China had allegedly sent North Korea what amount to a final warning over its military provocations. The rumor cited the May issue of Hong Kong monthly news outlet Dong Xiang. It said a Chinese Ministry of Foreign Affairs junior minister invited Park Myung-ho, an official of North Korea, for a meeting. China’s Foreign Minister Wang Yi attended the meeting and asked his junior to read aloud the warning to the North over the nuclear test. The memorandum mentioned that China will condemn strongly, pull back on all economic cooperation and even blockade North Korea if it conducted the test.
It didn’t take Korea long to respond…
China’s credit system expanded “too recklessly and too quickly,” and “it’s beginning to unravel,” warns Hayman Capital’s Kyle Bass.
Crucially, Bass notes that ballooning assets in Chinese wealth management products are another sign of a looming credit crisis in the nation.
“Some of the longer-term assets aren’t doing very well,” Bass said on Bloomberg TV from the annual Milken Institute Global Conference in Beverly Hills, California. “As soon as liabilities have problems – meaning the depositors decide to not roll their holdings – all hell breaks loose.”
The wealth management products, or WMPs, have swelled to $4 trillion in assets in the last few years, he said., on a $34 trillion banking system…
“think about this – in the US, our asset-liability mismatch at the peak of our subprime greatness was around 2%! … China’s mismatch is more than 10% of the system.”
Must Watch simplification of the next stage of the credit cycle in China…
Timing the drop is hard, Bass notes, reminding Bloomberg’s Erik Schatzker that “in the US, the first bumps in the road hit in early 2007, and we didn’t start to really accelerate until mid 2008… even a large unraveling takes a while.“
Bass has been sounding the alarm for some time that debt-burdened Chinese banks need to be restructured…
“What you see when the liquidity dries up is people start going down… and this is the beginning of the Chinese credit crisis.”
And judging by the collapse in both Chinese stocks and bonds, the deleveraging is accelerating…
And liquidity is getting desperate again…
Caixin Services and Composite PMIs for April
From the Markit / Caixin report (bolding is mine):
- Caixin China Composite PMI data (which covers both manufacturing and services) signalled a further slowdown in growth momentum at the start of the second quarter
- This was highlighted by the Composite Output Index posting 51.2 in April, down from 52.1 in March, and the lowest reading for ten months
- Latest data saw a loss of momentum across both the manufacturing and service sectors during April
- While manufacturers recorded the weakest rise in production since last September, service providers saw the slowest increase in business activity for 11 months
- Weak services growth was illustrated by the seasonally adjusted Caixin China General Services Business Activity Index registering at 51.5, down from 52.2 at the end of the first quarter, to signal only a modest rise in activity levels
- Although business activity growth eased in April, the amount of new business placed with service providers expanded at a quicker pace in April
- Some panellists mentioned that new products and improving market conditions had boosted new order intakes
- That said, the rate of expansion remained weaker than the historical series average
- Meanwhile, manufacturers saw growth in new work ease for the second successive month to a marginal rate
- At the composite level, total new business increased at the softest pace since last September
- Services companies continued to add to their payrolls at the start of the second quarter. However, the rate of employment growth eased to the weakest in 2017 so far and was moderate overall. At the same time, manufacturers continued to cut their staff numbers in April, with the rate of decline quickening to a three-month record. As a result, composite employment fell for the first time since the end of 2016, albeit only slightly.
- Data indicated a lack of pressure on operating capacity across services companies, as shown by a renewed fall in backlogs of work. Though marginal, it was the first time that unfinished workloads had fallen across the sector since last September. In contrast, outstanding business continued to rise across the manufacturing sector, though only modestly. Subsequently, composite backlogs of work accumulated at the slowest pace in a year.
- Cost pressures eased across both monitored sectors in April. Service providers registered only a modest rise in input costs that was the weakest in six months. Manufacturers meanwhile saw a rate of input price inflation that, though solid, was the softest recorded since last September. Higher raw material costs were cited as a key factor pushing up cost burdens across both sectors. Overall, composite input prices increased at the slowest rate in seven months. Similar trends were seen for prices charged in April, with both manufacturing and services companies raising their prices. Though marginal, April marked one of the fastest rates of charge inflation seen across the service sector for three-and-a-half years. However, it was the weakest rise in factory gate prices recorded since last August.
- Chinese companies generally held positive growth expectations for the year ahead in April. That said, the overall degree of positive sentiment moderated to a five-month low. Weaker confidence at the composite level reflected reduced optimism across both sectors, with manufacturers the least positive towards the one-year business outlook.
Commenting on the China General Services PMI data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:
- “The headline Caixin China General Services PMI fell for the fourth straight month in April to 51.5.
- It marked the weakest reading since May last year and was down 0.7 points from March.
- The sub-indexes of input costs and output prices dipped, while the sub-index of new business went up marginally.
- Growth in both manufacturing and services decelerated in April, reflecting a clear slowdown in the expansion of the Chinese economy
Recovers most of losses but off the highs.
The US stock indices are ending the day mixed after spending the day mostly lower for most of the day. As the cards settled, the Dow is the only major index to end with gains and those gains were minimal. The S&P and Nasdaq recovered from much lower levels, but still ended down on the day.
- The Dow ended the day with a small 7 point gain or +0.03%.
- The S&P index ended the day down 3.04 points or -0.13 points to 2388.13. The low reached 2379.75.
- The Nasdaq ended down -22.815 points or -0.37% to 6072.55. The low reached 6053.277. The high reached 6076.96