Paul Craig Roberts Rages At America"s Collapsing Prestige

Authored by Paul Craig Roberts,

The Nikki Haley moron appointed as US ambassador to the UN by Trump to destroy America’s reputation in the world...

...is today sucking her thumb.

All her threats to cut off US money to countries that voted against Trump’s illegal and unilateral action of establishing Jerusalem as Israel’s capital had no effect.

The world gave Nikki and Trump the bird, voting 129 to 9 against the rogue governments of the US and Israel.

The Chinese government referred to Trump’s effort to impose Israel’s will on international law as typical “American arrogance.”

Wherever one looks, Washington is digging America’s grave. The Russians view Trump’s, or rather the military/security complex’s, national security speech the same as I do.

Russian President Putin said that Washington’s strategy is “definitely offensive” and “definitely aggressive.” Russia has taken note, Putin said.

The world is fed up with Washington. If the fools governing us persist, they are going to destroy themselves along with the rest of us.

De-Dollarization Continues: China, Iran To Eliminate Greenback From Bilateral Trade

The more Washington lashes out in anger at those who will not bow to the unipolar world order, the more the rest of the world fights back. As the launch of its Yuan/Gold-settled oil futures looms, China is escalating its de-dollarization scheme further by seeking a bilateral rial-yuan agreement with Iran.

As a reminder, nothing lasts forever...

The World Bank"s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.

"The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank.

 

"The solution to this is to replace the national currency with a global currency."

The writing is on the wall for dollar hegemony. As Russian President Vladimir Putin said almost two months ago during the BRICs summit in Xiamen,

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

As Pepe Escobar recently noted, "to overcome the excessive domination of the limited number of reserve currencies" is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan, and now, as RT reports, Tehran and Beijing are determined to find ways to avoid using the US dollar as a settlement currency in trade, according to a report by Iranian economic daily Financial Tribune.

The topic of de-dollarization was raised at a meeting between leading Chinese government political adviser Chen Yuan and Iranian central bank officials in Tehran.

“Rial-yuan’s bilateral monetary agreement can have a significant role in increasing the volume of trade between the two countries and in this regard, we have conducted a series of negotiations with the central bank of the Republic of China’s president,”  said the Central Bank of Iran’s Governor Valiollah Seif.

Tehran has been pursuing the goal of eliminating the dollar in its trade, and has been trying to sign currency swap agreements with a few target countries.

Chen said that Iran and China should develop their banking links and also underlined the unfairness of the existing financial system, dominated by a few developed countries. He added, other nations would do better if the unfair system is eliminated.

“We could use the experiences of European countries in establishing the euro as a common currency between many countries, which is not exclusively controlled by a single country. But until then, we need to utilize the maximum available capacities to expand our banking relations,” he was quoted as saying by the Iranian daily.

As Federico Pieraccini previously noted, until a few decades ago, any idea of straying away from the petrodollar was seen as a direct threat to American global hegemony, requiring of a military response. In 2017, given the decline in US credibility as a result of triggering wars against smaller countries (leaving aside countries like Russia, China, and Iran that have military capabilities the likes of which the US has not faced for more than seventy years), a general recession from the dollar-based system is taking place in many countries.

In recent years, it has become clear to many nations opposing Washington that the only way to adequately contain the fallout from the collapsing US empire is to progressively abandon the dollar. This serves to limit Washington’s capacity for military spending by creating the necessary alternative tools in the financial and economic realms that will eliminate Washington"s dominance. This is essential in the Russo-Sino-Iranian strategy to unite Eurasia and thereby render the US irrelevant.

De-dollarization for Beijing, Moscow and Tehran has become a strategic priority. Eliminating the unlimited spending capacity of the Fed and the American economy means limiting US imperialist expansion and diminishing global destabilization. Without the usual US military power to strengthen and impose the use of US dollars, China, Russia and Iran have paved the way for important shifts in the global order.

The US shot itself in the foot by accelerating this process through their removal of Iran from the SWIFT system (paving the way for the Chinese alternative, known as CIPS) and imposing sanctions on countries like Russia, Iran and Venezuela. This also accelerated China and Russia’s mining and acquisition of physical gold, which is in direct contrast to the situation in the US, with rumors of the FED no longer possessing any more gold. It is no secret that Beijing and Moscow are aiming for a gold-backed currency if and when the dollar should collapse. This has pushed unyielding countries to start operating in a non-dollar environment and through alternative financial systems.

For China, Iran and Russia, as well as other countries, de-dollarization has become a pressing issue.

China: Systemic Risk Surges As HNA"s High Coupon Borrowing Binge Accelerates

In early November 2017, we returned to one of our favourite subjects, systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda. In particular, we asked whether the extortionately high coupon of 9% on an HNA dollar bond issue, with less than one year to maturity, marked the beginning of China’s Minsky moment? As we noted at the time, HNA has $28 billion of short-term debt maturing before the end of June 2018, much of it accumulated during an acquisition binge over the last two years, which has seen it become a major shareholder in companies such as Deutsche Bank AG and Hilton Worldwide Holdings.

Speaking to Bloomberg at the time, Warut Promboon, managing partner at credit research firm, Bondcritic, noted...

“Nine percent is really high for one year. Basically, it tells you that the worry is real."

In a sign that HNA is under pressure, both from the Chinese government and its creditors, CEO Adam Tan announced last week that the company was reversing its previous strategy. From Reuters.

HNA Group CEO Adam Tan said the acquisitive company is making adjustments to conform with national policies, and has sold some investments and real estate projects to improve its liquidity, domestic media reported on Tuesday.

 

Tan said the company would not invest in those areas not backed by the government, while supporting Beijing’s Belt and Road initiative, the 21st Century Herald reported. “Companies cannot invest chaotically overseas, because chaotic investment creates trouble,” Tan was quoted in a separate article by the media portal Sina.com.

HNA is already in trouble, the question is how much? The group is planning an IPO of Gategroup Holding AG, an airline catering company it only purchased in 2016 for $1.5 billion, next year. However, its interest expenses have been rising rapidly and paying 9% coupons is only going to make it worse.

Meanwhile, it continues to tap bond markets at high rates, this time paying 8.2% for an issue by a subsidiary of Hainan Airlines, the core business from which HNA developed. According to Bloomberg, units of HNA Group Co. are stepping up fundraising in the local bond market even as borrowing costs soar, adding to concerns about the Chinese conglomerate’s debt burden. Yunnan Lucky Air Co., a unit of Hainan Airlines Holding Co. -- HNA’s flag carrier -- sold a 270-day yuan bond to yield 8.2 percent last week, the highest coupon rate ever for the Yunnan airline. Tianjin Airlines Co., another subsidiary of Hainan Airlines, issued similar-maturity notes at the highest coupon rate in five years in November.

As Bloomberg notes, while other Chinese companies have cancelled bond issues, HNA doesn’t have that luxury.

While surging onshore bond yields last month forced Chinese companies to cancel the most bond offerings since April, HNA’s units didn’t slow their pace of financing. They revived debt sales from November, following a lull after news emerged in June about a crackdown by China’s banking regulator. The accelerated fundraising suggests a need for money and may hurt the conglomerate’s credit profile, according to credit research firm Bondcritic Ltd.

“They just keep piling on debt,” said Warut Promboon, managing partner at Bondcritic. “It’s not going to work.”

 

Two calls to Hainan Airlines’ public relations officers weren’t answered. There were no replies to questions sent via text messages.

The flood of issues from constituents of the HNA group is expected to continue, assuming that bond markets are amenable.

Hainan Airlines said last week that it is planning to sell 1 billion yuan of perpetual bonds on Dec. 6. That would be its third note sale in the local Chinese market in a month, according to Bloomberg-compiled data. In the carrier’s most recent sale of onshore securities last month, the company, which has top ratings from local credit assessors, issued local bonds at yields equivalent to junk notes in the nation.

 

Another HNA unit, Sanya Phoenix International Airport Co., is planning its third bond sale in three weeks on Monday, according to a statement on Nov. 29.

During his presentation last week, CEO Adam Tan commented that “Each of our business groups has its own cash flow management”. However, if Hainan Airlines is paying junk rates despite its “top” local ratings, it suggests that creditors are assessing risk from a group perspective…and unfavourably. Last week, Bloomberg noted that S&P cuts the HNA Group’s credit rating to five times below junk, citing its significant debt maturities, rising borrowing costs and proposed acquisition of New Zealand’s UDC Finance (will it ever learn).

S&P said on Wednesday it lowered HNA’s credit profile by one notch to b, or five levels below investment grade, from b+. The change was disclosed in a report by S&P on New Zealand’s UDC Finance Ltd., which HNA is seeking to buy.

 

“HNA Group has significant debt maturities over the next several years and its funding costs are meaningfully higher than that of a year ago," Andrew Mayes and Sharad Jain, analysts at S&P, wrote in their report. "We will closely monitor HNA Group’s access to capital markets and funding costs to determine whether additional actions are necessary.”

 

As to Australia & New Zealand Banking Group Ltd.’s UDC Finance, S&P said it may cut the company’s long-term debt rating by four notches to a junk level of BB- from BBB if its sale to HNA is completed. The deal, announced in January, has yet to be completed pending approval from New Zealand’s overseas investment approvals board.

It’s possible that HNA is approaching the “catastrophic margin call”, from its practice of pledging its own shares and those of its investments, which we first postulated in July 2017 in “A Reverse Rollup From Hell’: China"s ‘Boldest Dealmaker’ Faces Margin Call Disintegration”. From our post.

…while most Chinese companies pledged "only" their own shares to get loans, a handful of companies also used shares of the acquired companies as pledged collateral. This is precisely what HNA Group did, which now faces not only growing regulatory scrutiny from Beijing that threatens to spook bond investors and raise HNA’s financing costs, but also send its shares plunging as holders are forced to liquidate even as most of the shares pledged to fund its buying spree are already declining, accelerating its demise. And, in a scenario that can only be dubbed as a "reverse rollup from hell" - on steroids and margin - one that would make even Valeant blush and snicker, if the value of its collateral, i.e. stock price, falls enough, HNA will soon be forced to sell its holdings to repay debt, thereby resulting in the disintegration of the company.

HNA is a private company, hence a detailed breakdown of its borrowing position and its share pledges is not available. However, the circumstantial evidence remains highly negative and the systemic risk it poses for China is likely rising not falling.

This Cycle: It"s Not The Economy, It"s China, Stupid!

Authored by Kevin Muir via The Macro Tourist blog,

I know everything is fan-freaking-tastic - with the tax reform bill and global synchronized expansion and all. I figure the last thing you need is some nattering naysayer throwing cold water on this unbelievable party, so I won’t. At least not for the short run.

This rally will end when it ends. Maybe tomorrow, maybe next week, maybe next month, maybe next year. I don’t know and every time I try to guess, I just end up looking foolish.

But I recently listened to this terrific Bloomberg Masters in Business interview of the legendary hedge fund manager, Felix Zulauf, and he articulated such a compelling argument for the timing of the next slowdown, I felt like Felix was my Spirit Bear.

I have always enjoyed Felix’s viewpoint, but Barry Ritholtz did such a great job during this interview, that I have a new found appreciation for Felix’s career, and more importantly, his market calls. I had mistakenly assumed Felix was always bearish, but the truth of the matter is that he definitely switches from side to side, and is not the pro-typical Swiss hard money uber-bear. I didn’t agree with all of his economic philosophy by any means, but his market (and political) analysis was some of the most compelling dialog I have listened to in quite some time. If you haven’t heard it, then give it a listen.

If you don’t want to take the time, don’t fret - I have transcribed the most important part for you.

Felix: China I believe is in an interesting position right now. You heard President Xi’s speech last week, and in 2021 there is the 100th anniversary of the Chinese Communist party and it’s very clear that they want to have a strong economy at that time. If you want to have a strong economy in 2021, you stimulate in 2020. And they are central planners. So that’s means they have to take their foot off the pedal in 2018, 2019. I think in ‘18 and ‘19, they will address the imbalances in the financial sector and that will slow down the Chinese economy in ‘18 and ‘19, which will also slow down the rest of the world.

 

So we are entering a period where sometime in ‘18, I would say the peak of the market will be in the first half, the peak in the economy is probably from mid-2018 on, and then we slow down into 2020.

 

And 2022 is the next Chinese Congress, and President Xi is probably the first leader who tries to run for a third time. So he wants to have a very good economy in 2021 and 2022. That means he has to first slow things down, restructure some of the imbalances in the system because if he tries to carry through, it could backfire on him. It could be the worst of all worlds. Namely a completely overheated situation, with high inflation rates, etc…

 

That’s why I think the leader of this cycle, China, is going to slow down next year.

 

Barry: So the whole global economy is dependent on President Xi’s re-election desires in 2022?

 

Felix: As I said before, you always need to figure out what is the leading theme in the market cycle. In the last cycle, it was real estate, in this cycle it is China. And that’s why China is so important. China is the second largest economy, and in 10 or 15 years, it will be the largest economy of the world.

Longtime readers will instantly see why Felix’s theory appealed to me. I have long argued that China’s fiscal and monetary policy might be the most two important variables when it comes to forecasting the global economy. And here was Felix making the case that the entire global economic cycle is being driven by China. Felix - you had me at hello.

Now, make no mistake. This is a longer-term call. It’s not going to affect market prices next week, and probably not even next month. But in the coming quarters, it has the potential to be the most important determinant of financial asset performance.

I will take a little more nuanced approach to Felix’s theory, but in broad strokes, I completely agree with his analysis. The Chinese government will not allow their 100th anniversary be anything less than a rocking success. And President Xi is smart enough to know that he can’t just keep the pedal to the metal for the next four years and hope that the economic expansion lasts.

China’s performance over the past year

Remember all the dire warnings from your favourite star hedge fund managers about China’s coming collapse? Well, I don’t want to be prematurely counting any chickens, but it looks like Xi & Co. have managed to successfully navigate another year without the end of the world financial Armageddon scenario coming to fruition.

And it’s not like this has been achieved through growth-at-any-cost with super easy monetary policy. In fact, during the past year, both interest rates and the Chinese Yuan have risen.

It appears as if, bit-by-bit, China has slowly tightened monetary policy. And I suspect that trend will not only continue, but even accelerate from now. President Xi will continue strangling the excesses out of the Chinese financial economy through tighter monetary policy. The PBOC won’t plunge China into a recession, but instead slowly choke off the speculative froth.

But there’s more to the story

Now here is where I will expand on Felix’s theory. China is in the midst of a massive infrastructure spending program with their One-Belt-One-Road initiative. The program is massive, and entails many complicated and extensive transportation system upgrades in all parts of their country. This sort of development is not something that you easily turn on and off. And nor should it be. This is true investment in the future of China. Much like Eisenhower’s interstate highway program that set up America to become an economic powerhouse for decades to come, China’s OBOR initiative is a crucial step for China’s development. Xi will not alter this plan. The course is set, and the money will be spent.

In fact, it’s already happening. And it’s causing China to run the greatest fiscal stimulus in history. Have a look at this chart from the world’s most charming and well-spoken China bear, Kyle Bass:

Yup, that’s crazy. China is running a fiscal deficit of 14% of GDP. Any wonder why the global economy is cruising along so nicely? It sure helps when you have this sort of fiscal stimulus wind in our sails.

Will Xi tap this back? Sure, he might try to trim around the edges, but the reality is that he will not make any meaningful cuts to the OBOR policy.

Therefore, China will be running a hot fiscal policy for years to come, and the only way to counteract its effect, will be by tightening on the monetary side. This will also have the added benefit of causing the financial economy to slow. In fact, we are already seeing this play out in the housing market.

While I was thinking about this situation, I was reminded of a passage in the Market Wizards book where Stanley Druckenmiller spoke about his trade surrounding the unification of East and West Germany:

Everything started to come together at that time. Not only was I trading on my own without any interference, but that same eastern European situation led to my first truly major trade for Soros’s Quantum Fund. I never had more conviction about any trade than I did about the long side of the Deutsche mark when the Berlin wall came down. One of the reasons I was so bullish on the Deutsche mark was a radical currency theory proposed by George Soros in his book, The Alchemy of Finance. His theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tight monetary policy, the country’s currency would actually rise. The dollar provided a perfect test case in the 1981-84 period. At the time, the general consensus was that the dollar would decline because of the huge budget deficit. However, because money was attracted into the country by a tight monetary policy, the dollar actually went sharply higher.

 

When the Berlin wall came down, it was one of those situations that I could see as clear as day. West Germany was about to run up a huge budget deficit to finance the rebuilding of East Germany. At the same time, the Bundesbank was not going to tolerate any inflation. I went headlong into the Deutsche mark. It turned out to be a terrific trade.

Now I know this isn’t the perfect analogy, but I can’t help but wonder if it will be more correct than all the Yuan bears who are predicting a China collapse.

Putting it all together

We have a Chinese President who wants to be re-elected shortly after his party’s 100th anniversary celebration in 2021. Therefore, it will be important that the Chinese economy is humming along at full speed at that time. To do that, he needs to stimulate in 2020, but the problem is, if he doesn’t tap the brakes now, he might risk overheating before then. President Xi will therefore take the hit, and get the pain over with in 2018 and 2019. Yet the story is further complicated by the fact that China’s long run infrastructure program is causing a hot fiscal policy. All of these factors add up to a much tighter PBOC for the next couple of years.

Call me an idiot, but I am tempted to take the long Yuan trade. I know that seems insane - all those really smart hedge fund managers are all forecasting a China collapse. But buying Yuan is probably better than betting on stocks going down because of the tight Chinese monetary policy. Not convinced it’s the best trade, and not even sure if I am going to do it in any real size, but I have often found the hardest trades, are often the best trades.

Either way, be aware of this multi-year seasonal Chinese economic timing dynamic. Maybe Felix just laid out a timetable for the market to finally roll over, albeit still many months away. That’s probably good because it certainly feels like it will be that long before we get any meaningful correction…

 

China Deleveraging Hits Corporate Bonds As Cascade Effect Begins

Following the market lockdown during October’s Party Congress, many commentators were disturbed by the continued rise in Chinese government bond yields as we returned to “business as usual”, with the 10-year rising to 4%. At the beginning of this month, we discussed the sell-off (see “China: Shadow Bank Inflows Are Critical To Sustain The Ponzi…But They’re Falling”) and noted a useful insight from the Wall Street Journal.

An important anomaly to note about the bond rout: as government bonds sold off, yields on less-liquid, unsecured Chinese corporate bonds barely moved.

 

That is atypical in an environment of rising rates - usually, bond investors shed their less-liquid holdings and hold on to assets that are more easily tradable, like government debt.

The question was…why had corporate bond yields barely moved? The answer, according to the WSJ, was that China’s deleveraging policy led to redemptions in the shadow banking sector, e.g. in the notorious $4 trillion Wealth Management Products (WMP) sector. Faced with redemptions, shadow banks had to sell something…quickly…and highly liquid government bonds were the “easiest option”. Furthermore…and this is potentially significant…the WSJ noted.

Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.

Not any more (see below).

We agreed with the WSJ’s explanation at the time, but noted that the government bond sell-off was actually a sign of the unravelling of the WMP Ponzi scheme. The Chinese authorities are wise to the Ponzi which is why they announced the overhaul of shadow banking and WMPs last Friday (see “A ‘New Era’ In Chinese Regulation Means Turmoil For $15 Trillion In China"s ‘Shadows"). However, the new regulations don’t kick in until mid-2019, a sign to us that when they looked “under the bonnet”, they didn’t like what they saw.  

We doubt that China can achieve an orderly restructuring of its shadow banking sector, never mind its much larger credit bubble. A sign that we have taken another step towards China’s “Minsky moment” is that the bond sell-off has spread to the corporate bond market. The chart shows how spreads versus sovereign bonds have blown out during the last few weeks.

Bloomberg noted how the 10-year yield on China Development Bank notes, a quasi-sovereign issue, closed above 5% for the first time since 2014 today while, in another report, it put the corporate bond sell-off in a wider context.

China’s deleveraging campaign is finally starting to bite in the nation’s corporate-bond market, a shift that will make 2018 a clearer test of policy makers’ appetites to let struggling companies fail. Yields on five-year top-rated local corporate notes have jumped about 33 basis points since the month began, to a three-year high of 5.3 percent, according to data compiled by clearing house ChinaBond. Government bonds, which have far greater liquidity, had already moved last month as the central bank warned further deleveraging was needed.

With more than $1 trillion of local bonds maturing in 2018-19, it will become increasingly expensive for Chinese companies to roll over financing -- and all the tougher for those in industries like coal that the nation’s leadership wants to shrink. Two companies based in Inner Mongolia, a northern province that’s suffered from a debt-and-construction binge, missed bond payments on Tuesday, in a demonstration of the kind of pain that may come.

Bloomberg tries to put a positive spin on the corporate bond sell-off, defaults are healthy in terms of differentiating good and credits.

In the long haul, that all may be good for China. Allowing more defaults could see its bond market become more like its overseas counterparts, with a greater differentiation in price. And that could mean it channels funds more productively. “The deleveraging campaign and the new rules on the asset management industry will further differentiate good and bad quality credits, and make the onshore credit market more efficient,” said Raymond Gui, senior portfolio manager at Income Partners Asset Management (HK) Ltd. “Weaker companies will find it harder to roll over their debts because funding costs will stay high.” Gui predicts yields will keep climbing. The average for top-rated corporate bonds is already 2.2 percentage points above what investors demanded to hold them in October last year.

The rise comes as authorities show greater determination to shift the economy onto a more sustainable footing, with less debt. The latest move was a plan to discipline the asset-management industry, including banning guaranteed rates of return. People’s Bank of China Governor Zhou Xiaochuan graphically depicted the risk of excess leverage, by evoking a "Minsky moment," or sudden collapse of asset values. Key to that endeavor will be scaling back some of the implicit credit guarantees that have backed a broad swathe of Chinese borrowers. The country only started allowing corporate defaults in 2014. Last year there was a record, coming in at at least 29. It’s unclear yet whether that total will be met in 2017.

Bloomberg spoke to an analyst who also believes the recent sell-off in Chinese bonds is more to do with separating the “wheat from the chaff”, rather than anything more profound.

"We expect the divergence of performance between different bond categories (Chinese government bonds, policy bank bonds and credits) to become more prominent into 2018," Albert Leung and Prashant Pande, rates strategists at Nomura Holdings Inc., wrote in a note Wednesday.

We disagree. From our perspective, it looks like early signs of cascading sell-offs within Chinese financial markets, which have long been abused by excessive leverage and Ponzi characteristics. Talking of which, the Shanghai Composite Index suffered its biggest one-day drop since June 2016.

What caused the sell-off? According to some commentators it was fear that the local bond rout was getting out of control...hence "cascade". We noted last week that traders had been stunned by the official warning from Beijing that some stocks - in this case Kweichow Moutai - had risen "too far, too fast". Zhengyang Shen, a Shanghai-based analyst at Northeast Securites commented.

"The decline in Moutai has triggered selloffs in some of this year"s best performing stocks."

Which sounds an awful lot like another example of cascading selling...

China Slams "Wrong" US Sanctions Against North Korea-Linked Trading Firms

A day after China’s state-run airline closed its last remaining routes to North Korea – a decision the airline’s executives blamed on a sharp decline in business travelers due to restrictive UN Security Council sanctions – Communist Party spokespeople slammed new US sanctions targeting Chinese traders doing business with North Korean businessmen, calling them “wrong” while reminding the US that China has vigorously enforced the UN sanctions.

After announcing that the US would once again designate North Korea a state sponsor of terrorism due to its missile and nuclear tests and its trading in illegal arms with terrorist groups and unsavory governments, President Donald Trump revealed that the Treasury Department would be rolling out new sanctions over the next two weeks, the US’s latest volley in a "maximum pressure campaign" against Kim Jong-Un"s regime, AFP reported.

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As had been expected, the US Treasury Department announced on Tuesday that the list of North Korean and Chinese companies targeted by existing US sanctions has been expanded. It was this decision that angered the Chinese.

Only last week, Trump returned to the US from a five-nation tour of Asia with assurances from Chinese President Xi Jinping that China, the North’s primary benefactor which is responsible for 90% of its trade, would do more to economically pressure its restive neighbor.

 

Treasury sanctions trading, labor, and shipping companies and vessels
to further isolate North Korea and disrupt illicit funding of its unlawful nuclear and ballistic missile programs. Targets include one individual, 13 entities, and 20 vessels: https://t.co/CT9hMx3d6p

— Treasury Department (@USTreasury) November 21, 2017

 

The Treasury has added to a list of 10 Chinese companies believed to be doing business with the North in violation of international sanctions.

In response, a Chinese spokesman reiterated that China rejects unilateral sanctions against its companies and North Korea, saying these issues should be worked out through the Security Council.

"We consistently oppose any country adopting unilateral sanctions based on its own domestic laws and regulations and the wrong method of exercising long-arm jurisdiction," foreign ministry spokesman Lu Kang told a regular news briefing.

The sanctions are a sign that, despite Xi’s assurances, many doubts remain about China’s efforts to contain the North’s nuclear ambitions.

The spokesman called on Washington to provide "any solid evidence" that Chinese companies have violated the UN sanctions, according to AFP.

 

He added that if any companies or individuals have violated domestic laws, "we will severely deal with that in accordance with our laws and regulations".

While China has backed the Security Council sanctions – which it easily could’ve blocked with a veto – the country has been reluctant to take the more drastic step of cutting off oil supplies through a pipeline to North Korea"s lone refinery, fearing that regime collapse could lead to a flood of refugees and chaos on the China-North Korea border.

Still, US authorities believe some Chinese banks and trading firms continue to do business with the North in defiance of UN sanctions, US threats of unilateral action and warnings from the Chinese government.

Since the verbal standoff between Kim Jong Un and President Donald Trump began shortly after the latter’s inauguration, China has pressed for dialogue between the two countries, saying this week that "more should be done" to hold talks to resolve the crisis. Specifically, both Beijing and Moscow have pushed for a "dual track approach" which would see the US freeze its military drills in South Korea while North Korea would halt its weapons programs. Ultimately, the Chinese hope the US will remove its THAAD missile defense systems from South Korea, since the Chinese see the purportedly defensive systems as a potential offensive threat.

A Chinese special envoy also wrapped up a four-day trip to the North on Monday, during which the two sides discussed regional concerns but made no direct statements about the nuclear standoff.

US Treasury Secretary Steven Mnuchin said the sanctions would not only increase Pyongyang"s isolation but also expose "its evasive tactics."

"These designations include companies that have engaged in trade with North Korea cumulatively worth hundreds of millions of dollars," Mnuchin said.

 

"We are also sanctioning the shipping and transportation companies, and their vessels, that facilitate North Korea"s trade and its deceptive maneuvers."

In all, the new measures add one individual, 13 trading entities and 20 ships to US sanctions lists.

Any property or assets of the firms involved found to be in areas under US jurisdiction are to be frozen, and Americans are banned from trading with them. Three Chinese firms - Dandong Kehua Economy and Trade, Dandong Xianghe Trading Company and Dandong Hongda Trade - are said to have sold computers, minerals and ore to North Korea. Chinese businessman Sun Sidong and his company Dandong Dongyuan Industrial are accused of exporting vehicles, machinery, radio navigation and "items associated with nuclear reactors.” A woman who answered the phone at the company said it was not doing business with North Korea and suggested that the firm had halted its operations.

"We are not operating," she said.

Another woman at Dandong Kehua Economy and Trade denied knowing about the sanctions.

"We have temporarily suspended (trading)," she said.

In a surprise move, in addition to slapping sanctions on firms and North Korean ships, the Treasury added the Korea South-South Cooperation Corporation to its sanctions list. The firm is alleged to have sent North Korean guest workers to China, Russia, Cambodia and Poland. Foreign workers are a major source of income to the regime. Trump has repeatedly exhorted the US’s allies to expel North Korean guest workers, whose remittances provide a vital source of foreign currency to the regime.

Ironically, the stringent sanctions are being applied even as North Korea has, at least temporarily, ceased its missile tests. The North hasn’t launched a missile test since Sept. 15 – more than two months ago.

Some believe the North’s reticence is due to Chinese pressure. If this is accurate, we imagine Xi’s government might loosen its grip.
 

Victoria"s Secret Staff Think The Chinese Are Spying On Them

Stories about the shambolic Victoria’s Secret fashion show – which is slated to take place Tuesday Nov. 28 in Shanghai – just keep getting weirder.

Chinese bureaucrats have so far refused to cooperate with the show’s producers and planners, denying visas to Gigi Hadid, one of the show’s highest-profile models, and Katy Perry, the US pop superstar who was slated to be the musical guest.

The Communist Party has also inexplicably refused to issue press passes and visas to members of the western media who were supposed to travel to China to cover the event.

Already, we imagine the marketing brass at L Brands have learned their lesson, and that this will be both the first, and the last, VS fashion show held in China.

But as if all this weren’t enough, the New York Post is now reporting that the show’s organizers believe the Chinese government is spying on them. Which, of course, is probably true, given Chinese authorities’ well-known penchant for monitoring foreigners.

The Post says e-mails of VS show staffers and production crew are apparently being monitored by Chinese authorities.

TV and media-industry insiders who are desperately trying to figure out what’s going on amid the production chaos are getting frustrated by messages from colleagues in China simply saying that they can’t speak frankly about the issues with the government because their communications are being watched.

Perry had her visa application declined because she once showed support for Taiwan (which is in an independence struggle with China) during a Beijing concert. Hadid’s was denied because of a picture her sister, Bella Hadid, published on Instagram that the Chinese public deemed offensive. Plus, fellow Angel Adriana Lima’s visa application has been imperiled by an unknown “diplomatic issue.” Meanwhile, a host of other models have also had their visas denied.

Many fashion bloggers have also been denied visas, and TV producers have discovered that they need permits to shoot outside of the Mercedes-Benz Arena, where the show, which is slated to air on CBS later this month, is set to take place.

As one source put it, “If you’re going to China you want to show that you’re in China!”

The surveillance is apparently making it difficult for the show’s organizers to find replacements for the models who have been denied entry. Harry Styles has already been booked to fill in for Perry.

“They want to discuss what’s going on as far as replacements for those denied visas and alternative arrangements, but they have to be tight-lipped because it seems that the government is watching their e-mails,” said a source.

With more than a week to go before the show, we can only imagine what fresh entanglements will crop up as the date draws nearer.
 

Katy Perry, Gigi Hadid Banned From China As Victoria"s Secret Fashion Show Unravels

As we reported yesterday, this year’s Victoria’s Secret fashion show, which is slated to take place in Shanghai in just two weeks, is unraveling like a cheap lace thong thanks to Chinese authorities’ refusal to cooperate with its producers, and Communist Party"s decision to deny visas to some of the biggest stars who were slated to participate in the show.

The latest update on the deteriorating state of affairs comes via the New York Post, which has reported that US pop sensation Katy Perry – who was slated to perform at the show – and supermodel Gigi Hadid, who was supposed to walk in the show, have been indefinitely banned from China.

Sources told the Post’s infamous Page Six gossip section that the “Roar” singer had tried applying for a visa to enter the Communist nation, but was denied by Chinese officials.

And while she was initially informed that she’d be able to gain access, the decision was apparently reversed after the government caught wind of a controversial incident from 2015, in which Perry donned a bright, glittery dress with sunflowers on it during a performance in Taipei, the capital of Taiwan.

Gigi Hadid

The innocent gesture wound up causing widespread outrage in China because the sunflower had been adopted the year before by anti-China protesters.

However, Perry also waved a Taiwanese flag during the concert in show of support for the country, which has been clashing with the mainland for years over its autonomy.

“She was initially granted a visa to perform at the VS show in Shanghai, then Chinese officials changed their minds and yanked her visa,” a source explained. “For every artist who wants to perform in China, officials comb through their social-media and press reports to see if they have done anything deemed to be offensive to the country. Maroon 5 was banned a few years ago because one band member wished the Dalai Lama happy birthday on Twitter.

Meanwhile, Hadid and a handful of other models were banned because of social media posts that apparently offended Chinese government officials.

Hadid, who was booked for the show back in August, was banned because of a February Instagram video — in which she held up a biscuit shaped like a Buddha and imitated the religious figure by squinting her eyes.

The clip was posted by the model’s sister, Bella Hadid, in February. It was later deleted following a storm of criticism as Chinese social-media users warned her not to come to Shanghai, calling her racist.

Apparently, Victoria’s Secret has decided that the show will go on, with or without Hadid:

 

I’m so bummed I won’t be able to make it to China this year. Love my VS family, and will be with all my girls in spirit!! Can"t wait to tune in with everyone to see the beautiful show I know it will be, and already can"t wait for next year! :) x

— Gigi Hadid (@GiGiHadid) November 16, 2017

 

Some of Victoria’s Secret’s biggest names have been denied entry to China, in addition to lesser-known models, such as Julia Belyakova, Kate Grigorieva and Irina Sharipova.

Model Adriana Lima’s visa has been held up due to an ongoing “diplomatic problem."

Harry Styles will reportedly replace Perry as the show’s performing artist.
 

"It"s A Nightmare" - Chinese Bureaucrats Are Killing The Victoria"s Secret Fashion Show

The marketing brass at L Brands are probably starting to regret their decision to hold this year’s Victoria’s Secret fashion show - expected to have the largest audience in the show"s history - in Shanghai.

As the New York Post reports, the fashion show, which takes place in two weeks and will feature  Adriana Lima, Alessandra Ambrosio and Karlie Kloss, among other internationally recognized supermodels, is transforming into an international diplomatic crisis.

Chinese government officials are refusing to work with the show’s producers and grant the necessary expedited visas so fashion bloggers and other media types who’re supposed to cover the show, according to the New York Post.

Bureaucrats have also stubbornly resisted other seemingly routine requests, like approving shooting locations for the TV crew.

We’re told fashion bloggers booked to cover the glitzy event are canceling their trips because the Chinese government won’t give them visas; TV producers are grappling with bureaucrats over permission to shoot outside the Mercedes-Benz Arena, where it’s being held (“If you’re going to China, you want to show that you are in China!” fumed an insider); and Victoria’s Secret staffers in China can’t send out press releases because they have to be approved by government officials.

 

“It’s just a nightmare for all the media trying to cover [the show],” said a jet-setting insider. “These TV companies are spending a fortune on it, and they don’t even know what they can shoot when they get there."

 

We’re told that producers charged with coordinating the coverage for various outlets are “on the verge of nervous breakdowns."

The show, which will be broadcast on CBS, has mostly been held in the US since 2001, but the popular purveyor of ladies’ undergarments has had a run of bad luck in the past few years since trying to host the show overseas, the Post reports. Last year’s show (which was held in Paris) was also plagued with production issues caused by a terror attack and Kim Kardashian’s high-profile robbery.

For that event, every journalist covering the event had to submit to background checks and provide government ID, and security was so tight that cars dropping off VIP guests were only allowed to stop momentarily outside the venue, so celebrities had to circle the block before being dropped off.

This year, they’d be lucky to get a visa.

Democrats Now Concerned Trump Is Colluding With China

After trying (and so far failing) for a year to prove that President Trump and/or members of his campaign team colluded with Russia to throw the 2016 election, Democrats have now decided to pivot to a slightly tweaked new narrative which suggests the President may actually be colluding with China instead. 

As the Washington Examiner points out today, just as Trump gets set for meetings in China tomorrow, Senator Richard Blumenthal has suddenly taken a new interest in the Industrial and Commercial Bank of China which rents commercial space in Trump Tower.

In a call with reporters, Blumenthal said a Chinese bank renting space at Trump Tower in New York is illegal without congressional permission and may be influencing Trump"s policy decisions.

 

“To be really blunt, an arm of the Chinese government is paying President Trump rent for his building, and last year as you all know China granted President Trump 40 trademarks,” the Connecticut Democrat said on a conference call.

 

“These approvals of trademarks closely followed the president’s abrupt decision as president to honor the One-China Policy, a reversal of his earlier position," he said. "Shortly after receiving those trademark registrations, President Trump flip-flopped on labeling China a currency manipulator.”

 

“As he travels to China, we’re left wondering, Americans are left wondering if President Trump is representing American interests or his own, and which he’s going to put first," he said.

Ironically, while Senator Blumenthal was all too happy to speculate wildly about Trump Tower leases, he was somewhat less eager to answer questions about China"s "People"s Daily" newspaper which leases space in the Empire State Building, a building which his wife"s family manages.

But Blumenthal did not mention on the call that the People’s Daily newspaper is a tenant in the Empire State Building, which his wife’s family manages. He departed the call before a question and answer period with legal experts.

 

A moderator on the Constitutional Accountability Center-hosted call would not allow the experts to address whether Blumenthal is himself violating the clause. “The focus of this call is on the president and the lawsuit against him for his patent violations of the Foreign Emoluments Clause," the moderator said.

 

Blumenthal’s office previously said he does not personally own a stake in the Empire State Building, and that such holdings listed on his annual Senate financial disclosure forms belong to his wife.

 

But Michael Stern, senior counsel to the U.S. House of Representatives from 1996 to 2004, told the Washington Examiner that under Blumenthal"s logic, "President Trump could avoid any Foreign Emoluments Clause problem simply by transferring his financial interests into the names of his wife or children."

As laid out by Trump"s attorney, Sheri Dillon of Morgan Lewis, back in January, his roughly 500 business entities were placed into a trust to be run by Eric, Don Jr. and Trump"s current CFO Allen Weisselberg who were granted decision-making power over day-to-day operations without consulting the President.  Moreover, the trusts strictly forbid entering into new international business arrangements while new domestic arrangements have to be approved by an "independent ethics officer".

Trump’s businesses, which include more than 500 companies with $3.6 billion in assets and ties to more than 20 countries, will be placed into a trust. The trust will be overseen by an independent ethics officer and managed by Trump’s sons Eric and Don Jr., and chief financial officer Allen Weisselberg, who will make decisions without consulting the president. The Trump Organization will terminate all pending partnerships, and won’t enter into new international business arrangements, such as licensing deals for new hotels, while Trump remains in the White House.

 

Existing Trump businesses, which include hotels and golf courses, will continue to operate and enter into new agreements, such as hosting weddings, parties and other events. Those will be reviewed by the ethics officer to ensure they are conducted at arms’ length. Trump’s debts will be paid down, according to their schedules.

 

“President-elect Trump should not be expected to destroy the company that he built,” Dillon said.

Of course, this "scandal" could be easily solved via a quick review of the Bank of China lease at Trump Tower to make sure the rent is market based...but that"s not really the point now is it?

China Unveils "Magic" Island-Building Ship On Eve Of Trump Arrival

In a move that appears to validate Joint Chiefs Of Staff Chairman Joseph Dunford’s concerns about China’s strategy of slowly expanding its territorial and military footprint in the Pacific, the Chinese government unveiled on Sunday a “magical” island-building ship on the eve of Donald Trump’s visit in a move likely to renew fears about its claims to territory in the South China Sea, the Financial Times reported.

Measuing 140 meters, the Tiankun is the biggest dredger in Asia, with cutters and pumps capable of smashing the equivalent of three Olympic pools of rock an hour from the sea floor and shooting it up to 15 kilometers away to create artificial land. Over the past five years, China has used similar vessels to create a string of strategic islands to support its claims to 85% of the territory in the South China Sea.

China has been widely criticized by the international community for its land-reclamation efforts in in the Spratley islands, where China has been building manmade bases over some of the since 2014. China has asserted its dominance of several groups of tiny islands in the South and East China Seas. China last year said it would not accept a ruling against it made in a key international legal case over the strategic reefs and atolls that China has asserted its authority over. In that ruling, the ICC decided that the islands belonged to the Philippines.

According to Newsweek, the US estimates China has added 3,200 acres of land on seven features (which includes rocky outcrops and reefs) over the past three years.

Between 2013 and the middle of 2016 - the peak phase of the island-building efforts - China created seven islands and reclaimed 2,000 acres, and built airfields, missile bases and radar systems.

Last year, Beijing appeared to signal it was halting large-scale dredging. However, the creation of the Tiankun would suggest otherwise. Launched at a shipyard in Jiangsu province on Friday, the Tiankun will enter service next year with Tianjin Dredging Company, an arm of state-owned China Communications Construction Company that has carried out most of the dredging in the South China Sea.

The Marine Design and Research Institute in Shanghai, which designed the vessel, described it as a “magic island-maker” on Saturday.

The US military has taken a more hard-line approach to China’s territorial claims in the Pacific since President Donald Trump took office. Since inauguration day, the US Navy has conducted at least four “freedom of operation” missions whereby US destroyers have sailed within 12 miles of the controversial islands. The most recent such mission occurred in mid-October. Each time, China has scrambled fighter jets and ships to intercept the US vessel.

As the FT pointed out, Washington’s opposition to China’s claims remains an irritant in bilateral relations, and the topic is expected to be an important point of discussion with Xi Jinping, China’s president, when Trump arrives in Beijing on Wednesday for a two-day visit.
 

China: Shadow Bank Inflows Are Critical To Sustain The Ponzi... But They"re Falling

During the Party Congress, even China’s somewhat watered down versus of the free markets was suspended so as not to disturb the glorification of Xi Jinping as the nation’s greatest leader since Mao. Returning to “business as usual”, some commentators have been disturbed by the continued rise in government bond yields with the 10-year hitting 3.93% earlier this week.

Bloomberg described it this morning as a “tumultuous few days”.

We also noted Huachuang Securities Co. comment that bond holders may be about to get hit by “daggers falling from the sky,” if the Party adopts more aggressive deleveraging policies. In a far less sensationalist way, the Wall Street Journal has attempted a post-mortem on the recent sell-off in the Chinese government bond market.

Catching sight of a chain reaction in China’s markets is rare.

 

Carrying out a postmortem of a recent selloff in China’s $9 trillion bond market shows how it is becoming harder for Beijing to untangle its increasingly intertwined financial system. In the aftermath of China’s twice-a-decade party congress last week, yields on benchmark 10-year Chinese government bonds spiked to 3.9%, their highest in three years. Government bond futures fell.

 

Reasons proffered for the sudden rout ranged from expectations of higher U.S. interest rates to general fearmongering.

Having acknowledged the growing complexity of China’s financial system, WSJ provides a valuable insight, noting the relative stability of corporate bond yields during the recent sell-off in the government sector...

An important anomaly to note about the bond rout: as government bonds sold off, yields on less-liquid, unsecured Chinese corporate bonds barely moved.

 

That is atypical in an environment of rising rates - usually, bond investors shed their less-liquid holdings and hold on to assets that are more easily tradable, like government debt.

Using this handy (kind of) diagram of flows in China’s financial system...

...WSJ tries to explain “how the selloff in China really worked”.

In essence what happened is that, as funding costs for Chinese banks have risen, they have been forced to compensate by placing more money in the shadow banking sector, with all the risks that entails (i.e. leverage and risky assets). Here’s the Journal’s version.

Let’s start with the travails of China’s small and midsize lenders that—like most banks—fund themselves by taking in customer deposits and by borrowing in wholesale markets.

 

In China, the latter has increasingly meant issuing short-term bonds known as NCDs, or negotiable certificates of deposit. The trouble for Chinese banks of late is that both these funding sources have become expensive: Borrowing costs have risen as Beijing pursues its deleveraging campaign, while bank-deposit growth has also been slowing.

 

To balance out these rising costs, banks have been placing more of their money with so-called nonbank financial institutions—the likes of trust companies, funds and securities companies—that offer high returns from investing in various markets, from bonds to stocks and commodities.

 

Deposits placed by banks with these nonbanks - the bulwarks of China’s infamous shadow banking system - had grown to more than $4 trillion as of September this year.

Okay, this is where things get more interesting.

Please bear in mind that (as we’ll explain later) a key pillar supporting the stability of China’s financial system is the maintenance of rising flows into the Chinese shadow banks.

This Bloomberg chart shows the rapid growth in China’s shadow banking system in recent years.

The WSJ explains that the reduction in flows into the shadow banks has led to redemptions and something had to be sold quickly...

But with less funds coming into banks now, less can go out. That has led to trouble for the nonbanks, which, after years of only ever-higher inflows, have started facing redemptions.

 

Banks’ claims on nonbanks have dropped 2% since peaking in June, according to Wind Info, equivalent to a $90 billion withdrawal of funds.

 

In addition to these redemptions, the cost for nonbanks of juicing returns on their investments by leveraging up has also risen because of the higher interest rates mentioned above.

 

That brings us to the bond market. Faced with redemptions, nonbanks have needed to sell something, and quickly. Offloading highly liquid government bonds has proven the easiest option.

 

Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.

We think that the Journal’s analysis is correct…but it doesn’t fully appreciate the bigger picture regarding shadow banks’ need to “maintain high returns”.

China’s shadow banks are, in part, engaged in Ponzi schemes, for example in the $4 trillion Wealth Management Products (WMP) sector. In May 2017, Forsea Insurance, one of China’s largest insurers, warned that there would be “mass defaults and social unrest” if it was prevented from selling new WMPs to meet payouts. See “Chinese Insurer Warns Of ‘Mass Defaults, Social Unrest’ Due To ‘Mass Redemption’ Run”.

A month earlier, Minsheng Bank, China’s largest private bank, was found to have committed a RMB 3.0bn fraud by selling non-existent WMPs. See “Investors Rage After 3 Billion Yuan Vanish From China"s Largest Private Bank”.

The sell-off in Chinese government bonds implies that the deleverage in shadow banking we identified in September in beginning to bite.

We are in the last lap of the Chinese Ponzi as, piece by piece, the whole decrepit system is being exposed. In the end, it will boil down to how many trillions of RMB the PBoC needs to print to make the banks and their shadow banking relatives whole.