone that can stand up to the government, for that matter.

China is an immense Country, and it is difficult to foresee any other form of government in the near future.

But if China wants to continue to prosper, a radical change in the way the Party and the Government thinks and operates is needed.

And urgently…

Because the more able and their capital are leaving China in unimaginable numbers.

I call your attention to the M.P.O. The exhaustion of the Chinese Model that I wrote yesterday.

And I repeat the words with which I ended yesterday:

“Let’s hope it stays peaceful.”

Francisco (Abouaf) de Curiel Marques Pereira

 

 

(FT) If ‘right living’ head of one of country’s leading companies can disappear, then no tycoon is safe.

“People asked why I am not worried. You have to believe that as long as you have made no mistake, the government will not mess with you . . . if I have been good, why would the government want to target me?”

Guo Guangchang, chairman of Shanghai-based conglomerate Fosun International — known as China’s Warren Buffett — penned these words last year in a Guide-to-getting-rich-in-China-without-ending-up-in-jail. He has just been released after four days “assisting” police with an investigation into — no one quite knows what. No one knows where he was, or why he was allowed to leave (or what it was all about anyway). It seems the government found a way to “mess” with him after all.

We all know that wealth in China comes with a health warning. But Mr Guo, the modest chairman and co-founder of one of China’s most prominent companies, thought he had the secret antidote: right living. He is known to believe in keeping close to politics — but far from politicians. He practises the Asian martial art of tai chi, even during business meetings. He is a devout believer in the virtues of eastern philosophy. But it seems being “good” just wasn’t good enough.

True, police have not announced any charges against him, and it’s not even clear whether he was the target of the investigation, or whether he was only providing evidence against someone else. Fosun executives gave an entire press conference on Sunday night without saying anything clearly about that — though Fosun later told some foreign business partners that he was not the target and the probe was just “political”, as though that is any consolation in China.

It’s also not clear whether his disappearing act is over for good — and the Shanghai police have found it inconvenient to answer their phones for days, so there’s no risk of them clarifying anything. Some stories about the episode have disappeared from local media and transcripts of the Fosun press conference have even been deleted from some websites. Maybe the government thinks we’ll all forget that one of China’s richest and most internationally prominent businessmen disappeared for four days and no one knows why. Perhaps they want to disappear all evidence that they disappeared him.

All may still be well for Mr Guo. But these aren’t the kind of headlines he’s going to want very often — and certainly not when in the middle of buying an Israeli insurance company, a German private bank and trying to acquire one of the City of London’s oldest names in banking, BHF Kleinwort Benson. If the man whose company owns Club Med and vast tracts of the centre of Shanghai, not to mention one of the most famous buildings in Manhattan, isn’t safe, then what Chinese tycoon is? Could we one day be reading headlines about Alibaba’s Jack Ma going missing, perhaps even in the newspaper he has just announced he is buying, the South China Morning Post ?

“If this was anywhere else in the world, [Guo] would be out in front of the cameras telling how this is an outrage,” says Fraser Howie, co-author of Red Capitalism . “But this is China. He is staying quiet.”

He’s not normally so quiet. A year ago I sat down with Mr Guo over lunch, and I never thought that scarcely a year later I’d be writing stories about how he’d gone missing.

I should have known better: an alarmingly high proportion of those I have interviewed in China are no longer free to answer questions. My inaugural interview with a Chinese tycoon was in 2008, when an FT team spoke to home appliance mogul Huang Guangyu, who was at the time China’s richest man. Shortly after the interview he was arrested and has been in jail ever since.

Then there was Wang Zongnan, head of Bright Food, the company that bought Weetabix and tried to nab Yoplait and United Biscuits. We interviewed him in 2011. Now he’s been sentenced to 18 years for bribery and embezzlement — and Mr Guo was linked to him in the court transcripts.

Mr Guo’s detention may have everything or nothing to do with that. It may even have nothing to do with Mr Guo. But the message could not be more damaging, to him, to his company, and to China. The government can “mess” with you. However good you are.Wealth-comes-with-health-warning-in-China-FT

M.P.O. The exhaustion of the Chinese Model

M.P.O. 

On China, the anti-corruption drive, and the latest developments.

The World was surprised by the sudden disappearance and the following reappearance of Mr Guo Guangchang the Chairman of Fosun, China’s self styled Warren Buffett.

Fosun has been on an acquisition spree abroad, and owns  quite a number of very well known companies in the West, and has substantial investments in Portugal.

The official explanation for the four days absence , and a face saving one, was ” four days out of sight while assisting a judicial investigation” (Financial Times).

Even if it is not uncommon in China for public and private officials to assist an investigation, no one is buying that version of the events.

Because Mr Guangchan was not charged of any wrongdoing, and Fosun said that the investigations had nothing to do with the Company.

This bizarre situation comes after Mr Guangchang having been advised, more than a year ago,  to get a second, and of different Country, passport.

But he said he did not need one because he had been “behaving well”…

A lot of private entrepreneurs have been “pested” by the various authorities since the Communist Party General Secretary Xi Jinping announced his anti-corruption campaign following the 18th National Congress which was held in November 2012.

And recently, in another article in this site, Mr Xu Ming, a former business ally of disgraced Chinese politician Bo Xilai has died in prison of illness, months before he was due to be released.

Probably he knew too much…

From The FT:

“The death of Xu Ming, founder of property conglomerate Dalian Shide Group, who testified against Bo’s wife Gu Kailai in 2013, is the second high-profile death in recent months of a person involved in the downfall of Bo and Gu, the biggest political scandal in China since the trial of the Gang of Four more than three decades ago.”

Then you have the military confrontation with the US, clearly provocative, the interference in Taiwan’s elections, with the “meeting of two gentlemen, the admission, (finally), that there is a serious pollution problem, the trial of lawyers including the famous and prominent Mr Pu Zhiqiang , the massive capital flight, the persecution of financial market players, blaming them because he market went down, etc, etc, etc.

The statement by Fosun saying that from now on , the Company was going to focus on China, clearly is in response to pressure by the authorities, that have been trying to control the massive capital flight.

And that have been pesting the companies that try to list abroad, because it is an obvious way to expatriate capital.

President Xi Jinping is a very astute person, and reportedly the most powerful Chinese leader since Mao Tse Tung.

Or even more powerful,some people say.

He knows that the growth model based on exports with  cheap labour and highly polluting factories is no more.

He also knows that the clean up is going to take decades.

He also knows that China , traditionally, has been a corrupt society, in part due to the very low wages.

He knows that his currency is devaluating and that he can do very little about it.

He wants to keep the power in the Communist Party.

And in consequence, and as usual in these kind of Countries (vidé Russia), he has to crackdown on anything that resembles power, and promote everything else that distracts the people’s attention from the fact that China is not growing what it used to in the past.

And that past growth was the people’s excuse to tolerate the system.

Which is under more and more scrutiny.

This is what all this is about, in my opinion.

Let’s hope it stays peaceful.

Francisco (Abouaf) de Curiel Marques Pereira