Those higher interest rates in the US next year could make big problems for China

[F-22Raptor]

Rising interest rates in the United States have an obvious effect on the world's biggest economy — but less obvious is the impact those rates could have on the second biggest.

Higher interest rates in the United States could make it harder for China to manage its exploding debt, as the Asian giant increasingly depends on borrowing in order to keep growing — while simultaneously trying to block capital from fleeing for more fruitful shores in America.

"If the Federal Reserve [keeps increasing] interest rates in the United States, the single biggest casualty of that this time is going to be China, because there's so much money just waiting to leave" the country, said Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management. Sharma spoke Tuesday evening as part of a panel at the Asia Society in New York.

Sharma pointed out that over the last year, China has moved from one bubble to another: commodities, stocks and, currently, real estate. That is not a sustainable way for China to grow, he said, especially considering that China's "debt increase over the last five years has been 60 percentage points as a share of its economy."

"They're playing whack-a-mole constantly. They try to bring down one bubble, and something pops up somewhere else. They do that, and something comes up somewhere else," said Sharma, who noted that housing prices in China's largest cities have increased between 30 and 50 percent over the last 18 months alone.

Fed officials on Wednesday approved the first U.S. interest rate increase in a year. The 0.25 percentage point hike was widely expected, but the more aggressive pace for future increases outlined by the Fed — three next year instead of the two that were previously expected — was not.

Rising U.S. rates typically mean better yields for U.S. Treasurys and a stronger U.S. dollar. And indeed, both bond yields and the greenback immediately moved higher after Wednesday's announcement.

"I certainly think we could hit a 3 (percent on the 10-year Treasury yield) by the first quarter" of next year, Rick Rieder, CIO, global fixed income at BlackRock, told CNBC on Wednesday. The 10-year was last at 3 percent in January 2014.

Such moves could become trouble for Beijing, which is already working hard to block capital from fleeing China as its currency, the yuan, declines in value against the dollar. More appealing investment options in the United States are a powerful lure drawing money out of China. (China also is using its foreign currency reserves to buy up yuan in a desperate attempt to keep its currency from plunging.)

Others doubt Sharma's take on China's economy. More optimistic observers of the country correctly point out that the country's debt is fundamentally different from debt in most other places. The government in China has so much control over so much of the economy, and a direct stake in so many markets and businesses in China, that it has proven capable of engineering its way out of previous bubbles.

But the ability to keep financing its "massive debt binge" is impaired, Sharma said, if too much money bleeds out of the system. And China needs a lot of money — and more and more of it — to keep hitting the largely arbitrary 6-percent GDP growth rate that Beijing has mandated for the country.

"Today in China, it's taking $4 in debt to create a dollar of GDP growth," said Sharma, who is also the author of "The Rise and Fall of Nations: Forces of Change in a Post-Crisis World."

Sharma isn't alone among economists and market watchers who are watching China with rising concern.

Peter Boockvar, chief market analyst at economic advisory firm The Lindsey Group, said in a Wednesday note that China "is headed to debt outstanding as a percent of GDP to north of 250% vs 163% in 2008," citing sharp increases in consumer and banking debt within the country.

On Wednesday, the Chinese government said it issued 794.6 billion yuan ($115.1 billion) in new loans last month, well above October's 651 billion yuan ($94.28 billion).

Meanwhile, total social financing in China, a broad measure of credit in the country, rose to 1.74 trillion yuan ($250 billion) in November, from 896.3 billion ($129.8 billion) in October.

"This is out of control, as this is happening at the same time their growth rate is in secular decline," Boockvar said.

China's GDP growth rate has steadily dropped since 2010, when China's economy grew nearly 10 percent, according to data from the International Monetary Fund.

http://www.cnbc.com/2016/12/14/high...-next-year-could-make-problems-for-china.html

 

[Jlaw]

lol, another joke article by the PDF joker.
1. rising interest rates will kill US stock market and
2. destroy US real estate . subprime part 2 but worse than 2008
3. China is creditor nation, US is debtor nation, which monitize debt by selling bonds to China, Japan, K.S.A. So who is getting more interests income? who is paying more interests cost? LMAO.
4. higher rate, less borrowing by US corporations, less capital, less hiring by US Corp.
5. higher dollar, killing more industries, more consumption & imports, more deficit, more debt, the joker seems happy?

 

[sankar]

China keep surving the bubbles as in articles. But if China gets affected by it, then it may break

 

[shadows888]

China keep surving the bubbles as in articles. But if China gets affected by it, then it may break

I have more fear of a second recession in the US after trump is done with it than China.

 

[sankar]

I have more fear of a second recession in the US after trump is done with it than China.

You're right. It looks so.

But we have to be very carefull as before 2008 no one ever dreamt of US recession except very few scholars.

Similarly what we see in front of our eyes is not the actual case. Need to wait and see. Just another 3 years time,. we will know

 

[slng]

probably simpson prediction is right

trumpt and then end of us dollar

he is treating the country as business without considering external factors

 

[F-22Raptor]

Last week, when the U.S. Federal Reserve raised interest rates, it was a sign for many investors that things were getting back to normal. For China, facing large-scale capital outflows and a declining currency, it was a sign of a serious problem.

For the past decade, China has maintained a "soft peg" of the yuan, allowing it to rise and fall within a narrow band against the U.S. dollar. This has worked, for the most part, because the two countries have had relatively synchronous business cycles and broadly similar monetary policies. But now their economies are diverging in important ways.

The Fed has been openly worrying about rising prices, as the U.S. economy grows steadily and its labor market tightens. That's why it is boosting rates. In China, by contrast, state news outlets now regularly talk about the "new normal" of slower growth. Private investment has grown by only 2.5 percent this year through September. Near-zero consumer inflation has risen lately only due to speculation.

Worse, many years of excessively loose monetary policy have produced wildly inflated asset prices. Real estate in some Chinese cities ranks among the most expensive in the world. Virtually every commodity, from coal to garlic, has experienced a boom and bust in 2016, sometimes more than once. With few investment opportunities in a sluggish economy and bubble-level asset prices, investors are moving money overseas at an accelerating rate. Economists at Goldman Sachs Group Inc. estimate that $69.2 billion exited China in November. Other estimates suggest a total outflow of nearly $1 trillion for 2016.

This places China's policy makers in a bind. They need lower interest rates to boost growth and ease the burden on heavily indebted firms. But they need higher rates to maintain the soft peg to the dollar as the Fed tightens. Keep rates low, and they risk busting the peg, pushing more capital overseas and placing intense pressure on the financial system. Boost rates to maintain the peg, and they risk raising costs on indebted firms and pushing many of them into bankruptcy.

In other words, China is caught in what economists call the "impossible trinity." No country can simultaneously sustain a pegged exchange rate, a sovereign monetary policy and free capital flows. At some point, policy makers must make a trade-off.

Financial markets recognize the potential danger. China's bond market has suffered its biggest rout in years, with yields on 10-year sovereigns rising from 2.6 percent in October to nearly 3.5 percent after the Fed hiked rates. Investors pondering the consequences of higher funding costs in an economy with rising defaults are rightly concerned.

There is no easy way to resolve this dilemma. Ultimately, China has to fully liberalize its currency, but it can't simply let the yuan float freely without running the risk of a major outflow and a liquidity crunch. A significant drop in the yuan matters not for how it will impact Chinese trade but for how it will affect an increasingly fragile financial sector.

So reform needs to start with the banking system. First, the government must accept that its policy of letting credit grow at twice the rate of gross domestic product has only encouraged risky lending. Fitch Ratings estimates that the percentage of bad loans in China's financial system could be 10 times the official number, potentially resulting in a capital shortfall of more than $2 trillion. Reducing the flow of credit and cleaning up that toxic debt must be China's top priority.

Next, policy makers need to lay out a plausible long-term plan to unbind the yuan from the dollar. The government has said it will let the yuan float freely by 2020, but that looks increasingly unlikely. Regulators have actually been walking back currency reforms, and enacting ever-stricter capital controls. It seems logical to expect a tightening of current-account transactions next year. China is still managing its economy as if the massive foreign investment and trade surpluses that characterized its decades-long growth spree will return. Unfortunately, those days are gone for good.

Given that President-elect Donald Trump has promised a large infrastructure stimulus, the likelihood of more U.S. interest-rate increases in the next two years is growing. That will only put more pressure on the yuan -- and on China's policy makers to act, one way or another.

https://www.bloomberg.com/view/articles/2016-12-20/the-fed-puts-china-in-a-bind#