799 China warns Soros against Shorting the Yuan. BoJ says China should impose Capital Controls

China warns Soros against Shorting the Yuan. BoJ says China should
impose Capital Controls

Newsletter published on 29 January 2016

(1) China warns Soros against Shorting the Yuan and HK Dollar
(2) Hedge Fund tells Chinese: Sell your shares now
(3) Chinese companies borrow in $; external borrowing surged from $200
billion in 2009 to $1.1 trillion in 2014
(4) Bank of Japan Governor says China should impose Capital Controls to
defend the Yuan
(5) China Outflows Could Reach $500 Billion in 2016, JPMorgan Says
(6) Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’, about
to burst
(7) China in trouble because it followed World Bank advice - John Ross
(8) Fundamental errors of the World Bank report on China - John Ross (2012)
(9) Yuan joins IMF's SDR basket; the price is "finance sector reform",
ie Deregulation
(10) Yuan joins SDR, but PBoC advised to reduce intervention, allowing
market forces
(11) IMF SDR represents a claim to foreign currencies for which it may
be exchanged
(12) IMF SDRs to replace $ as one-world currency
(13) China Rebalancing means Chinese consume more, export less;
industries move to India, Mexico, Vietnam
(14) PBoC Currency Intervention to stop rise of Yuan, then fall of Yuan
(15) China's slowdown is hurting countries that export to it
(16) Luxury exports from West to China plummet

(1) China warns Soros against Shorting the Yuan and HK Dollar

http://www.newsmax.com/Finance/Markets/george-soros-china-yuan-hong-kong-dollar/2016/01/26/id/710882/

China's State Media Warns Soros on Betting Against Yuan, HK Dollar

Tuesday, 26 Jan 2016 08:24 AM

China's state media has warned billionaire investor George Soros against
betting on falls in the value of the Chinese yuan and Hong Kong dollar,
amid widespread worries over the health of world's second-largest economy.

China's fourth-quarter economic growth slowed to the weakest since the
global financial crisis, increasing pressure on a government struggling
to regain investors' confidence after perceived policy missteps jolted
global markets.

"Soros' challenge against the renminbi (yuan) and Hong Kong dollar is
unlikely to succeed, there is no doubt about that," the People's Daily
overseas edition said in a front-page opinion piece on Tuesday.

China's economic fundamentals remain sound, despite slower growth,
volatility in its stock market and the yuan's depreciation against the
U.S. dollar, said the opinion piece, written by a researcher at the
commerce ministry.

Soros told Bloomberg TV on Thursday he sees a hard landing for China's
economy contributing to global deflation.

In his comments to Bloomberg, Soros said he had been betting against the
S&P 500, commodity-producing countries and Asian currencies, while
buying U.S. government bonds. He did not specifically mention the yuan
and Hong Kong dollar.

China's economic growth slowed to 6.8 percent in the fourth quarter,
bringing the full-year growth to 6.9 percent in 2015 - the poorest
showing in 25 years.

The Xinhua news agency also warned against speculation on China's stocks
and currency, saying that smart, far-sighted investors should seize the
opportunities from China's economic restructuring.

"Some people believe that the Chinese capital market is experiencing a
major crisis, of which they try to take advantage with speculative
actions and even vicious shorting activities," Xinhua said in a
commentary published on Saturday.

China has been constantly improving its market regulatory system and
legal system, it said.

"As a result, reckless speculation and vicious shorting will face higher
trading costs and possibly severe legal consequences."

China's central bank has pledged to keep the yuan basically stable
against a basket of currencies while Hong Kong's central bank has said
it had no plans to change the Hong Kong dollar's peg to the U.S. dollar,
despite recent market volatility.

(2) Hedge Fund tells Chinese: Sell your shares now

http://www.newsmax.com/Finance/InvestingAnalysis/China-trader-short-sale/2016/01/25/id/710817/

Trader Who Made 6,200 Percent on China Futures Says Go Short or Get Out

Monday, 25 Jan 2016 07:26 PM

Huang Weimin, the hedge fund manager whose Chinese stock-index futures
wagers returned more than 6,200 percent last year, has some advice for
investors in 2016: Sell your shares now, before it’s too late.

The 45-year-old former worker at a state-owned company, a virtual
unknown until last year, has become a star of the Chinese futures market
after a slew of timely bets on the direction of share prices propelled
his Yourong Fund to the top of the country’s performance rankings. He’s
carried the winning streak into 2016, returning 35 percent through Jan.
22 after selling stock-index futures just days before the market’s
worst- ever start to a year.

Huang, who opened the Yourong Fund in 2014, says China’s benchmark
Shanghai Composite Index could drop another 15 percent in the first half
as slowing economic growth and a weaker yuan fuel capital outflows.
While he’s sticking with bearish futures bets to take advantage of
further losses, he says the average Chinese stock investor would be
better off shifting into cash.

"I’m not optimistic about this year," said Huang, a self- taught trader
who manages more than 100 million yuan ($15.2 million) in the Yourong
Fund and separate client accounts that use similar strategies. "My
advice is to hold cash, wait and watch."

Many of China’s 99 million investors appear to be doing just that.
Volumes in the nation’s $5.6 trillion cash equities market slumped to
the lowest level in three months last week, while trading of stock-index
futures has dropped about 99 percent since June. A bungled government
attempt to introduce market circuit breakers in the first week of 2016
deepened investor pessimism after the mechanisms sparked panic instead
of restoring calm.

Huang’s ability to profit from the turbulence has made him a standout in
China’s hedge-fund industry, which has struggled to cope with price
swings that reached the most extreme levels since 1997 last year. More
than 700 funds were forced to liquidate prematurely in 2015, and this
year’s 18 percent slump in the Shanghai Composite has left many more on
the brink of shutting down.

The Yourong Fund was the best performer last year among 310 private
Chinese futures funds tracked by Shenzhen Rongzhi Investment Consultant
Co. Huang’s closest rival was up just over 1000 percent, while more than
a fifth of his peers posted losses, according to Shenzhen Rongzhi, which
collects performance figures directly from the financial institutions
where funds hold their trading accounts to ensure the data’s authenticity.

To make money last year, Huang had to be nimble. He was bullish for much
of the first half, building long positions in stocks and equity-index
futures as the Shanghai Composite surged to seven-year highs. After
trimming his equity exposure in May, he bet against the market in the
second half of June as shares tumbled.

One-Day Profit

When volatility increased at the end of that month, Huang turned to
short-term wagers. A short-term bet on Everbright Securities Co. that he
sold the following day, for example, produced an 11 percent return on
June 30 as the market posted a brief rally, he said in an interview with
Bloomberg News last week from China’s southern Fujian province.

Huang moved in and out of the market over the next two months, making
one of his most profitable bets in late August after positioning for
losses in stock-index futures before a rout that sent the Shanghai
Composite down as much as 25 percent in just two weeks.

"It’s like surfing," said Huang, who became a full-time investor in 2006
after quitting his job at a state-owned company. "You have to dance on
top of the waves."

Amplifying Returns

Aside from good timing, Huang’s outsized returns were made possible by
the built-in leverage of futures. The purchase or sale of a futures
contract typically requires an initial deposit, known as margin, that’s
just a fraction of the value of the underlying assets. That means even
small price changes can lead to big profits -- or losses -- for holders
of the derivatives.

Huang sees China’s stock market coming under pressure this year from
both the economic slowdown and a potential surge in the supply of new
shares.

Gross domestic product growth fell to 6.9 percent in 2015, the weakest
pace since 1990, as an estimated $1 trillion of capital flowed out of
the country last year and the yuan posted its biggest annual drop in two
decades. Despite six interest rate cuts by China’s central bank, the
latest economic indicators for December showed growth is still slowing.

"When you add a lot of cold water into the pot, the firewood we have is
for sure not enough,’’ Huang said.

Recovery Signals

With 660 Chinese companies waiting to sell shares via initial public
offerings, Huang said the additional supply could divert funds from
existing shares. The impact could be even bigger if policy makers follow
through on plans for a registration system, which would reduce the
government’s ability to control the pace of offerings.

There are signs that Chinese shares are poised for a rally. The Shanghai
Composite’s relative strength index was 33 on Friday, near the threshold
of 30 that some traders use as a signal of recovery. Li Yuanchao,
China’s vice president, said in an interview in Davos last week that the
government is willing to keep intervening in the stock market to make
sure a few speculators don’t benefit at the expense of regular investors.

The government’s intervention has made life more difficult for Huang. He
had to pare back his positions last year, particularly in bearish
contracts, after authorities cracked down on what they saw as excessive
speculation in the stock- index futures market and vowed to go after
"malicious" short sellers.

Grateful Investors

Still, none of that seems to have hurt Huang’s knack for calling the
markets. Cai Zhongyu, a retired electronics institute worker in Shanghai
who’s been following the trade recommendations dispensed by Huang in
online chat groups since 2009, said she made a 300 percent return last
year "all thanks to him."

"He always got it right on the market direction," Cai, 55, said by
phone. "You have to admit that."

Cai was among more than 90 admirers of Huang who traveled to the coastal
city of Xiamen to hear him give trading tips and his market forecasts in
December. After an extraordinary 2015, his outlook for this year was
decidedly more modest.

"I’ll just be following the market and do a few trades as it falls, like
ants biting on a bone," Huang said. "If I get 5 to 6 percent each time
and end the year with 50 percent to 60 percent, I’d be happy."

(3) Chinese companies borrow in $; external borrowing surged from $200
billion in 2009 to $1.1 trillion in 2014

http://www.theepochtimes.com/n3/1947856-new-data-shows-how-chinas-massive-carry-trade-is-unwinding/

New Data Shows How China’s Massive Carry Trade Is Unwinding

By Valentin Schmid, Epoch Times | January 22, 2016 Last Updated: January
24, 2016 2:36 am

China’s currency and the capital outflows behind it have dominated
headlines and market analysis in the last half year.

One of the causes for the outflows ($676 billion in 2015) is the
repayment of foreign currency debt or the unwind of the carry trade. In
the windup of the carry trade, investors borrowed in a country with a
low interest rate (the United States) and invested in a country with a
high interest rate (China).

The Bank of International Settlements (BIS) tracks this data and just
released its findings for the third quarter of 2015, the period before,
during, and after China’s shock devaluation of last August.

This BIS finds China’s total cross boarder foreign currency liabilities
decreased $130 billion to $877 billion from the second quarter to the
third quarter of 2015.

"This represents the sharpest single quarter drawdown since data were
made available in the first quarter of 1978 and a 20.9 percent fall from
its peak of $1109 billion in the third quarter of 2014," the investment
bank Nomura writes in a note to clients.

Chinese banks owe most of the foreign currency debt ($530 billion) with
other corporations owing the balance, although banks mostly facilitate
these transactions for corporations. (Nomura)

After the financial crisis of 2008, Chinese corporations found it more
lucrative to borrow in dollars for a very low single digit rate and
invest it in China for a low double digit rate. Because the Chinese
central bank guaranteed the Chinese currency to go up, they would make
money through the exchange rate as well. As a result, Chinese external
borrowing surged from less than $200 billion in 2009 to $1.1 trillion in
2014.

Why would Chinese corporations engage in financial speculation? Some say
because there were fewer opportunities on the ground, others say Chinese
companies just like to take any opportunity to make easy money, like
investing in property even if it has nothing to do with the core business.

"Companies in the chemical, steel, textile, and shoe industries have
started up property divisions too: The chance of a quick return is much
higher than in their primary business," Bloomberg Business reporter
Dexter Roberts wrote in 2009 when the property boom was in full swing.

When property started to cool down in 2013, the carry trade was the next
best alternative.

This is not the case anymore. Because the Chinese central bank stopped
supporting a strong yuan policy and the U.S. central bank has started
raising rates, Chinese banks and corporates reversed the trade in the
third quarter of 2014 and accelerated it in the third quarter of 2015.

This helped the better connected companies and individuals get out even
before the shock devaluation of August 2015.

"China’s private sector was better prepared for the renminbi weakness,
given the fall in foreign-currency liabilities and foreign exchange
hedging since 11 August 2015. In our view, this is an important factor
why Chinese authorities have allowed for a more market-determined
renminbi from early December to early January," writes Nomura.

(4) Bank of Japan Governor says China should impose Capital Controls to
defend the Yuan

http://www.bloomberg.com/news/articles/2016-01-23/kuroda-advises-china-to-impose-capital-controls-to-defend-yuan

Kuroda Advises China to Impose Capital Controls to Defend Yuan

Simon Kennedy and Jeff Black

January 23, 2016 — 10:34 PM AEST

Bank of Japan Governor Haruhiko Kuroda said China should impose capital
controls to defend the yuan rather than keep burning through currency
reserves.

As he and other international policy makers expressed confidence that
the world’s second largest economy will avoid a hard landing, Kuroda
made his proposal on the final day of the World Economic Forum’s annual
meeting in Davos, Switzerland.

China is struggling to hold up the yuan as a slowing economy forces it
to loosen monetary policy and prompts capital to flee. It now faces
questions from investors over just how long it can keep deploying
reserves to calm the yuan’s volatility.

"This is my personal view, and it may not be shared by the Chinese
authorities, but in this kind of somewhat contradictory situation
capital controls could be useful to manage the exchange rate as regards
domestic monetary policy in a consistent and appropriate way," Kuroda
said on Saturday. Deploying Reserves

China is burning through its reserves as it tries to prop up the
currency. China’s stockpile plunged $513 billion last year to $3.33
trillion, the first annual decline since 1992 and the holdings will drop
to $3 trillion or less by the end of this year, according to the median
of 12 forecasts in a Bloomberg News survey this month. They were
projected to tumble further, to $2.66 trillion by the end of next year.

"The massive use of reserves would not be a particularly good idea,"
said International Monetary Fund Managing Director Christine Lagarde,
who suggested China better clarify how it manages the yuan.

China has already tightened some capital controls, requiring lenders in
offshore yuan-trading centers to lock away more funds in their latest
efforts to combat capital outflows.

It also suspended some foreign lenders from conducting some cross-border
yuan operations and cracked down on illegal money transfers.

Market Jitters

China’s economic slowdown -- and the subsequent financial turmoil it
helped to spark --- were among the most-discussed topics in Davos this
week. For all the market jitters, most delegates bet that the economy
will soon stabilize as officials pivot from debt-fueled investment and
exports toward consumption and services.

"We’re not seeing a hard landing," said Lagarde. "We’re seeing an
evolution, a big transition which is going to be bumpy, which will offer
some turbulence."

U.K. Chancellor of the Exchequer George Osborne said that even at the
current growth rate, China would add the equivalent of Germany to global
output by the end of this decade.

"We actually believe that China will have a soft landing," said Credit
Suisse Group AG Chief Executive Officer Tidjane Thiam.

More broadly, Thiam said global banks are in a much stronger position
now and praised the work of regulators in forcing them to strengthen
their balance sheets. He also said it’s high time that the U.S. Federal
Reserve raised rates even though it means that global monetary policy is
now going out of sync.

"A normalization is necessary because I don’t like periods where the
price of risk is distorted for a long period of time," said Thiam.

(5) China Outflows Could Reach $500 Billion in 2016, JPMorgan Says

http://www.newsmax.com/Finance/StreetTalk/China-currency-reserves-outflow/2016/01/26/id/710924/

Tuesday, 26 Jan 2016 11:33 AM

China could see capital outflows of $500 billion this year, posing a
challenge to policy makers trying to defend the yuan in the midst of an
economic slowdown and a plunge in equities, according to JPMorgan &
Chase Co.’s chief Asia strategist.

While the People’s Bank of China would like to control the yuan’s
decline, those holding assets denominated in the currency could sell to
avoid losses, Adrian Mowat said in an interview in Manila on Tuesday.
The nation is estimated to have seen withdrawals of $650 billion last
year, he said.

"You are going to have this tension around the renminbi and it will
continue to drive volatility," said Mowat, referring to the yuan by its
official name. "Another area where you have tension is that the markets
aren’t allowed to find their levels in the A-share market."

China’s stockpile of foreign-currency reserves plunged $513 billion last
year to $3.33 trillion, the first annual drop since 1992, as the nation
propped up the yuan. The Shanghai Composite is the worst performer in
January among 93 primary equity gauges tracked by Bloomberg, while the
economy grew last year at the slowest pace in a quarter century.

Mowat’s forecast for last year’s capital outflows from China compares
with a figure of $1 trillion estimated by Bloomberg Intelligence. While
outflows surged in December after the central bank unnerved markets by
saying it would refocus the yuan’s moves against a wider basket of
currencies, rather than the dollar alone, exporters are holding funds in
dollars instead of the yuan, according to Tom Orlik, Bloomberg’s chief
Asia economist in Beijing. Special: The Best Credit Cards of 2016

The MSCI China Index, a gauge of mainland companies listed in Hong Kong
and other overseas markets, would still be able to erase losses recorded
so far this month and end 2016 with a gain, Mowat said. The gauge, whose
members include U.S.-listed Internet services companies Alibaba Group
Holding Ltd. and Baidu Inc., is expected to report earnings growth of 15
percent this year, he said.

(6) Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’, about
to burst

http://www.theepochtimes.com/n3/1942610-steve-keen-chinas-stock-market-is-an-unbelievable-bubble/

Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’

The most famous unconventional economist talks about debt in China and
why it's a problem

By Valentin Schmid, Epoch Times | January 17, 2016

Last Updated: January 19, 2016 4:55 am

     Steve Keen, a professor at London's Kingston University, thinks
China's stock market is a big bubble and is about to burst. (Samira
Bouaou/Epoch Times)

It’s the debt, stupid. This is what professor Steve Keen of London’s
Kingston University has been saying all along: Private debt is
responsible for financial crises. He’s also been saying that
conventional economists are wrong, and even wrote a book about it:
"Debunking Economics."

Apart from his razor-sharp logic and witty style, Keen was one of the
few analysts who predicted the financial crisis in the West in 2008. Now
he sees another crisis looming in the East.

The Epoch Times spoke to Steve Keen about why private debt is again
responsible for China’s economic problems and why the debt fueling
China’s stock market is the most ridiculous thing ever. A private person
can’t direct the central bank to pay that debt.

Epoch Times: How did China avoid the financial crisis of 2008?

Steve Keen: The crisis in 2008 destroyed their export policies. There
was a 45 percent fall in Chinese exports in one year.

The response at that time was to dramatically boost private lending,
trying to cause a boom domestically, to take the place of exports which
they have relied on. So you had an enormous increase in private debt in
China. Professor Steve Keen, an unconventional economist, in every way.
(Steve Keen)

Professor Steve Keen, an unconventional economist. (Steve Keen)

Epoch Times: Some people say that doesn’t matter because in China the
debtors are mostly related to the government.

Mr. Keen: It’s state-owned banks and state-directed banks that lent to
private institutions. The liabilities are private. State-owned banks
have loaned to private companies. Almost all of the increase in debt is
to private organizations, and almost all of that has gone to Chinese
property developments.

It’s not like the debt in the West where private banks lend to private
organizations. What matters is, who owes the money. It’s still owed by
private individuals and companies. If they can’t pay, they are bankrupt
and they want to run away and get out of their liabilities. This is
going to cause the usual downturn in the economy, even though the debt
is owned by state-owned banks.

It comes down to who the liabilities are owed by. If the federal
government has a debt, it can direct the central bank to pay that debt.
A private person can’t direct the central bank to pay that debt. Total
demand will fall, and that’s the situation we find in China now.

Epoch Times: Give us some numbers please.

Mr. Keen: Seven years ago private debt was about 120 percent of GDP,
according to the Bank of International Settlements (BIS). Now it’s 201
percent. The American level peaked at 170 percent before the financial
crisis.

The level of demand coming into the economy is relying on continually
increasing that debt ratio. But once you reach a peak level of debt,
people will not be borrowing beyond that point. The change in debt goes
from 20 percent growth to zero. As a result, 20 percent of GDP
disappears. (Macquarie)

Epoch Times: Please explain how that works.

Mr. Keen: Total demand in the economy is demand generated from existing
money plus the change in debt. Let’s say GDP is running at a trillion
and debt increases 20 percent, then total demand is $1.2 trillion in
year one.

So GDP is growing at let’s say 10 percent. So next year’s GDP is $1.1
trillion, but if the change in debt goes to zero, total demand will fall
from $1.2 trillion to $1.1 trillion. So even if GDP keeps growing at the
same rate—which won’t happen—total demand will fall, and that’s the
situation we find in China now. That affects all asset markets. This is
an unbelievable bubble.

Epoch Times: What about debt and the Chinese stock market?

Mr. Keen: I have never seen anything quite as ridiculous as margin debt
in China. The level of leverage per asset market is crazy. The Shanghai
Composite Index had a bubble and a crash in 2008, but there was no
margin debt after that crash.

It continued down until June 2014, then it took off and hit a peak of
about 5,100. What had happened in the meantime, they had deregulated and
allowed margin debt to be brought in 2010.

The level of margin debt began in March 2010 at 0.00014 percent of
China’s GDP. You fast-forward to 2014, it was 0.3 percent of GDP. In
July of 2014, it was 0.5 percent of GDP, by 2015 it was 1 percent of
GDP, by July 2015 it was 2.16 percent of GDP. It has since fallen to
0.84 percent of GDP. This is an unbelievable bubble.

It’s the most volatile level of margin debt anywhere in the world—ever.
So you have got this insane level of debt finance and speculation at the
same time.

Epoch Times: What can the Chinese do?

Mr. Keen: The property market was the original way to boost demand in
the Chinese economy. That has come to an end; the share market has come
to an end. So you have this enormous hole in demand.

The 20 percent in debt growth per year was all financing the building
boom; suddenly that’s over. All those workers are losing their jobs, and
they are going back to the countryside.

There is not going to be demand for new housing in China for 10 years.
For example: China is still a major buyer of Australian concrete. A huge
part they are buying they can’t use it anymore. So it has been used by
China as foreign aid in Africa.

A big part of the political shifts we are seeing are reactions to the
slowdown and they are desperately trying to soften the slowdown, and
that’s where all the crazy policy choices are coming from out of the
Politburo.

Most of the infrastructure projects, they can’t keep on doing. The only
thing that’s needed is to replace coal with solar. They have huge excess
capacity, there is no new export market to go into anymore, and they
can’t boost domestically.

(7) China in trouble because it followed World Bank advice - John Ross

http://ablog.typepad.com/keytrendsinglobalisation/2016/01/how-the-influence-of-world-bank-policies-damaged-chinas-economy.html

How the influence of World Bank policies damaged China's economy

John Ross

08 January 2016

Present negative trends in China's financial system and economy were
accurately predicted by me three years ago as occurring if there was any
influence of policies of the World Bank Report on China.

While China has made major steps forward in areas such as the Asian
Infrastructure Investment Bank and New Silk Road ('One Belt One Road')
unfortunately in some areas World Bank policies did acquire influence.
As predicted they led to present negative trends.

There should also be clarity. China has the world's strongest
macroeconomic structure so these trends will not lead to a China 'hard
landing'. But they are a confirmation that no country, including China,
can escape the laws of economics. As long as there is any influence of
World Bank type policies, which are also advocated by Western writers
such as George Magnus and Patrick Chovanec, there will be problems in
China's financial system and economy.

The article I wrote in September 2012 which was published under the
original title 'Fundamental errors of the World Bank report on China' is
republished without alteration.

(8) Fundamental errors of the World Bank report on China - John Ross (2012)
http://ablog.typepad.com/keytrendsinglobalisation/2012/09/fundamental-errors-of-the-world-bank-report-on-china.html

18 September 2012

Fundamental errors of the World Bank report on China

The World Bank's report China 2030 has, unsurprisingly, provoked major
criticism and protest. I have read World Bank reports on China for more
than 20 years and this is undoubtedly the worst. So glaring are its
factual errors, and economic non-sequiturs, that it is difficult to
believe it was intended as an objective analysis of China's economy. It
appears to be driven by the political objective of supporting current US
policies, embodied in proposals such as the Trans-Pacific Partnership.

Listing merely the factual errors in the report, of both commission and
omission, as well as the elementary economic howlers, would take up more
column inches than are available to me. So what follows is just a small
selection, leaving space to consider the possible purpose of such a
strange report.

The report has no serious factual analysis of the present stage of
China's economic development. On the one hand it is behind the times and
"pessimistic", saying China may become "the world's largest economy
before 2030". This is extremely peculiar as, by the most elementary
economic calculations, (the Economist magazine now even provides a ready
reckoner!) China will become the world's largest economy before 2020.

On the other hand, the report greatly exaggerates the rate at which
China will enter the highest form of value added production. As such,
the report calls for various changes in China, and bases its calls on
the rationale of "when a developing country reaches the technology
frontier'. But China's economy, unfortunately, is not yet approaching
the international technology frontier, except in specialized
defence-related areas. Even when China's GDP equals that of the US,
China's per capita GDP, a good measure of technology's spread across its
economy, will be less than one quarter of the US's. Even making
optimistic assumptions, China's per capita GDP will not equal the US's
until around 2040, by which time China's economy would be more than four
times the size of the US's! Put another way, China will not reach the
technology frontier, in a generalized way, for around three decades, so
this rationale can't be used to justify changes now.

The report appears to envisage China's development path differing from
that of every other country on the planet. It claims that in China "the
continued accumulation of capital… will inevitably contribute less to
growth". But one of the most established trends of economic development,
first outlined by Adam Smith and econometrically confirmed to the
present day, is that capital's contribution to growth increases with
development. Deng Xiaoping certainly argued that economic policy must
have "Chinese characteristics", i.e. be adapted to China's specific
conditions. However, he never argued that China was exempt from economic
laws, which is what this report appears to envisage!

The report makes elementary economic mistakes, such as confusing the
consequences of high export shares with trade surpluses. It argues: "If
China's current export growth persists, its projected global market
share could rise to 20 percent by 2030, which is almost double the peak
of Japan's global market share in the mid-1980s when it faced fierce
protectionist sentiments… China's current trajectory… could cause
unmanageable trade frictions." But if China increases its import share
at the same rate as exports, this would not create major trade
frictions. Japan's problem was trade surpluses, not export share.

It is almost impossible to believe, given such elementary mistakes, that
this report was intended as a serious objective analysis of China's
economy. What, then, is its goal? , The report spells out its goal
clearly enough in calling for China to abandon the policies launched by
Deng Xiaoping which brought such success. It says: "Reforms that
launched China on its current growth trajectory were inspired by Deng
Xiaoping… China has reached another turning point in its development
path when a second strategic, and no less fundamental, shift is called for."

What is this new "non-Dengite" economic policy? Deng Xiaoping's most
famous economic statement was "it doesn't matter whether a cat is black
or white provided it catches mice". Effectively, this means, in economic
terms, that a company should not be judged by whether it is private or
state owned but by how it performs. The proposed new economic policy
overturns Deng's dictum by saying: "Reintroduce judging cats by colour,
promote the private sector cat."

The consequences of this are clearly seen in the report's financial
proposals. During the international financial crisis, China was
protected by its state-owned banking system. The US and European
privately-owned banks simultaneously created the financial crisis and
were flattened by it, throwing their economies into crisis. China,
however, suffered no significant setback.

The reasons for the US and European banking crisis are well understood.
Modern banks are necessarily very large, both in order to undertake
international operations and because of the inherent risk of large
investment projects. They are literally "too large to fail", as the
failure of any large bank creates an unacceptable economic crisis. This
theoretical point was rammed home by the devastating consequences of
Lehman's collapse, following which no government will allow a large bank
to fail.

But a situation in which the state is blocking the bankruptcy of a large
bank, whose profits are being privately retained, creates disastrous
risk. If large private banks are state guaranteed against crippling
losses, but retain profits, they are incentivized to undertake
potentially profitable but highly risky operations. The disastrous
results of this scenario were seen during the financial crisis.

Extraordinarily, this report proposes that China abandon the financial
system which brought it successfully through the financial crisis and
instead adopt the one which led the US and Europe to disaster. This is
the real significance of "privatization would be the best way to make
SFIs [State Financial Institutions] more commercially oriented".

This ties in with US TransPacific Partnership pressure for the
elimination of China's state-owned companies, which are seen as giving
China a completive advantage over the US. The US, of course, does not
possess such companies. If the US is worried about the competitive
disadvantage created by not having state-owned companies, it should
create some, not call for China to abandon its own.

The last World Bank report of this type was published in February 1991
and its Study of the Soviet Economy provided the basis for Russia's
economic policies of the 1990s.

The result was that Russia suffered the greatest peacetime economic
disaster to befall any country. GDP declined by more than half. Russian
male life expectancy fell by four years and we saw the beginning of a
population decline, which continues to this day. The USSR subsequently
disintegrated, in what Vladimir Putin called the greatest geopolitical
catastrophe of the 20th century. Russia has not recovered.

This type of economic program is therefore not simply a "theoretical"
model. It has been thoroughly and demonstrably discredited on account of
the catastrophes it has produced. Russia was ill advised enough to adopt
this type of economic program. It is to be hoped, then, that China does
not follow the same course *   *   *

This article originally appeared on China.org.cn.

(9) Yuan joins IMF's SDR basket; the price is "finance sector reform",
ie Deregulation

http://atimes.com/2015/11/chinas-slippery-sdr-sanctification/

China’s slippery SDR sanctification

By Gary Kleiman on November 19, 2015 in

Chinese financial markets continued their comeback as the IMF staff set
the stage for yuan inclusion in the Special Drawing Rights artificial
basket.

The inclusion comes with a technical "freely usable" finding for
international currency and trade transactions, despite capital controls
due to last through end-decade under the latest 5-year economic plan.
Managing Director Lagarde endorsed the report, and IMF board acceptance
at end-month will be a formality with US support triggering an entry
timetable for late 2016.

The Treasury Department decision came in the face of its semi-annual
assessment that the RMB was "below appropriate medium-term valuation,"
as it acknowledged incremental flexibility and cross-border opening and
moved to repair strained relations from Congress’ failure to pass IMF
governance reform.

The preliminary SDR weighting should be ahead of the Japanese yen at
around 15%, but foreign central bank reserve and investor capital market
allocation will remain paltry for years without access and trading
breakthroughs as in all other emerging economies that have historically
been outside the synthetic "global currency."

China’s central bank launched the admission campaign in the wake of the
2008-09 crisis to diversify dollar reliance, but with persistent GDP
slowdown and foreign exchange outflows it is no longer in such a strong
implementation position. The logic has shifted to financial sector
reform impetus for overcoming current trade, investment and debt
squeezes, and laying a foundation for modern banking and securities
markets as in the rest of the region.

According to the SWIFT payments network, the yuan is only used for 2.5%
of international commerce, and the BIS puts it behind the Mexican peso
and other units as fractional components in foreign exchange dealing.
The local stock and bond markets are valued at multiple trillions of
dollars, but foreign investor participation is limited by quotas and
operational and regulatory hurdles.

Index provider MSCI just raised China’s portion with Hong Kong of the
core developing market benchmark to 26% from the previous 23% with the
addition of overseas-listed firms like internet giant Alibaba.  However,
the mainland exchange has experienced widespread suspensions and
official intervention the past three months to further deter
international players. The debt market in contrast has been partially
liberalized for non-resident institutions, but their share is stuck
under 2% as state-owned banks and enterprises dominate both buying and
issuance with minimal secondary trading.

The main near-term post-SDR yuan inflow may come from central banks and
sovereign wealth funds realigning holdings, with estimates in the $100
billion range annually. Yet this amount is negligible against the over
$10 trillion in global reserves and China’s own $3.5 trillion stash.
Managers also consider liquidity, safety and economic policy and
performance factors outside the Fund’s basket formula for placement.

The Japanese yen has an 8% weighting but draws only half that allocation
in the IMF’s regular survey of central bank preference, while the Swiss
Franc is a major choice outside the SDR. Domestic banking system health
is paramount and October figures showed a sharp credit drop as the
understated non-performing loan ratio drifted toward 2%, despite
interest rate and reserve requirement cuts. Under supply and demand
constraints money supply expansion may be only single digits in 2016, as
the GDP growth forecast was already pared to 6.5% in 2016. Debt defaults
at both private and state firms in the energy, steel and cement
industries reflect lingering overcapacity and deflation worries that cap
the manufacturing PMI under 50, as the services sector is pressed to
absorb the slack.

Exchange rate direction can now go both ways and basic stability cannot
be assumed despite the SDR move. The RMB has recovered ground against
the dollar but may slip again with a Fed rate nudge in December, and
onshore and offshore rates continue to diverge. The authorities have
begun to disclose limited reserve data but not interventions reportedly
concentrated on the murky forward market. They are also studying the old
standby of a Tobin tax to discourage "speculative" trading, when the
emphasis should be on new convincing steps toward routine commercial
dealing within established emerging market practice if the Fund’s
conceptual maneuver is to inspire actual mainland makeover.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman
International in Washington, D.C.

(10) Yuan joins SDR, but PBoC advised to reduce intervention, allowing
market forces

http://www.reuters.com/article/2015/11/14/us-imf-china-yuan-idUSKCN0T22OC20151114

China's yuan takes leap toward joining IMF currency basket

WASHINGTON | BY KRISTA HUGHES

China's yuan moved closer to joining other top global currencies in the
International Monetary Fund's benchmark foreign exchange basket on
Friday after Fund staff and IMF chief Christine Lagarde gave the move
the thumbs up.

The recommendation paves the way for the Fund's executive board, which
has the final say, to place the yuan CNY=CFXS CNY= on a par with the
U.S. dollar .DXY, Japanese yen JPY=, British pound GBP= and euro EUR= at
a meeting scheduled for Nov. 30.

Joining the Special Drawing Rights (SDR) basket would be a victory for
Beijing, which has campaigned hard for the move, and could increase
demand for the yuan among reserve managers as well as marking a symbolic
coming of age for the world's second-largest economy.

Staff had found the yuan, also known as the renminbi (RMB), met the
criteria of being "freely usable," or widely used for international
transactions and widely traded in major foreign exchange markets,
Lagarde said.

"I support the staff’s findings," she said in a statement immediately
welcomed by China's central bank, which said it hoped the international
community would also back the yuan's inclusion.

Staff also gave the green light to Beijing's efforts to address
operational issues identified in a report in July, Lagarde said.

The executive board, which represents the Fund's 188 members, is seen as
unlikely to go against a staff recommendation and countries including
France and Britain have already pledged their support for the change.
This would take effect in October 2016, during China's leadership of the
Group of 20 bloc of advanced and emerging economies.

China has rolled out a flurry of reforms recently to liberalize its
markets and also help the yuan meet the IMF's checklist, including
scrapping a ceiling on deposit rates, issuing three-month Treasury bills
weekly and improving the transparency of Chinese data.

Economists said with the yuan's inclusion in the IMF basket as a reserve
currency now looking like a formality, China should step up efforts to
build trust between global investors and its policy makers.

China's heavy-handed intervention to stem a stock market rout over the
summer, and an unexpected devaluation of the yuan in August, had raised
some doubts about Beijing's commitment to reforms.

Singapore-based Commerzbank economist Zhou Hao said China needs to
further accelerate domestic reforms and improve policy transparency.

"The PBOC should reduce the frequency of market intervention, allowing
market forces to really play a critical role."

The United States, the Fund's biggest shareholder, has said it would
back the yuan's inclusion if it met the IMF's criteria, a U.S. Treasury
spokesperson said, adding: "We will review the IMF’s paper in that light."

If the yuan's addition wins 70 percent or more of IMF board votes, it
will be the first time the number of currencies in the SDR basket -
which determines the composition of loans made to countries such as
Greece - has been expanded.

"I would say that the likelihood of China's yuan joining the IMF
currency basket this year is very high," said Hong Kong-based Shen
Jianguang, chief economist at Mizuho Securities Asia.

"The only thing that could deter this is if the U.S. led a group
rejecting the yuan's inclusion, which could complicate things. But the
United States' current official stance doesn't reflect such an
attitude," he said.

Some currency analysts say making the yuan the fifth currency in the
basket could eventually lead to global demand for the currency worth
more than $500 billion.

But China's extensive capital controls mean it would take a while before
the yuan rivals the dollar's dominant role in international trade and
finance, analysts say.

Its closed capital account still limits foreigners from buying
yuan-denominated assets and places caps on how much cash residents can
take out of the country. These restrictions, along with concerns that
the yuan is set to come under steady depreciation pressure, may cause
corporates to back off from holding yuan.

Nonetheless, the People's Bank of China said the IMF statement was an
acknowledgment of the progress China had made in reforms and opening up
its economy.

"The inclusion of the RMB in the SDR basket would increase the
representativeness and attractiveness of the SDR, and help improve the
current international monetary system, which would benefit both China
and the rest of the world," the PBOC said in a statement.

China would respect the board's decision and continue to deepen economic
reforms, the PBOC said.

(Additional reporting by Timothy Ahmann in Washington, Jason Subler in
Beijing and Brenda Goh in Shanghai; Editing by James Dalgleish & Shri
Navaratnam)

(11) IMF SDR represents a claim to foreign currencies for which it may
be exchanged
http://news.xinhuanet.com/english/2015-04/19/c_134162891.htm

China's Zhou says IMF members frustrated with quota reform delay

19 Apr 2015

WASHINGTON, April 18 (Xinhua) -- China's central bank governor Zhou
Xiaochuan has said that members of the International Monetary Fund (IMF)
are frustrated with the long-delayed 2010 quota reform of the fund and
called for early passage of the reform.

"The 2010 quota reform has been delayed for so long. IMF members are not
simply disappointed but frustrated," Zhou told Xinhua on the sidelines
of the World Bank-IMF Spring Meetings on Friday.

To reflect the growing and underrepresented influence of emerging
economies, the IMF called for a 6 percent shift in quota share to the
emerging economies in 2010. However, the reform has been delayed for
five years due to blocking by U.S. Congress as the United States retains
a de facto veto.

The IMF members are discussing an interim solution which does not need
the U.S. congressional approval.

"The interim plan should not be an alternative to the original reform
program. We are pushing for fully implementing the 2010 quota reform,"
he said.

Commenting on the IMF's review of including the Chinese currency, the
yuan, into the basket of the Special Drawing Rights (SDRs), Zhou said
that the evaluation process of the RMB's inclusion is proceeding in
order, and China would speed up relevant reforms to promote the process.

Christine Lagarde, managing director of the IMF, said on Thursday that
China knew quite well what is desirable, what needs to be changed and
improved in the monetary policy and in the financial sector in China.

"I believe what the Chinese authorities have actually indicated...will
naturally be conducive to an assessment of whether or nor the RMB is
freely usable, which is as you know one of the key criteria," she said
at a press briefing on the sidelines of the Spring Meetings.

SDRs are international foreign exchange reserve assets. Allocated to
nations by the IMF, an SDR represents a claim to foreign currencies for
which it may be exchanged in times of need.

Although denominated in the U.S. dollar, the nominal value of an SDR is
derived from a basket of currencies, with a fixed amount of Japanese
yen, U.S. dollars, British pounds and euros.

According to the IMF, the selections of currencies for the SDR basket
are based on two criteria -- the size of the country's exports and
whether its currency is freely useable.

In the IMF's last review in 2010, the RMB met the export criteria, but
was assessed to not meet the freely useable criteria.

WASHINGTON, April 18 (Xinhua) -- China will take a series of reforms to
further increase the capital account convertibility of Renminbi (RMB),
and make RMB, or yuan, a more freely usable currency, governor of the
People's Bank of China (PBOC) Zhou Xiaochuan said on Saturday.

In a statement at the 31st meeting of the International Monetary and
Financial Committee meeting held in Washington, Zhou said that China
will further expand cross-border investment channels for individual
investors, such as via pilot program of Qualified Domestic Individual
Investor.

(12) IMF SDRs to replace $ as one-world currency

http://www.wnd.com/2015/11/global-currency-plan-gets-boost-from-imf/

Global-currency plan gets boost from IMF

U.N. backs effort to replace U.S. dollar as choice of trade

Jerome R. Corsi

November 16, 2015

NEW YORK – A decision last week by the International Monetary Fund to
accept reserve-currency status for China’s yuan advances a developing
plan backed by the United Nations to replace the dollar as the world’s
reserve currency.

Last Friday, IMF Managing Director Christine Lagarde endorsed a staff
recommendation to include China’s yuan in the basket of four currencies
that currently make up the IMF Special Drawing Rights, or SDRs: the U.S.
dollar, the euro, the British pound and the Japanese yen. The SDRs play
the role of an alternative to the use of the U.S. dollar to settle
transactions in international trade.

In a reversal of policy from policy of previous presidents, President
Obama has indicated the United States plans to drop opposition to the
inclusion of the Chinese yuan in the IMF basket of currencies, giving a
green light to anticipated IMF approval of the plan at a meeting of the
IMF board Nov. 30.

In 2013, the Society for Worldwide Interbank Financial
Telecommunication, a provider of international payments services,
announced the Chinese yuan had advanced to overtake the euro to become
the second-most used currency in global trade finance after the dollar.

A meeting between U.S. Treasury Secretary Jack Lew with Chinese Vice
Premier Wang Yang and Finance Minister Lou Jiwei at the G-20 leaders
summit in Antalya, Turkey, provided an opportunity for the Obama
administration to make clear to China that the U.S. intends to support
the inclusion of the yuan in the SDRs, provided the currency meets the
IMF’s existing criteria.

Reuters noted the irony of the IMF decision following the unexpected
devaluation of the yuan in August. The move by the Chinese government
triggered a global stock market selloff amid objections by World Trade
Organization free-trade advocates that it created an unfair price
advantage for China’s exports while raising questions about Beijing’s
commitments to financial reforms.

Advantages of a reserve currency

William T. Wilson, Ph.D., a senior research fellow at the Heritage
Foundation, in a research report published Aug. 17 titled "Washington,
China, and the Rise of the Renmimbi: Are the Dollar’s Days as the Global
Reserve Currency Numbered?" argues the fall of the dollar has been
accelerated by the relatively slow growth of the U.S. economy since 2009
and the accumulation of a sovereign debt set to double in the eight
years Obama is in office.

Among the advantages of being a reserve currency, Wilson notes "the
reserve-currency countries have the ability to run up fiscal debts
denominated in their own currency at relatively low interest rates."

Wilson lists as additional advantages the convenience for the exporters
and importers of dealing in the country’s own currency rather than in
foreign currencies, reducing the transaction costs as well as the
foreign exchange reserves.

Bob McTeer, a former president of the Dallas Federal Reserve Bank, noted
in a 2013 article published by Forbes that being the world’s reserve
currency of choice for the past 70 years has boosted the U.S. standard
of living "by others’ willingness to hold our currency without ‘cashing
it in’ for goods and services, or, before 1971, gold."

(13) China Rebalancing means Chinese consume more, export less;
industries move to India, Mexico, Vietnam

http://www.taipeitimes.com/News/editorials/archives/2015/01/04/2003608411

Sun, Jan 04, 2015

China's economic rebalancing act

By Zhang Monan

After more than 30 years of extraordinary growth, the Chinese economy is
shifting onto a more conventional development path — and a difficult
rebalancing is under way, affecting nearly every aspect of the economy.

China's current-account surplus has shrunk from its 2007 peak of 10
percent of GDP to just over 2 percent last year — its lowest level in
nine years.

In the third quarter of last year, China's external surplus stood at
US$81.5 billion and its capital and financial account deficits amounted
to US$81.6 billion, reflecting a more stable balance of payments.

This shift can partly be explained by the fact that, over the past two
years, developed nations have been pursuing reindustrialization to boost
their trade competitiveness. For example, in the US manufacturing grew
at an annual rate of 4.3 percent, on average, in 2011 and 2012, and
growth in durable-goods manufacturing reached 8 percent — having risen
from 4.1 percent in 2002 and 5.7 percent in 2007. Indeed, the US'
manufacturing industry has helped to drive its macroeconomic recovery.

Meanwhile, as China's wage costs rise, its labor-intensive manufacturing
industries are facing increasingly intense competition, with the likes
of India, Mexico, Vietnam and some Eastern European economies acting as
new, more cost-effective bases for industrial transfer from developed
nations. As a result, the recovery in advanced economies is not
returning Chinese export demand to pre-crisis levels.

These trends — together with the continued appreciation of the yuan —
have contributed to the decline of Chinese goods' market share in
developed nations. Indeed, Chinese exports have lost about 2.3 percent
of market share in the developed world since 2013, and about 2 percent
in the US since 2011.

Incipient trade agreements, such as the Trans-Pacific Partnership, the
Transatlantic Trade and Investment Partnership, and the Plurilateral
Services Agreement, are set to accelerate this process further, as they
eliminate tariffs among certain nations and implement labor and
environmental criteria. Add to that furtive protectionism, in the form
of state assistance and government procurement, and Chinese exports are
facing serious challenges.

China is also undergoing an internal rebalancing of investment and
consumption. As it stands, declining growth in fixed-asset investment —
from 33 percent in 2009 to 16 percent this year — is placing significant
downward pressure on output growth. Investment's contribution to GDP
growth fell from 8.1 percent in 2009 to 4.2 percent last year.

One reason for the decline is that China has yet to absorb the
production capacity created by large-scale investment in 2010 and 2011.
Aside from traditional industries, inlcuding steel, non-ferrous metals,
construction materials, chemical engineering and shipbuilding, excess
capacity is now affecting emerging industries, such as wind power,
photovoltaics and carbon fiber, with many using less than 75 percent of
their production capacity.

However, the decline in investment is also directly correlated with that
of capital formation. From 1996 to 2012, China's average incremental
capital-output ratio — the marginal capital investment needed to
increase overall output by one unit — was a relatively high 3.9, meaning
that capital investment in China was less efficient than in developing
nations experiencing similar levels of growth.

Moreover, the cyclical increase in financing rates and factor costs has
brought a gradual restoration of the price scissors of industrial and
agricultural goods. As a result, industrial firms' profits are likely to
continue to fall, making it difficult to sustain high investment.

Meanwhile, the expansion of China's middle class is having a major
impact on consumption. Last year, China surpassed Japan to become the
second-largest consumer market in the world, after the US.

Chinese imports remain focused on intermediate goods, with imports of
raw materials like iron ore having surged over the past decade. However,
in the past few years, the share of imported consumption goods and
mixed-use (consumption and investment) finished products, such as
automobiles and computers, has increased considerably. This trend is set
to contribute to a more balanced global environment.

The final piece of China's rebalancing puzzle is technology. As it
stands, a lag in technological adoption and innovation is contributing
to the growing divide between China and the Western developed nations,
stifling economic transformation and upgrading, and hampering China's
ability to move up global value chains.

However, as China's per capita income increases, its consumer market
matures, and its industrial structure is transformed, demand for capital
equipment and commercial services is likely to increase considerably.
Indeed, over the next decade, China's high-tech market is expected to
reach annual growth rates of 20 to 40 percent.

If the US loosens restrictions on exports to China and maintains its
18.3 percent share of China's total imports, US exports of high-tech
products to China stand to reach more than US$60 billion over this
period. This would accelerate industrial upgrading and innovation in
China, while improving global technological transmission and expanding
related investment in developed nations.

China's economy might be decelerating, but its prospects remain strong.
Its GDP might have reached US$10 trillion last year. Once it weathers
the current rebalancing, it could well be stronger than ever.

Zhang Monan is a fellow of the China Information Center and the China
Foundation for International Studies, and a researcher at the China
Macroeconomic Research Platform.

(14) PBoC Currency Intervention to stop rise of Yuan, then fall of Yuan

http://qz.com/386421/why-chinas-economy-is-slowing-and-what-it-means-for-everything/

Why China's economy is slowing and what it means for everything

Matt Phillips

April 19, 2015

It's really happening.

China, an increasingly important engine of global economic growth, is
slowing fast. [É] Does the fact that it's losing steam mean we're doomed
to another global slump? Well, no. Thankfully, developed market
economies such as the US seem to be in decent shape and set to pick up a
bit of slack. The world economy grew by 3.4% in 2014, according to the
IMF. And it's projected to expand by 3.5% and 3.8% in 2015 and 2016. [É]

In the aftermath of the Great Recession, when some of China's most
important export markets, such as the US were mired in the deepest
recession since the Great Depression, China embarked on a massive
investment binge. But that, too, is now slowing. Investment growth
declined to 13.5% in the first quarter, the slowest in since 2000.

In an ideal world, Chinese consumers would pick up some of the slack.
But retail sales growth also continues to slump, it fell to 10.2% in
March, worse than expected. In other words, its unclear what will fuel
China's economic engine.

Capital outflow

So, it's far from clear that China will be able to easily pull off such
a transition. And there are indications that the foreign investors that
have pumped billions into the Chinese economy in recent years aren't
waiting around to find out.

How do we know? Well, we can look at Chinese foreign exchange reserves.
As part of its policy of keeping its currency cheap to boost exports,
China has amassed nearly $4 trillion dollars in reserves in recent years.

Here's how it worked. Essentially, when China's currency, the yuan or
RMB, would strengthen against the dollar, the government printed fresh
yuan and used them to buy dollars. That increased the supply of Chinese
currency floating around in the market, and shrunk the supply of
dollars—because the Chinese government bought them and pulled them out
of circulation. Increased yuan supply and smaller dollar supply weakened
the Chinese currency.

But it recent months, the opposite seems to be happening. The
governments pile of dollars is shrinking a bit, suggesting it has been
selling dollars to try to keep the yuan from weakening too much. The
yuan isn't strengthening the way it has been in recent years, which
suggests investors aren't as eager to invest in the country.

And since China's pile of dollars has stopped growing, the country
hasn't needed to buy as many US government bonds. (Treasuries are
traditionally a key place where China would stash its cash.) Lo and
behold, China this week lost the crown of the largest foreign creditor
to the US, as Japan overtook it.

Trade winds

So, China's slowdown doesn't doom the world to recession. But its path
forward is far from clear. And investors seem to be a bit jittery. The
biggest economic impact tied to the China slowdown could well be outside
of China, particularly among the suppliers of the raw materials China
has used to fuel its industrial and investment binge in recent years.

For example, China consumes roughly 47% of the world's base metals, up
from 13% in 2000, according to the IMF. So it shouldn't be a surprise
that metal prices are now roughly 44% below their 2011 peak.

China's slowdown has weighed on copper prices, for instance. And that's
weighed on copper exporters, such as Peru.

Likewise, iron ore prices have hammered Australia's revenue from exports
of the raw material to Chinese steel mills.

The fact that Brazil is being battered by a similar trend only adds to
the dour outlook for the South American giant. The IMF projects the
Brazilian economy will fall into recession in 2015 and contract by about 1%.

What is to be done?

That's the trillion-dollar question. Will China be able to pull off a
transition to a different economic model without a hiccup? Probably not.
That doesn't mean the economic miracle in the People's Republic is over.
But it does open the door for a bit of volatility over the next few
years. Can the government pull it off? [É]

(15) China's slowdown is hurting countries that export to it

http://www.businessinsider.com.au/us-industrial-impact-chinese-slowdown-2015-6

China's slowdown is bad news for the world's big industrial exporters

Bob Bryan Jul 4, 2015, 4:09 AM

China's slowing economy is a serious concern for the economies of the
nearly 50 nations that count China as their top export destination.

According to economists at UBS, not only will it impact the countries
where the goods are coming from, but individual industries will also be
hit harder than others.

China's flow of imports increased by only 0.7% in 2014. This represents
the lowest growth rate in five years for the country. In terms of growth
for particular global industries, four out of nine tracked by UBS
exported less to China than in 2013.

Imports of minerals and fuels, electronics, textiles, and instruments
all decreased. Two other industries, chemicals and plastics, increased
imports by less than 1%.

US manufacturers were hit similarly hard. Census Bureau data shows that
China is the third-largest export destination for US goods, after the
NAFTA partners of Canada and Mexico, with $US122 billion heading across
the Pacific in 2014. Trade with China grew 1.9% last year according to
the UBS report. This is above the global average, but drastically below
average 9.9% year-over-year growth for the three years preceding based
analysis of Census Bureau data.

Textiles and minerals and fuels decreases in exports of over 10%, while
only agriculture had double-digit growth. UBS notes that while
commodities took the biggest hits, the slowdowns are starting to reach
processed items as well.

"With China's property construction deceleration set to deepen this year
in a multi-year slowdown, we may see a longer-term decline in China's
appetite for foreign industrial imports," said the report.

This is especially troubling to vehicle and machinery producers, as
around 30% of all exports from the US in those industries go to China.
Globally, Germany and the EU send nearly 50% of their goods in these
industries to China.

Over the first four months of 2015, exports have decreased by 6.3% from
the same period last year, though labour disputes at the West Coast
ports contributed to the problems.

China's slowdown has already started to reach American manufacturers.

(16) Luxury exports from West to China plummet

http://qz.com/429127/western-companies-are-reporting-plummeting-sales-in-china/

Western companies are being forced to figure China out all over again

Richard Macauley Heather Timmons

June 22, 2015

Foreign companies have long known that China's economic slowdown—now
upon us—could hit their earnings hard. They just didn't expect they'd be
hit by changing consumer buying habits and a rise in Chinese competitors
at the same time. Suddenly, foreign brands are finding it a lot harder
to convince consumers in the world's most populous country to part with
their cash.

The net result has been a string of miserable earnings reports, company
reorganizations, and cost-cutting announcements in recent weeks,
particularly for the world's biggest luxury and auto brands.

Italian luxury goods maker Prada reported a 44% drop in net profit to
Û59 million ($67 million) for the three months through April, well below
expectations of Û85 million. Executives pointed to weakness in mainland
China and a drop in the number of shoppers heading to Hong Kong and
Macau as a major driver for Prada's poor performance, and warned that it
is a trend showing Òno signs of abating.Ó

Luxury companies have long charged mainland Chinese shoppers a premium
of between 25% and 40% (paywall) compared to other markets, for the
simple fact that consumers were willing to pay inflated prices for
status symbols. Some of those companies are now slashing prices to keep
consumers interested.

Auto makers are suffering too. Last week, BMW reported its first monthly
year-on-year drop in sales in China, its largest market, in a decade.
Earlier this year executives said they were surprised by the speed of
China's slowdown. Jaguar Land Rover's profit fell 33% in the first
quarter and this was also, it said, thanks to a China slowdown. The
steepest drop in two years pushed the company to appoint a new China
sales boss from Porsche to turn things around.

It has been no secret that the Chinese economy has been slowing in
recent years, and a corruption crackdown has squeezed high-end spenders
in particular. But an economy still growing at around 7% shouldn't
create the kinds of sales drop-offs reported by some Western brands, and
the fact that many of these earnings drops were surprises for analysts
and investors shows just how difficult some Western companies are
finding the Chinese market to navigate.

Better domestic competition is part of the issue. The quality of Chinese
brands is improving, as are their marketing chops (paywall) and domestic
brands often predict Chinese consumers' changing desires better than
foreign brands can. In fact, some of the fastest-growing luxury brands
in the world are now Chinese companies like jewelers Lao Feng Xiang and
Chow Sang Sang.

Chinese consumer habits are another. Unilever, which owns brands from
Dove soap to Magnum ice creams, saw sales in China fall 20% in the
fourth quarter last year. Nestl_ has been burning the coffee it couldn't
sell in China, according to the Wall Street Journal (paywall).

Unilever's chief financial officer Jean-Marc Hu‘t told the newspaper
that it had failed to anticipate how quickly and thoroughly Chinese
consumers would make the switch to buying online. Putting it bluntly, he
said Western consumer goods companies were just Òtoo slow to react to
the changes in the marketplace.