Tag Archives: China

The change in China that could suffocate the global economy

Note: Since I rarely update this blog, I will be using it to preserve and highlight some of my favourite posts from ForexLive. I’ll start with this one from April 24, 2013:

People in Beijing don’t wake up and check the daily weather forecast; they check the air pollution index so they know what face mask to wear.

China air pollution April 23, 2013

This shocking series of pictures were taken on a ‘clear’ day. The air is described as a noxious soup. Blow your nose and it’s black.

The problem didn’t happen overnight but air pollution indexes are up 30% in 2013, and that’s if you believe the government numbers.

Chinese officials are trying to curb pollution without hurting economic growth but those goals may be incompatible.

Change could come any day. Chinese politicians live in Beijing and their children are breathing the same air and getting sick. An unusual weather pattern could hit Beijing and cause a spike in pollution that sends hundreds of thousands of people to hospitals. That could be the tipping point for radical change and the consequences for the global economy are impossible to predict.

Bloomberg should add Chinese air pollution indexes to their tickers. Today’s readings aren’t high but half the day was still worse than living in an airport smoking lounge.

The prevailing winds from China blow toward the Pacific ocean but occasionally they shift Northward and Japan and Korea are covered by smog, and they’re increasingly unhappy. If a 10,000km ocean buffer didn’t separate California from China, the United States would never tolerate being poisoned by the people taking their jobs.


After the Greek Haircut it’s Time to Focus on the ECB

So much is going on in Europe. The number one thing I’m waiting on is the Greek bond haircut but something around 50% seems fairly certain at this point. The euro will rally once there is an agreement but it will be telling to see how much it rises.

Quick recap/analysis of today’s news:

–          EU agrees to 9% bank capital ratio. €106B to be raised, with 75% of it in Greece, Spain, Italy and Portugal. The list of how much banks in each country must raise is here.

There is no way Greek banks can raise €30 billion so that money is coming straight out of the EFSF. I don’t know all the details of European financials but I’m eager to see how they react in stock markets tomorrow. I’ll go from there.

There is also to be a question about whether convertible debt will count toward the ratio but I’m guessing Germany and Spain will lose.

Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital. (link)

–          No concrete news on the EFSF but it sounds like a two-pronged approach. 1) first loss guarantees on new periphery debt 2) Use the EFSF and get investors (China) build a fund that will buy debt on the secondary market.

For instance, Italy will need to issue about €300 billion next year. If the EFSF guarantees the first 20% of losses, that would amount to €60 billion. If Italian funding is still under strain, the second approach will be implemented.

At those rates, the EFSF will be swallowed up fairly quickly. The longer-term risk is that debt markets get addicted to the EFSF backstop and that it will never be removed. On the face of it, it’s an okay plan. The near-term risk is that the details fail to impress.

–          Italy delivered a letter of intent to reform spending and sell €15 billion of assets over the coming three years.

A fist-fight broke out in Italian parliament about pension reform after an opposition leader said coalition partner Bossi’s didn’t favour pension reform because his wife retired on a generous state pension at the age of 39 from her job as a teacher.

I would say stability in Italy is a major question mark right now and Burlesconi is a major liability. The whole thing could come crashing down because of these idiots.

As I mentioned, the Greek haircut news is really the last piece of the puzzle for the immediate term. The market will then immediately shift its focus to the ECB’s Nov. 3 meeting, just one week away.

Although this is the first meeting led by Draghi, I don’t see him hesitating to cut rates.

Regardless of the outcome, the market will make a strong push to price in a dovish scenario over the next three days. I’m not trading this news but I would like to sell a post-Greek-haircut bounce, especially if a spike over 1.40 looks like a short squeeze.