Chinese Economics Thread

[horse]

Third part of this rant ...

So, what is the point here?

Another point worth mentioning, is the obvious fact, and also has to do with the propaganda that we read constantly on a daily basis.

The fact is simple, pertaining to China, simply put China is a financial powerhouse. Full stop.

That is why the Western media is unrelenting in its propaganda about the Chinese real estate market and the Chinese stock market.

The West does not want China to be a financial powerhouse. But that is too late. Being a financial powerhouse means power. Full stop.

So this American propaganda is a lame attempt to curtail Chinese power, trying to paint a picture that China is not a financial powerhouse, when it is.

Now, we get to real life, which is irony! Who else does not want the world to know that China is a financial powerhouse?

That is right, you guess it! The Chinese does not want the world to know that China is a financial powerhouse.

Why?

We already know the answer.

Two years from now, China will be advancing in ways unimaginable, and the economy will be expanding.

China loaned a lot of money to various countries in the world, some who still live in their own shit. Two years from now, they still will be living in their own shit, and invariably some of them will ask for some loan forgiveness.

Two years from now, China will have advanced and be even more richer. How can China say no to fellow socialist Marxist brothers?

That's life.

 

[chgough34]

Sovereign debt is risk-free and thus any rates on sovereign debt are going to be tied to the central bank policy rate. Risk pricing that applies to corporates doesn’t apply here (risky debt is going to be priced as an expression of a spread plus the yield on an currency risk-free yield; ex., a bond issued by Siemens in EUR is going to be priced as say, 50bps + the yield on a 10yr Bund)

Since investors should be indifferent between buying 10 1yr treasuries or one 10yr treasury; that means longer term debt is a bet on the future direction of monetary policy with the relationship between the maturity period and interest rates being positive to account for the uncertainty in the future path of rates (the term premium). If the term premium is flat or inverted; that means investors are very certain that monetary policy will be as loose or looser as it is now, which means investors do not see for decades into the future, substantial upside to economic growth but instead, only see deflation and recession (otherwise a central bank wouldn’t cut rates). The rapid rally in CGBs reflects an information cascade in China to that effect of the new macroeconomic consensus.

 

[Jamie28]

Sovereign debt is risk-free and thus any rates on sovereign debt are going to be tied to the central bank policy rate. Risk pricing that applies to corporates doesn’t apply here (risky debt is going to be priced as an expression of a spread plus the yield on an currency risk-free yield; ex., a bond issued by Siemens in EUR is going to be priced as say, 50bps + the yield on a 10yr Bund)

Since investors should be indifferent between buying 10 1yr treasuries or one 10yr treasury; that means longer term debt is a bet on the future direction of monetary policy with the relationship between the maturity period and interest rates being positive to account for the uncertainty in the future path of rates (the term premium). If the term premium is flat or inverted; that means investors are very certain that monetary policy will be as loose or looser as it is now, which means investors do not see for decades into the future, substantial upside to economic growth but instead, only see deflation and recession (otherwise a central bank wouldn’t cut rates). The rapid rally in CGBs reflects an information cascade in China to that effect of the new macroeconomic consensus.

WTF I'm reading

 

[chgough34]

WTF I'm reading

It’s using arbitrage pricing theorem applied to bonds to explain why term premiums exist and then explaining why a collapsing term premium in the CGB market reflects an information cascade in China on the pessimism in Chinese financial markets on future growth prospects in China.

 

[chgough34]

Using the yield curve term premium to forecast GDP growth is a widely accepted forecast method - higher term premiums result in larger forecast gdp growth and vice versa.

see for example this Cleveland Fed model that tries to nowcast gdp growth using nothing more than the historical relationship between the 3month and 10yr treasury yields and gdp growth

Please, Log in or Register to view URLs content!

 

[pbd456]

Nobody was pessimistic for US economy when the long yield was less than 2%

 

[fishrubber99]

Don't short maturity bonds in China having having lower yields compared to longer maturity ones just mean that the bond market is expecting more rate cuts and monetary easing by the PBoC (partially because the US is likely to cut rates more aggressively starting from September because they want to avoid a recession, so this gives China more room for easing without putting too much pressure on the Yuan).

More expected rate cuts is partially due to China's economy not having good credit growth at the moment (really, since the real estate bubble popped), but there seems to be a lot of room for China to do extra easing measures if necessary to bolster growth because the Fed will need to cut rates at a faster pace this year to avoid a recession. I don't really see anything to be panicked about because of this.

 

[GiantPanda]

Nobody was pessimistic for US economy when the long yield was less than 2%

Everything from the West is focused on a China Collapse narrative.

China's 5.5% growth is bad. But US is 2.5% is great.

China has a much larger real economy than the US (2X electricity consumption, 2X autos sales, 9X steel demand, etc.)

A 5% growth from a larger base on secondary goods -- manufactured items -- is far harder than an equivalent growth for tertiary goods -- services and financial products. You can always charge outrageous prices for lawyer fees and create trillions out of thin air for Wall Street derivatives as long as you don't tip into hyper inflation.

China's 5.5% is for a real economy creating real things. US' 2.5% is mainly for the growth of service jobs plus inflating wages of work outside actual creation of tangible goods.

 

[GiantPanda]

Don't short maturity bonds in China having having lower yields compared to longer maturity ones just mean that the bond market is expecting more rate cuts and monetary easing by the PBoC (partially because the US is likely to cut rates more aggressively starting from September because they want to avoid a recession, so this gives China more room for easing without putting too much pressure on the Yuan).

More expected rate cuts is partially due to China's economy not having good credit growth at the moment (really, since the real estate bubble popped), but there seems to be a lot of room for China to do extra easing measures if necessary to bolster growth because the Fed will need to cut rates at a faster pace this year to avoid a recession. I don't really see anything to be panicked about because of this.

Lower bond yields means easier financing by government. It means people trust that the government will not inflate the currency as a way to pay off the bonds.

If you think the economy is in the pits and the government needs to print money to stimulate it, you won't touch the bonds unless they are paying high rates so you don't end up with less than what you bought the bond for after inflation.

This is why Global South countries need to pay through their noses to attract buyers. China is an exception. It is a Global South nation paying interest on its bond like a reserve currency that comes from a dominantly stable economy.

Think about this. A Global South middle income nation with the financial advantages of a First World one.

Advantages of both developing and developed. Unprecendented really: fast growth of developing country coupled with low inflation and low borrowing costs of a developed one. This is how you finance and build, for example, 70% of the world's HSR.

 

[chgough34]

Nobody was pessimistic for US economy when the long yield was less than 2%

The main macroeconomic hypothesis of the 2010s was that the US economy was in secular stagnation