Saturday, July 25, 2015

Flashback: "Hayek, Once China's Poison, Is Now Its Prophet."

Hayek, Once China's Poison, Is Now Its Prophet: Andy Mukherjee By Andy Mukherjee - July 26, 2004 15:53 EDT July 27 (Bloomberg) -- If economist Friedrich Hayek were alive today, he would scoff at Beijing's awkward -- and failing -- attempts to check runaway economic growth as yet more evidence that all central planning was ultimately a ``pretense to knowledge.''

In a way, Hayek, the 20th century's leading critic of statism, may have given his verdict, some 60 years ago, on whether China's Premier Wen Jiabao (or any other state planner, for that matter) can have enough ``man-on-the-spot'' information to be able to cool excess investments in some industries without freezing up the whole economy.

``If we can agree,'' argued Hayek in a 1945 essay, ``that the economic problem of society is one of rapid adaptation to changes, it would follow that the ultimate decisions must be left to the people who're familiar with the (changed) circumstances.''

``We cannot expect,'' reasoned the Austrian-born British economist, ``that this (economic) problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders.''

And that's just what's frustrating the task of policy making in China. Although wedded to capitalist ideals now, China remains a planned society where the state allocates resources. While a market economy can curb overheating by raising interest rates -- a ``pricing'' signal to businesses to reconsider investments -- Beijing is trying to ``plan'' a correction by telling bankers whom they shouldn't lend to.

Credit Crunch

So far, the script hasn't played to planners' satisfaction.

Eddie Wong, the Hong Kong-based chief strategist at ABN Amro Asia Ltd., explained in a note to clients last Friday how Beijing's instructions to banks to curb credit are backfiring.

Since working capital loans are renewed in three months to 12 months and the duration of fixed-asset credit is between three years and five years, ``when the banks are asked to tighten,'' says Wong, ``the easier way is to stop rolling over working capital loans as they'll mature faster, although this is not what the central bank wants them to do, and more importantly, it is not what the economy needs.''

In fact, China's strategy of choking credit to real estate firms and makers of cement, steel and aluminum, is turning out to be an all-round clampdown on credit, even causing airlines to curtail new aircraft orders, according to David Hale, president and chief economist at Hale Advisors LLC.

``They want to slow things down selectively,'' Hale said last week. ``But because their system is so clumsy and so authoritarian, what they produced in the last eight weeks is an across-the-board credit crunch.''

``Pretense to Knowledge''

Hayek, who opposed British economist John Maynard Keynes's view that state intervention was often the key to keep an economy at full employment, was never in any doubt about what works better -- ``pricing'' or ``planning.''

A market-based pricing system is superior because of ``the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action,'' he argued.

Hayek's works were banned in Mao Zedong's China.

``Full of poison,'' is how a Chinese introduction described his 1944 book ``Road to Serfdom,'' which was made available to high-ranking communist cadre to acquaint them with the ``enemy's'' thinking, according to William McGurn in the 2000 book ``China's Future: Constructive Partner or Emerging Threat?''

The ban has since been lifted, and Hayek is a respected name among Chinese scholars now, according to Kate Zhou, a professor of political science at the University of Hawaii at Manoa. ``Even some government officials,'' Zhou writes on the Web site of the Mackinac Center for Public Policy, ``have put some of Hayek's writings on their work desks for decoration.''

Blunt Weapons

Earlier this month, China reported second-quarter economic growth of 9.6 percent, slower than 9.8 percent in three months to March 31. Growth in fixed-asset investment eased to 29 percent in June, from 35 percent in the previous month, raising expectations that government measures to slow the economy were succeeding.

However, ``preoccupation with statistical aggregates,'' as Hayek so presciently warned, is counterproductive because the knowledge that oils the wheels of an economy is ``of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority.''

Commodity prices, which contain Hayek's ``man-on-the-spot'' information, don't suggest a slowdown is near. The London Metal Index, which combines prices of copper, aluminum, lead, tin, zinc and nickel, closed at 1684.6 on Friday, 9 percent higher than its May 17 low. Since June 30 last year, the index has risen 47 percent, primarily because of strong metal demand in China.

Asia's second-biggest economy is still growing at a ``torrid and unsustainable rate,'' Morgan Stanley Chief Economist Stephen Roach said.

Hayek Vindicated

Hayek was vindicated when the Berlin Wall fell in 1989, three years before his death at age 92. The Nobel Prize-winning philosopher's prophecy is now catching up with China, which is undergoing what ABN Amro's Wong calls a ``policy vicious cycle.''

``When the government tightens,'' says Wong, ``the economy will die; when the economy is about to die, the government will loosen; when the government loosens, it will lose control.''

State planning, especially when it involves state-sponsored investment booms and busts, can be every bit as messy as Hayek said it would be.

Thursday, July 23, 2015


On Wednesday, the dollar ended down -0.0032% and -¥0.0002 against the renminbi. The dollar is still up ¥0.0032 and 0.0516% over the past four weeks. Over the past year, the dollar is up 0.1791% and ¥0.0111 against the renminbi.<br />
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Monday, July 20, 2015

Chinese Monetary Printing and Re-Nationalizations Sending Gold Prices ... Down?

"Dollar in demand, gold dives to five-year low."
Wayne Cole, July 19, 2015, Reuters

The U.S dollar held broad gains in Asia on Monday as investors looked ahead to higher interest rates from the Federal Reserve, while gold slumped to five-year lows as a lack of global inflation left little to hedge against.

The precious metal XAU= ran into a wave of selling in Asia that drove it down 3.9 percent to $1,089.80 an ounce, having already suffered its worst weekly performance since March last week. ...

There was better news from China where home prices rose for a second month in a row in June, suggesting government efforts to boost the struggling property sector have started to gain traction.

China stocks seem to have pulled out of their recent nosedive amid a barrage of measures from regulators and buying by brokerages and mutual funds.
The reasons given for a drop in the price of gold are the Chinese central bank's monetary easing policies to prop up the housing market and the central government's decision to re-nationalize much of the equity market.  It is time to buy gold.  The time to buy a hedge against inflation is precisely the time the rest of the world thinks there is "little to hedge against."

Sunday, July 19, 2015

2015-06 Relative Price Trends

Consumer prices increased 1.4% year-over-year in May, whereas purchasing prices fell 5.6% over the same period. This marks China’s 43nd month of economic contraction.

As usual, commentators quoted by the mainstream financial media maintain their sentiment that up is down, and left should be further to the right.  Mr. Li-Gang Liu, chief China economist at Australia & New Zealand Banking Group, was quoted by Bloomberg as saying "As deflation risk remains elevated and market sentiment deteriorated sharply amid the stock market slump, China’s monetary and fiscal policies will have to become more supportive."

What could be more supportive than cutting interest rates and reserve requirements four times since November, halting all initial public offerings, organizing the largest re-nationalization of Chinese industry since 2009, and posting online that the People's Bank of China will provide "ample liquidity" to the stock market
“Consumer prices signal stronger demand,” said Zhu Qibing, an analyst at China Minzu Securities Co. “But the figure is still lingering at a low level. The central bank doesn’t need to worry about inflation for now.”

That’s a relief for the People’s Bank of China, which has joined other government bodies in the effort to halt a month-long slide in stocks that threatens to derail signs of economic stabilization. ...

“The People’s Bank of China has already ratcheted up its easing efforts,” Bloomberg’s Chief Asia Economist Tom Orlik wrote in a note. “With market turbulence reinforcing the argument for further easing, we continue to expect a further rate cut by the end of the year.”
 In just that one article, the author implied that a three year bull market with triple digits represents "economic stabilization", whereas a "month-long slide in stocks" threatens stability.  At the same time, another Bloomberg employee is quoted as saying this is all "market turbulence".  How about we first understand the causes of the tremendous run-up in Chinese equities, as well as the causes of the sharp downfall, before we begin proscribing policy responses?

Wednesday, July 15, 2015

Tsinghua Unigroup Offers to Buy Micron Technologies.

On Monday night, Tsinghua University's investment arm, Tsinghua Unigroup Ltd., made a $21 billion bid for Micron Technology Inc., the world's fifth largest chip maker.  If the deal goes through, it would be the largest outward investment on record, surpassing Cnooc Ltd.'s purchase in 2012 of Nexen Energy for $17.4 billion.

Personal computer sales are down considerably over the past year, and Micron technology has been made considerably cheaper because of it.  Its stock price ended December 31, 2014 at $35.01, but ended June 2015 down 46.1% to $18.84.  Tsinghua Unigroup offered $21 per share.

The deal seems to be driven by Beijing's industrial policy, as opposed to commercial considerations.  According to Bloomberg:
If completed, a deal by state-owned Tsinghua Unigroup would be the largest overseas takeover by a China-based company and comes as the nation that accounts for more than half of global semiconductor sales seeks to wean itself from technology developed overseas. The government has budgeted as much as 1 trillion yuan ($161 billion) for spending on the chip industry over the next five to 10 years, consulting firm McKinsey & Co. estimates.
It's unclear what Tsinghua Unigroup would bring to the table.  It has limited technology or management expertise to bring to the table.  China's technology sector is suffering the same pressures as the rest of the world, so One Billion Customers is not as attractive as it otherwise would be. If U.S. regulators allow the deal to go through, market share seems likely to transition towards Samsung Electronics Co. and SK Hynix Inc.

Tuesday, July 14, 2015

China Auto-Makers Find Out the Answer to the Question: "What Could Go Wrong?"

The mainstream media is beginning to write about China in a more desperate tone.  A recent USA Today article on auto sales in China is an excellent example.
For the last 20 years, China has been the auto industry's promised land. A population of 1.4 billion, a growing middle class and projections that sales would continue to soar created a "what could go wrong?" attitude.
The China Association of Automobile Manufactures reduced the sales forecast for 2015 from 7% to 3%.  The year is half over, how can they already be off by half?  General Motors, the second largest auto-maker in China after Volkswagen, is discounting models by up to 20%, yet growth for the first half of the year was only 4.4%.

Not only is the auto industry having a demand problem, it is having a supply problem.  The China auto market is a classic example of mal-investment supplying artificial demand.  According to the same article, "Manufacturers have been engaged in a massive race to boost production that has outpaced demand and dented profits." Car markers built 270,000 more cars in 2014 than they sold, the widest gap since 2007.  General Motors sold 246,066 vehicles in June in its largest market.  On top of deep discounts to drive current demand, car makers will have to reduce production to burn off inventory.  That is bad news for commodities and wages.

Monday, July 13, 2015

New Money Creation in the New Year.

For monthly economic indicators, the Chinese New Year can pose problems for comparisons over a twelve month period.  For example, in 2012, Chinese New Year was on January 23rd, but it was on February 11th in 2013.  The growth rate of a certain indicator may be understated by comparing January 2012 to January 2013, but overstated when comparing February 2012 to February 2013.  Chinese New Year in 2014 fell on January 31st, so economic activity related to the new year would have been spit between both January and February, further complicating accurate comparisons over a twelve month period.

Usually, the best way to compare the two is to measure the month containing Chinese New Year with the previous year's month for Chinese New Year, although this cannot mitigate the issues with Chinese New Year impacting the end of January and the beginning of February.  In that case, the only accurate comparison is between Q1 of one year and Q1 of the next year.

China's currency in circulation (M0) is an example of an indicator that is impacted significantly by the timing of the Chinese New Year.  January 2015's value decreased by -17.58% over the previous 12 months, but February 2015's value increased 16.97% over the previous 12 months.  This information is not very useful.

One trend that is noticeable is that the Chinese New Year spike in 2015 was lower than the spike in 2014.  In the data available, this only happened back in 2002.  However, that decrease was only -1.72%, and there was an abnormally large increase in bank reserves to make up for it.  The drop in 2015 was -4.69%, and with no abnormal increase in bank reserves.

Now that May's numbers have been released, we can see annual growth figures that are not impacted by the Chinese New Year.

M0 in May grew at its lowest rate ever for the available data in comparable months.  Previously, the growth rate had never dropped below 6.00%, but now it already down to 1.77%.

M1 in May grew at its second lowest rate for the available data in comparable months.  Perhaps this is the new normal?

M2 growth in May continued its downward trend.  Similar to M0, it is now at its lowest rate for the available data in comparable months.

Despite cutting interest rates and reserve requirements, the Chinese money supply seems to be losing steam.  Could the Year of the Goat be the year the credit addict experiences withdrawals?