China Plays “Whack-a-Bubble”

Bandleader Lawrence Welk was famous for the bubble machines that kept the air around the bandstand covered with bubbles show after show. China is full of bubble machines of a different type, but they are just as much about “putting on a good show” as were Welk’s bubble machines.

We know all about China’s export bubble, the real estate bubble, the state-owned enterprise bubble, and the excess-infrastructure bubble. We watched the stock market bubble pop last summer, and have become aware of China’s looming debt bubble.

As one bubble bursts or deflates, another bubble must emerge — else where will the growth come from? This time, the answer is B-O-N-D-S.

Where it is going is into bonds. An auction of 10-year government bonds issued by China’s Ministry of Finance on Oct. 14 shocked numerous investors; its initial yield was below 3%. A flood of applications to buy the bonds pushed down the yield to 2.99%. It was the first time a new issue failed to reach 3% since December 2008, right after the global financial crisis struck.

Yields are being pushed lower by the huge amounts of cash flowing out of Chinese stocks and into bonds.

After Shanghai’s stock bubble imploded, banks and funds began putting money into bonds, according to Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management, which specializes in offering bond-focused mutual funds to institutional investors.

Banks now seem to be using their money — which used to be pooled in loans for people who wanted to buy stocks — for bond investments.

… According to Thomson Reuters, public placement of straight corporate bonds in China was as high as $408.6 billion last year, quadruple that in Japan and the largest total in Asia. Were this plump market to be pricked next, the repercussions would be felt more widely than the Shanghai crash of 2015. __

In China, “the show must go on.” The nature of the bubble is not as important as the fact that there must be someplace to stash the cash. For it is China’s vast stash of cash that is driving much of the world’s economic humbug. And without humbug, modern economies would be in very big trouble.

What is actually happening in China’s industrial world?

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.” __ Bloomberg

The disaster is the result of a combination of factors, including a slowing Chinese economy, falling commodity prices, and an industry loaded with debt.

Earlier this month, state-owned enterprise (SOE) Sinosteel defaulted on a debt-interest payment of $315 million on bond notes maturing in 2017.

… China’s economy is trying to make the difficult transition from one based on investment to one based on domestic consumption, so it’s useful to think of its economy in two parts: new China and old China.

… As new China rises, old China is fading. But the rising is happening slowly, and the fading is happening faster than anyone thought. The Chinese government faces the colossal challenge of managing this transition without a string of credit events crippling the economy.

As we all know, it is China’s cash stash that is propping up real estate markets from London to Sydney. And it is China’s cash that has propped up corrupt commodities producers from Brasil to South Africa to Venezuela to Russia.

But as China’s engine continues running down, these economies and markets that are so dependent upon China’s bubble-blowing are starting to hurt, as well.

The most dangerous global humbug that has been inflated by China’s bubble machines, is the global military bubble. In order for China to gain the respect its corrupt government leaders believe that it deserves, it must boost military spending, domestic military capacity, and international weapons sales. Part of this humbug involves expanding China’s territorial hegemony at the expense of several neighbors.

China’s military-backed bubble-expansion of territory in the South China Sea is pissing off neighbors from Japan, to Taiwan to the Philippines, to Vietnam, to Indonesia, to Malaysia, to Brunei, to my Uncle Phil in Poughkeepsie.

China has built up a number of man-made islands, and is attempting to extend a bubble 12 nautical mile perimeter of control around them.

Under the UN Convention on the Law of the Sea, limits of 12 nautical miles cannot be set around man-made islands built on previously submerged reefs.

… The US just called China out on a huge bluff on Tuesday, sending a naval destroyer into the most disputed waters in the world — waters that China claims it has the right to control.

… One US defense official said the USS Lassen sailed within 12 nautical miles of Subi Reef. A second defense official said the mission, which lasted a few hours, also included Mischief Reef and would be the first in a series of freedom-of-navigation exercises aimed at testing China’s territorial claims. __

It is said that “a power play without cash is an empty gesture.” China still has a lot of cash — but then they used to say the same thing about Russia.

China and Russia

China is attempting to inflate its territory to its east at the same time that its frenemy Russia has been doing the same to its own west. But everyone knows that it is the Russia : China borders that are in ultimate play — as well as the borders of nations that come between Russia and China, geographically and politically.

China is trading great guns with Ukraine at the same time that Russia is trying to force Ukraine into humiliating concessions. China is moving into the Central Asian Republics just when Russia most needs a stronger presence there. Wherever Russia seeks influence — from Cuba to Venezuela to Argentina to Kazakhstan to Afghanistan to Iran — China is always crouched in the background, waiting for an advantageous opportunity to make its move.

A Natural Relentless Ongoing Incursion by China Into the Former Russia

A Natural Relentless Ongoing Incursion by China Into the Former Russia

But all of that strategic posturing very much depends upon China’s ability to maintain a large cash stockpile, in order to exert influence wherever wire transfers are done. And to maintain its cash, China must do something with its exponentially growing debt mountain — besides blowing more bubbles.

In June of 201,4 Standard and Poor’s reported that China’s corporate borrowing had hit $14.2 trillion in 2013, outpacing the issuing of $13.1 trillion of debt by U.S. corporations. S&P observed that China was financing as much as third of this huge corporate debt load through its “shadow banking sector.” The rating agency took note of what it saw as a growing risk posed to global markets by a Chinese economy that was increasing corporate borrowing even as corporate balance sheets were actually deteriorating.

… Also in the mix: $4 trillion dollars in municipal debt China issued to keep things humming locally and at the provincial level. Now the country finds itself at a tipping point it just can’t “grow out of.” __ Robert Hennelly

China recently lowered interest rates at the same time as it relaxed its “reserves ratio” for banks, and made it easier for corrupt local and regional governments to issue “junk” bonds. In other words, China wants to blow bigger and bigger bubbles, to keep the show going on at all costs.

When all of these bubbles burst around the world, it will be a show for the ages. Lawrence Welk, eat your heart out!

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3 Responses to China Plays “Whack-a-Bubble”

  1. John says:

    Doug Noland, Credit Bubble Bulletin Has one article a week and has followed it for many years, good reading if you have some time.

    • alfin2101 says:

      Thanks. Added link to news link list.

      • John says:

        I don’t know where you get the time to write and do all that you do but I appreciate the stories and updates, miss all the old links and the separation of topics from the old format but glad you are back to assessing the future again.

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