Whither China?

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Whither China?

Postby Khalaad » Sun Mar 30, 2014 10:48 am

Week ending 17 January 2014, USDCNY and USDCNH appeared to have bottomed after a multi-year downtrend. I did not even notice the event.

Yesterday, while researching for my Nuggets topic I came across a comment by Jack Schwager about prices and fundamentals which recalled An important chart that will have major implications.

https://twitter.com/TechCharts/status/4 ... 88/photo/1

which in turn made me re-read George Soros writing The World Economy’s Shifting Challenges on 2 January 2014 for Project Syndicate. Soros, understandably, gives no hint of his position(s) on China, but opined:

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

http://www.project-syndicate.org/commen ... G9LPLBp.99

I am a firm believer in doing the own thing. Yet it is sensible to be aware of what others are doing; and keep in mind the big picture, and remember:

The trend is your friend except at the end when it bends. Ed Seykota

The question is, do the USDCNH and USDCNY lows of 14 January 2014 and the Soros comments mean the same thing?

To try to understand this, I referenced Colm O’Shea, who once worked with George Soros. O’Shea is a global macro trader, and Founding Partner and Chief Investment Officer of COMAC Capital, LLP.

The following is what I found in the O’Shea interview in Jack Schwager’s Hedge Fund Market Wizards:

What was your first job after graduating?
I got a job as a junior trader at Citigroup in the foreign exchange department. My first week at work was the week when the pound was kicked out of the ERM.

The week when George Soros in the popular vernacular “broke the Bank of England”?
Yes. As you may know, I worked for George Soros before starting my own fund. My favorite George Soros story concerns an interview with Chancellor Norman Lamont, who stated that the Bank of England had £10 billion in reserve to defend the pound against speculators. George apparently was reading an account of this interview in the next morning’s paper and thought to himself, “£10 billion. What a remarkable coincidence! — that’s exactly the size of the position I was thinking of taking.”

At the time, I remember explaining to the head of the trading floor why the pound would not leave the ERM. I argued that it would be political suicide for the conservative government to drop out of the ERM; hence they would make sure it didn’t happen.

What was your boss’s response?
He just smiled and nodded at me. He said, “Okay, we’ll see.” About three hours later the pound crashed out of the European ERM. I felt like a complete idiot.

I had absolutely no comprehension of the power of markets versus politics. The policy makers didn’t understand that either. I think, as is often the case, policy makers don’t understand that they are not in control. It’s not that speculators are in control, either, but rather that fundamentals actually matter. Fundamentally, the U.K. remaining in the ERM was untenable. The U.K. was in a recession with a greatly overvalued currency.

Germany needed high interest rates to constrain the high inflation of the post-unification period with East Germany. Because the currencies were linked, the U.K. was also forced to maintain a high interest rate even though it’s on going recession dictated a need for the exact opposite policy. All that Soros did was to recognize that the situation was untenable. The Bank of England’s effort to support the pound was the equivalent of trying to fight gravity.

You were lucky to make your first big mistake when you didn’t have any money on the line. Did that episode make an impression on you?
It made a huge impression. I learned that markets matter more than policy. You have to look at real fundamentals, not at what policy makers want to happen. The willing disbelief of people can carry on for a long time, but eventually it is overwhelmed by the market. The genius of Soros was recognizing the turning point when things change — the ability to not only know that a position was right, but that it was right now, and that now was the time to have a big risk on the trade.

The Soros trade of going short the pound in 1992 was based on something that had already happened — an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the ERM. Afterward, every one said, “That was incredible obvious.”

George Soros has the least regret of anyone I have ever met. Even though he will sometimes play up to his public image as a guru who knows what is going on, it is in no sense what he does as a money manager. He has no emotional attachment to an idea. When a trade is wrong, he will just cut it, move on, and do something else. I remember one time he had this huge FX position. He made something like $250 million on it in one day. He was quoted in the financial press talking about the position. It sounded like major strategic view he had. Then the market went the other way, and the position just disappeared. It was gone. He didn’t like the price action, so he got out. He doesn’t let his structural views on how he believes the market will play out get in the way of his trading.

So, what is obvious about China; so obvious it may be incredible?

Khalid
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Whither China?

Postby Khalaad » Mon Mar 31, 2014 9:46 am

Curious features of Chinese economy:

http://www.economist.com/news/china/215 ... 2Nbe3.dpbs

Khalid
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Whither China?

Postby Khalaad » Thu Apr 10, 2014 2:29 am

China’s Coming Economic Crisis?

The debate continues:

http://www.nytimes.com/roomfordebate/20 ... ef=opinion

Khalid
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Whither China?

Postby Khalaad » Sun Apr 20, 2014 3:33 am

BIS Working Papers No 446 -- One currency, two markets: the renminbi’s growing influence in Asia-Pacific

http://www.bis.org/publ/work446.pdf

Khalid
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Whither China?

Postby Khalaad » Sun Apr 20, 2014 3:33 am

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Whither China?

Postby nanningbob » Wed May 07, 2014 11:53 pm

Almost 15% of China's GDP comes from real estate. That is not sustainable and if it comes down to a more normal 6-8% China will have a no growth economy. Here is a note that came out:

China’s weakening property market poses an increasing danger to local governments, threatening to strain their finances and intensify an economic slowdown. Land sales in 20 major cities fell 5 percent in March from a year earlier, the biggest drop in at least a year, according to China Real Estate Information Corp. data compiled by Bloomberg. The value of land sales in third-tier cities declined 27 percent last month, according to SouFun Holdings Ltd., the nation’s biggest real-estate website owner. Failure to find other revenue sources increases the risk of defaults and financial turmoil that curb economic expansion already...

http://www.bloomberg.com/news/2014-05-0 ... ances.html

Since most local govts in China rely on real estate for their tax income what happens to them when it stops or slows down.
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