The Chinese Yuan Is Collapsing
Below we have tried to simplify what is happening as much as possible… (since there are many pathways into and out of all of these positions) to try and enable most to comprehend the problem
Virtuous circle… (last few years)
- Specs sell USD/JPY/EUR, Buy CNY
- Use CNY to buy copper/commodities
- Use copper to finance credit
- Use credit to finance working capital/real estate purchases
- Real estate goes up, more credit available
- Copper goes up, more credit available
- encourages more buying CNY to start virtuous circle…
BUT what happens when one of these chains start to break? OR ALL OF THEM? (now!)
- Thanks to PBOC, can't roll debt via shadow banking system
- Can't rely on local govt to bail out cashflow
- Sell copper/commodities to meet cashflow needs
- Copper price goes down, credit tightens
- Credit tightens, Real estate prices drop
- Real estate prices drop, specs start exiting CNY
- CNY weakens…
And then… (tomorrow)
- Plenty more firms piled on to use the inexorable trend in CNY strengthening as their carry-trade piggy bank (or merely to hedge their export receipts)…
- Those derivative (over-hedges) are now losing money very rapidly…
- Liquidate hedges – downward pressure on CNY
- downward pressure on CNY, more losses…
Remember carry-traders are little more than sophisticated leveraged momentum players – so when the trend is no longer your friend, no amount of carry-arbitrage will cover MtM losses on the notional…
The Music Just Ended: "Wealthy" Chinese Are Liquidating Offshore Luxury Homes In Scramble For Cash
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Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.
Looks like the parties about to start….
The scary thing is as I was reading your post the radio in the background started playing “it’s the end of the world as we know it” by R.E.M. Freaky or what?
jmsrachel wrote:"it's the end of the world as we know it"Very apt Joe. In a few years you'll be reminiscing over a beer, "remember the good ol' days when …..".
I don't think I've ever seen a RE markets under threat from so many angles as now.
Export earnings are set to take a substantial hit over the next 12 – 18 months as China unwinds. We're already seeing extremely low prices for coal and declining prices for iron ore, copper etc. That's going to rub off hard as the govt tries to contain budget deficits while keeping growth alive. That translates into more layoffs as exporters struggle and their associated businesses (logistics chain) also feel the pinch.
Banks are a real threat if liquidity freezes. AU banks are heavily exposed to China. ANZ is up to its eyeballs with Reinhart's financing of the new Roy Hill mine. There is an avalanche of supply coming on over the next 18 months just when demand is retracing.
Hot money flows out of China have fueled property markets globally. If the Chinese unwind gets out of control (and I can't see how they can retain control of such a complex credit problem) then the early signs of Chinese selling their stashes of globally distributed property to cover debts and maintain their personal liquidity will start to show soon in property markets locally. Sydney and Melbourne could get hit quite hard. It will be bad enough if the Chinese simply stop buying. It will get magnitudes worse if they start selling because just as they have little regard for what price they pay when times are tough they give little regard to what they sell for.
If you start to see panic in the market it's game over.
It's just not fair….
Furious Chinese Demand Money Back As Housing Bubble Pops
With new project prices down over 20%, 'homeowners' exclaim "return our hard-earned money" and "this is very unfair" – who could have seen this coming… "We aren't speculators. We just want an explanation from the developer," said one 35-year-old home buyer, who said he had bought an apartment and gave his surname as Wu. "This is very unfair." Unfair indeed.
Bank runs in China?? No way… get outa here…
What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors
Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.
The average Chinaman knows implicitly that the system is built like a house of cards and could collapse at any minute hence the race to withdraw one's funds at the merest rumor. The West hasn't yet figured this out but soon will is my guess and when that days comes……
One only needs to look at the history of China to see what will eventually happen!? Although the government completely controls most aspects of the economy and population growth, they are trying to maintain it at an unsustainable level.
Is it now?
I don't thinks so, China is the richest country in the world, guess who the western world owes all its debt to?
So much noise. Its best to wear ear plugs.
Hey Freckle, as an Aussie expat living in Hong Kong I'm always very interested reading your posts regarding what looks to be not "If" but "when" the financial markets collapse. I'm very curious to know what you believe will happen to the Aussie dollar as a result, currently I have saved 20% deposit in HK dollars & of which I'd have to exchange into Aussie for the purchase.. I'm definitely of the view the Aussie is way overvalued & of course if the Aussie collapses then Id be better of holding onto the Hk dollars in the mean time & investing in property at a later date.. the frustrating thing is forecasts of sydney to continue growth upward of 10+% & brisbane 5+%… catch 22 i hold off for the hk dollars to be exchanged into higher aussie or bite the bullet exchanging dollars but expect the asset to go up in value. Hmm?
underdev wrote:China is the richest country in the world, guess who the western world owes all its debt to?
China isn't rich. It's one of the most indebted countries in the world. It prints 200+ billion per month trying to keep the ship afloat. Without cheap labor it falls flat on its face.
Stevie2013 wrote:I'm very curious to know what you believe will happen to the Aussie dollar as a resultThe AU$ is a tough one. Logic says it wall fall against all currencies if China folds but if China folds then many other countries are also in the crapper as well. The US$ is looking like it could take a hiding over the next decade. The Ukraine debacle has pushed Russia and China closer and that's bad for the US and to a lesser extent Europe. If Putin puts the screws on Europe via the energy lever then the Euro economy could tank spectacularly.
Ask me something simple like what are the lotto numbers for this week.
I can't be absolutely sure in this upside down world of finance but my gut tells me China may just have had an uh-oh! moment…
China's Credit Pipeline Slams Shut: Companies Scramble For The Last Drops Of Liquidity
…where $1 trillion in credit was created in the fourth quarter alone, that is clearly unsustainable for the simple reasons that i) China will quickly run out of encumbrable assets and ii) the bad, non-performing loan accumulation has hit an exponential phase, which incidentally is why Beijing is scrambling to slow down the "flow" from the current unprecedented pace of $3.5 trillion per year.
Boy this is going to hurt…
It's not unusual for the big guys to grab all the limelight in good times and bad but in their shadow stand many smaller countries who will add to the mayhem should things go tits up.
Hong Kong banks have loaned 165% of the territory’s GDP to China
Pretty obvious where this is going …..
HSBC China Composite PMI Tumbles To 28-Month Lows As Services Fell (& Rose)
Hey mate
China is slowing down, you should see how bad exports are out if china. In fact 4 major shipping lines will be merging just to stay afloat
Jpcashflow | JP Financial Group
http://www.jpfinancialgroup.com.au
Email Me | Phone MeYour first port of call in finance :)
How China’s Commodity-Financing Bubble Becomes Globally Contagious
Which means that far from merely crushing exporters who suddenly are dealing with Chinese importers who have torn apart contracts, obviously with no recourse, suddenly China’s entire “hot money” laundering infrastructure which as explained over the weekend, has gold performing an even greater role than copper is about to collapse.
And when the counterparties of China’s hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times but has been sold, then there is truly no way of saying what happens next.
….and now here comes the crackdown on the use of iron ore to finance failing and frankly insolvent bankrupt steel mills. This will continue to push the price of ore down. It will be felt indirectly through loss of State and fed govt revenues which will translate into increasing pressure on budgets that will invariably need to be cut. Interest rates wil come under pressure if rating agencies mark down the state and national economy.
Iron Ore Prices Tumble As China Crackdown Begins
- The major problem, of course, is any restriction or tightening is necessarily lowering the price of the iron ore… thus reducing the value of collateral and thus worsening credit conditions in a vicious circle as firms can borrow less and less actual Yuan against their inventory at a time when cash flows are becoming increasingly negative from demand collapse.
As I’ve alluded to many times China’s boom is over and it’s now in the bust phase. How that will shake out and what form it will take is difficult to define but one thing is for sure Chinese property ‘will‘ be a leading cause of their decline.
Mr Mao said China’s house production per 1,000 head of population reached 35 in 2011. The figure is below 12 in most developed economies “even when the housing market is hot; no country has a figure of greater than 14”.
“By 2011, housing production per 1000 people reached 30 in Tier 2 cities, excluding the construction of affordable houses. A persistently high figure such as this should cause alarm,” he said.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
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This reply was modified 10 years, 8 months ago by Long John.
Strong predictions, indeed! There it is, the devaluation of China’s yuan. Now Chinese wealth is pouring into overseas properties as a means of protection. Some are shifting their savings into other currencies. Others are buying overseas properties in other markets with higher yields such as Japan, for example.
P. Donnelly | NTI - Nippon Tradings International
http://nippontradings.com/
Email Me | Phone Me@p. Japan has a higher property yield than the various markets in Chin?
I understand the flight to safety and think this is the main driver.
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