China’s Problems Continue To Mount
Saturday, June 15, 2013
Although many still view China as the miracle that will keep on giving, they don’t quite get the fact that China cannot sustain itself economically and politically. A recent audit revealed that “Local government debt skyrockets in China,” a condition that will magnify as time goes by and will run its obvious course.
An audit of 36 local governments in China has revealed their total debt amounted to 3.9 trillion yuan (US$627.4 billion) as of last year, up 12.9% from 2010, with some struggling to repay their arrears, China's state auditor says.
In addition, “Off-balance sheet financial items risky for China's banks,” as banks provide a variety of financial products to the unsuspecting public.
Following mounting demands among investors for the preservation of the value of their financial products and their diversified allocation, financial institutions have developed a broad range of financial products since 2012, the People's Bank of China said in a report on the country's financial stability in 2013. As of the end of the year, banks had launched 31,000 financial products worth 6.7 trillion yuan (US$1.1 trillion) in fund balances, which reflected a 64.4% year-on-year growth, representing an average yield rate of 4.32%. This has made them one of the most important financial investment tools, according to the report.
In Europe the dance continues and European Central Bank President Mario Draghi stated that the ECB “would not use its yet-to-be-activated bond-buying programme to save profligate countries from insolvency, but only to preserve the euro.” But here’s the other side, according to Draghi.
"The ECB says if there is a confidence crisis in the euro which is threatening the solvency of the countries not beyond what their fundamentals are, then we are ready to intervene," he said in a video interview with German public broadcaster ZDF.
I understand the difference, but “profligacy” at this juncture is irrelevant. However, the ECB “defended its bond-buying program in a German courtroom on Tuesday, arguing that the scheme many credit with saving the euro from collapse was within its mandate and had not spawned unlimited risks.” Meanwhile, yields have been moving up since May, with Greek 10-year up two points to 10% and Portuguese 10-year up one point and going for 6.5%. Spanish 10-year is now above 4.6% and the Italian 10-year trades at 4.35%, both above the 4% mark seen in May.
Then the World Bank cut global growth to 2.2% from the 2.4% forecast in January citing “a deeper-than-expected recession in Europe and a recent slowdown in some emerging markets.” Apparently they didn’t get the memo that the global economy will not improve any time soon.
A bit of confusion is dominating the markets, with the Fed’s commitment to the ongoing silly asset bubble being questioned, while Japan is in everyone’s mind. All indices remain short-term neutral and long-term positive. The dollar is still short and long-term negative, pressuring equities, while the euro remained positive all around. The yen is short-term positive and long-term neutral, running into the $0.0106 obstacle. WTI and Brent are being pushed up by a weaker dollar and uncertainty in Syria, and they’re both short-term positive and long-term neutral. The spread shrunk to $7.98 from $8.23. Gold and silver have found an indecisive range, and remain short and long-term negative, while copper stayed short-term negative and turned long-term negative. The 10-year Treasury rate declined to 2.13% from 2.16%. The 10-year note and the 30-year bond are still short and long-term negative. Next week we’ll get U.S. FOMC meeting and housing data. In addition, we’ll have the G8 meeting and global flash PMIs numbers.
The Mortgage Bankers Association’s mortgage application activity index increased 5.0%. Refinancing increased 5.0%, and home purchases increased 5.0%. Freddie Mac's average 30-year mortgage rose to 3.98% from 3.91%, and the 15-year increased to 3.10% from 3.03%. Jobless claims decreased 12,000 to 334,000, and the 4-week moving average decreased 7,250 to 345,250. The number for seasonally adjusted insured unemployment increased 2,000 to 2,973,000.
Wholesale inventories rose 0.2% in April, and excluding autos inventories were flat. Business inventories rose 0.3%, and sales declined 0.1%. U.S. Treasury had a budget deficit of $139 billion in May, $15 billion higher than May 2012. The deficit is running 26% lower thus far in 2013 due to higher tax receipts. Retail sales rose 0.6% in May, with core sales rising 0.3%. Import prices decreased 0.6% in May, while export prices declined 0.5%.
PPI rose 0.5% in May, the first increase in three months, with the core reading up 0.1%. Both the PPI and the core rate are up 1.7% on an annual basis. The current account deficit rose to $106 billion, with “the increase in the current-account deficit was accounted for by a decrease in the surplus on income and an increase in outflows of net unilateral current transfers, such as government grants, government pensions, and private remittances.”
Industrial production was unchanged in May, and capacity utilization declined to 77.6% from 77.8% and still weak. The Thomson Reuters/University of Michigan's preliminary consumer sentiment index declined to 82.7 in June, down from 84.5 in May.
Eurozone’s industrial production grew 0.4% in April from the previous month. Annual inflation registered 1.4% in May with the core at 1.2%. One year ago it was 2.4%. Employment in the Eurozone dropped 0.5% during Q1-2013. French manufacturing output increased 2.6% in April, and Italian output declined 0.3%. Consumer prices in Germany were up 1.5% on an annual basis, while French CPI was up 0.8% on the year. German wholesale prices declined 0.1% in May year-over-year.
China's annual CPI registered 2.1% in May, down from 2.4% in April. PPI declined 2.9% year-on-year. New yuan loans declined to CNY667.4 billion from CNY792.9 billion in April, and fixed asset investment increased 20.4% annually. Industrial production was up 9.2% and retail sales increased 12.9%. Japanese GDP was revised to show 1.0% growth in Q1-2013, and annualized growth rate of 4.1%.