Example of ASEAN ‘Free Trade’ Integration: Governments of Malaysia and Indonesia Forges Palm Oil Cartel!

Free trade? Or crony capitalism disguised as free trade? 

Well here is an example of the 'thrust' to promote ASEAN ‘Free Trade’ Integration

From Nikkei Asia: (bold added)

Indonesia and Malaysia on Saturday formed a two-nation palm oil cartel in a bid to halt the rise in stockpiles of the commodity and the fall in prices.

Calling it a "game changer," the two countries have big hopes for the Council of Palm Oil Producing Countries. They see it as a tool that will help them jointly manage their output and promote the use of palm oil in biofuel. By taking these steps, Indonesia and Malaysia hope to boost demand for the commodity.

"By coordinating our stock management, we should be able to bring about sustainable prices," Rizal Ramli, Indonesia's coordinating minister for maritime affairs, told reporters.

The minister did not reveal a target price or stockpile level. Reserves rose to a record high in September, swelling 26% year on year to 2.63 million tons.

Palm oil prices have declined by over 30% since peaking in February 2011.

One way to manage the rising stockpiles is to create demand for the commodity by upping the ratio of palm oil in biofuel. Indonesia has decided to ramp up this ratio to 20% from the current 15%. Malaysia is currently at 10% but may consider taking it up to 15%.

Malaysia has already taken a step to reduce the amount of palm oil on the market. It has subsidized the replanting of some 830 sq. km of old palm trees, which helped to keep 250,000 tons of palm oil from adding to the global glut, said Douglas Uggah Embas, the country's minister in charge of plantations.

Malaysia and Indonesia together account for about 85% of global palm oil production. The commodity is an important source of revenue to the two governments as well as to companies such as Sime Darby in Malaysia and Golden Agri-Resources. These companies in turn are supported by about 4 million small household planters in Indonesia and 500,000 in Malaysia.

As I recently wrote:

At the rudiment, free trade represents decentralized social activities. But modern day politics are centrally structured. In essence, forces of decentralization and centralization collide or are diametrically opposed. So this has NOT been and will NOT be about free trade.

Politically managed trade is NOT free trade.

Oh by the way, signs are that the world seems headed for protectionism, or the world risks embracing more protectionism rather than ‘free trade’/integration/union. This runs contrary to the recently concluded big junkets to supposedly promote trade or economic union in Asia.

Recent geopolitical developments have been pointing at this direction, through the surge of anti-refugee or anti-immigration sentiment, soaring nationalism that has been punctuated by terrorism and its response—border controls. Aside from Europe, where right wing groups have been gaining, even leading US presidential candidate Donald Trump seem to represent the above.

This is aside from brinkmanship politics between the opposing alliances of superpowers in Syria, Ukraine and South China Seas.

Intervention begets intervention; from border controls to social/people controls then to economic controls (wage, price, production).

Intensifying inflationist monetary policies by global central banks, via currency devaluations (QE, zero bound or negative interest rate policies—e.g. Swiss bank ABS imposed negative rates on clients), aka currency war, which are forms of capital and exchange controls, should likewise aggravate the political desire to erect barriers to trade.

And all these have been compounded by an ongoing slump in global trade which fans the populist protectionist fire, e.g. again US leading Presidential candidate Donald Trump seem to advocate protectionism. The Portuguese government have recently been taken over by left wing (communist-socialist) coalition.

Of course, the ongoing deterioration of global trade has been a product of many interventionist policies, mainly through inflationism (boom-bust cycles).

Understand that since cartels are offsprings of political actions designed to 'protect' certain sectors of society by restricting or controlling either prices or production or both, then cartels essentially are part of the many faces of protectionism or government interventionism that has been intended to curtail free markets.

Hence, the Malaysian-Indonesian governments' response to the sluggish global trade/economy hardly points to the implementation of the touted regional trade union but defeats the very purpose of what they purportedly wanted to promote. 

Action speaks louder than words. Yet such action showcases state and crony capitalism in motion.

As I earlier described APEC, which should apply to ASEAN integration: 

A wolf in a sheep’s clothing remains a wolf.

Yesterday, Thailand’s SET suffered from a Massive Convulsion! More signs of ASEAN's Deflating Bubbles

I was startled to see this…

(chart from stockcharts.com)

I thought the above signified  a data error. I checked and found out that this has been accurate…Thailand’s SET suffered from a massive intraday CRASH! The SET collapsed by as much as a shocking 9.2% (!!!) before a late day recovery. The SET closed the session down by still a whopping 2.41% decline! 

Yesterday’s loss compounds on last week’s 5.18% slump!

From the Bloomberg:

Thailand’s benchmark stock index fell the most in 11 months as energy companies slumped on a rout in crude and investors speculated this year’s rally was excessive relative to earnings prospects.

The SET Index (SET) dropped 2.4 percent to 1,478.49 at the close, taking a five-day decline to 7.5 percent. The gauge briefly tumbled as much as 9.2 percent in afternoon trading before recovering most of its losses. PTT Exploration & Production Pcl (PTTEP) retreated for a seventh day, while its parent PTT Pcl (PTT), Thailand’s biggest energy company, tumbled 4.9 percent. The two stocks represent about 10 percent of the SET Index by weighting.

“Thai stocks have been hit by foreign selling as investors pull out from emerging markets,” said Mixo Das, an Asia ex-Japan equity strategist at Nomura Holdings Inc. in Singapore. “A large listed oil-and-gas sector and expensive valuations relative to history are adding more pressure.”

The report rationalizes that “this year’s rally was excessive relative to earnings prospects”. 

Well as I have been saying, stocks are driven by liquidity, credit and confidence. The latter of which is a product of the the former two.

Two weeks back I wrote,

To sum it up, since 2008, stocks have NOWHERE been about G-R-O-W-T-H, but about LIQUIDITY and CREDIT from which CONFIDENCE or MOMENTUM has been a product of. Expand liquidity and or credit, then financial assets (stocks, real estate, bonds etc…) booms, regardless of the direction of the economy.

Hounded by negative real rates via zero bound (financial repression), the public response to such policies have been to chase on yields even when they have been pillared from gross misperceptions.

Yet take away credit and liquidity, the illusion of CONFIDENCE and MOMENTUM evaporates.

The same factors can be seen in Thailand whose economy has been walking a tightrope between stagnation and recession but whose stocks, via the SET, like the Philippines (whose chart also has been replica of the Phisix) have been approaching milestone highs. The SET has been up 23% y-t-d as of Friday.

Take away credit and liquidity, the illusion of CONFIDENCE and MOMENTUM evaporates: "This year's rally was excessive" 

Clues had already been present, Thailand’s banking loan growth was reported to have registered a huge decline in 3Q 2014—a sign of diminishing liquidity. I wrote:

Despite the marked slowdown in the Thai economy, and the reported recent slowdown in bank lending, it is still surprising to see lofty levels in credit expansion in the private sector in 1H of 2014 (left), but money supply seems to have plateaued for the year

Again, the SET episode simply demonstrates that global and regional deflationary pressures have returned big time!

Oh by the way, I earlier posted that the Indonesian rupiah have reached at ALL time lows. 

I guess the pressures on the currency has spilled over to her stock markets as the JKSE at presently trades down by sizeable 1.8+%. The JKSE as I posted last week has a minor head and shoulder formation: a break of around 4900 would extrapolate to a considerable downside if the chart's portent should be validated. 

Deja vu 1997?

Update: The Thai SET opens today's session with a big 3% decline!

ASEAN's Hissing Bubbles: Thailand Non Performing Loans Swell as Malaysia’s Property Markets Cools

Those booming stock markets appear to be increasingly masking surfacing signs of troubles in ASEAN’s real economy

The Bank of Thailand (BoT) projects a mild recovery in her sluggish economy predicting a 1.5% growth this year and 4.8% next year banking on recently announced stimulus. The Thai government announced a 364 billion baht (US $11 billion stimulus last October. 

The Thai economy has recently endured a significant downshift aggravated by the tumultuous politics which culminated with a coup last May. 

2Q GDP of a  marginal +.4 growth in GDP spared the Thai economy from a technical recession (chart from tradingeconomics.com)

Given the stagnant 1H, it would take about 3% growth for the 2H in order to meet the BoT’s 1.5% target this year. Yet the BoT admits that debt burdened consumers have been marginally improving.

From Bernama.com.my(bold added) Demand in the private sector play a greater role in driving the economy but low prices of farm products and high household debt are limiting consumption. In addition, slow government spending is limiting investment in the private sector, said Roong…However, spending on durable goods, especially automobiles, has not recovered due to high household debt and strict lending controls by financial institutions.

As a side note to the biased report, slow government spending isn't an obstacle to private sector investment. It is those immense debt levels spent on bubble projects that has impeded investments. Importantly all government spending are anchored on forcible transfers from the private sector money/resources which means growth in government spending stymies private sector investments. This is an economic concept called crowding out.

To add, exports have reportedly fallen too, from the same article: According to Roong, the value of Thai exports fell by 1.7 per cent in the third quarter although it rose in September by 2.2 per cent.

So banking on government spending to spike the economy to meet the 1.5% target is like promising the moon. Of course there is such a thing called statistical massaging for the Thai government to meet their targets.

But the optimistic growth by the Thai government seems faced with a major headwind: ballooning non performing loans (NPL)

From Nikkei Asia: (bold mine)

Loan growth at Thailand's four major banks slowed in the third quarter through September, reflecting the slow recovery in the country's business and consumer confidence since the political turmoil deepened in the country earlier this year. Nonperforming loans increased, on the other hand, as household debt continued to grow.

According to the banks' recently released third quarter results, nonperforming loans rose at all four banks. The combined amount was 190 billion baht ($5.8 billion) as of the end of September, up more than 10% from the end of December 2013. High household debt level is one factor for the bad loans. The ratio of household debts to gross domestic product was 83.5% as of the end of June, a 4 percentage point increase on the year.

Despite the marked slowdown in the Thai economy, and the reported recent slowdown in bank lending, it is still surprising to see lofty levels in credit expansion in the private sector in 1H of 2014 (left), but money supply seems to have plateaued for the year.

The leveling of money supply in the face of sustained credit expansion gives a clue that part of the money being borrowed may be used to pay off existing liabilities: Debt IN Debt OUT. Such dynamics would seem as consistent with the NPL growth being experienced by major Thai banks as some entities may not have been able to sustain maintaining onerous debt levels.  Debt payments and defaults destroys money.

As I pointed out last May, a material slowdown in the Thai economy will expose on her banking system’s huge debt problem. 

And given the substantial debt exposure by the Thai economy, such stimulus won’t seem enough to shield her economy from any intensification of debt problems which has likewise been amplified by the deceleration of Thailand’s property bubble. 

The Global Property Guide on Thailand’s housing prices: housing prices rose by 2.28% during the year to Q2 2014, down from 3.76% the previous year. Housing prices dropped by 0.25% q-o-q in Q2 2014.

Aside from Thailand, the Malaysian economy seems faced with same predicament. Malaysia like Thailand has the highest household debt exposure among the ASEAN majors, chart from the World Bank.

Perhaps worried about a runaway property bubble Malaysia’s government has embarked policies to rein property prices, the effects have now become apparent

From Nikkei Asia (bold mine)

Uncertainty is growing about the future of Malaysia's housing market because of government measures to curb speculation and excessive competition in urban areas.

In Kuala Lumpur, high-rise condominiums are being built everywhere, even though many new apartment blocks are half-empty. Malaysia's leading property developer, Gamuda, says the country's real estate market is losing steam. Another major developer, UEM Sunrise, has cut its 2014 sales target from 3.2 billion ringgit ($962 million) to 2 billion ringgit.

A survey by the Real Estate and Housing Developers' Association Malaysia paints a grim picture. Between January and June this year, 10,189 new condos went on sale, up 9% from the July to December period last year. However, the ratio of purchases fell in the first half of 2014 by 4 percentage points to 49%.

The survey found 35% of respondents are pessimistic about prospects for Malaysia's housing market for the second half of this year, while 46% are pessimistic about the first half of next year. Despite this, developers plan to sell 15,820 condos in the July to December period, a nearly 70% increase from the same period last year. Analysts see this as optimistic.

Bank Negara Malaysia, the country's central bank, last July implemented a more stringent housing loan policy to cool the overheating real estate market. And the government will in April introduce a 6% consumption tax, which is expected to include property transactions. While it is hoped these measures will help prevent a property bubble, concern is growing they could also quickly dampen investors' enthusiasm for real estate.

There is also the problem of a supply glut. High-rise condos continue popping up in big cities, but their prices are declining in some areas.

Aside from taxes and increased stringent lending guidelines, the Malaysian government has increased official interest rates last July by 25 basis points.

Nonetheless despite government actions, loans to the private sector continues to skyrocket even as money supply levels appears to be inflecting—signs of debt in debt out. 

NPLs growth should eventually follow while the Malaysian economy should start to downshift. It’s when the slowdown has been magnified when bad debts become pronounced. And both economic slowdown and bad debts will function as a feedback mechanism.

At the end of the day, ASEAN has been revealing increasing signs of credit strains.  As I pointed out at the start of the year, ASEAN is a candidate for a global black swan event. All it takes is for a trigger to expose on all the accrued unsustainable imbalances.

Don’t worry be happy, stocks will rise forever. As of the close of October 31, year to date gains of Thailand’s equity bellwether the SET has been at a phenomenal 21.98%! In today’s world the more the risks, the higher returns. Whereas Malaysia’s KLSE has been down –.63%.

As Debt Surges, Malaysia’s Shadowy Fund Adds to Systemic Risk

ASEAN’s credit risks has been vastly underestimated. 

In Malaysia, a cross between the nation’s sovereign wealth fund and private investment vehicle sporting an investment grade credit rating can’t even generate enough cash to pay interest rates.

Reuter’s chart link

From Reuters: (bold mine)

Lurking beneath Malaysia's solid investment-grade sovereign rating is a risk posed by a $14 billion investment fund that is not even generating enough cash from operations to cover interest costs.

Regarded as a cross between a sovereign wealth fund and a private investment vehicle, with Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of $11 billion in borrowed money.

The government says it only guarantees around 14 percent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that raises concern.

More…

Critics have questioned its investment choices, the size of its debt, $2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.

A $1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a $2 billion initial public offering that would reduce debt incurred buying 15 power plants. In a statement published on May 23, 1MDB said the IPO for its power division will take place in the second half of this year.

In 2013, 1MDB, with liabilities of more than $13 billion, generated cash flow of 860 million Malaysian ringgit ($267.75 million) from operations, far below the annual interest outgo of 1.62 billion. It would have made a 1.85 billion ringgit loss, but for a 2.7 billion ringgit revaluation of its property portfolio.

Opposition leader Anwar Ibrahim was quoted at a news conference in late April warning; "If we continue with this culture of accumulating debts, Najib's 1MDB will fail and become a liability that should be called 1Malaysia's Debt of Billions."

Malaysia’s debt to GDP from tradingeconomics.com

The increasing recourse to accounting magic….

Malaysia's debt-to-GDP ratio stood at 53.8 percent at the end of 2013, central bank data shows, up sharply from 43 percent in 2008 and close to an official debt ceiling of 55 percent, beyond which the government must seek parliamentary approval.

Contingent liabilities, however, stood at 15.9 percent of GDP, up from 9 percent in 2008, bringing total government and government-backed debt to 69.7 percent of the economy, and the off-budget character of 1MDB raises questions.

"It can be viewed as a way to circumvent the 55 percent ceiling on government debt to GDP, while shielding this spending from parliamentary scrutiny," said Prashant Singh, a fund manager at Neuberger Berman in Singapore.

Some important points

-The 1MDB’s investment grade credit ratings essentially departs from the company’s real conditions. Just because the company has been partly owned by the government and whose debt has been partially backed government doesn’t make it 'risk free'. In short, the company doesn’t deserve its investment grade ratings.

This also reveals how credit rating agencies have been mostly remiss or derelict of their fundamental duty: the monitoring credit risks.

-“Investment community assumes it would provide more if needed” means three things: excessive complacency, extreme overconfidence, and the implicit pressure on the Malaysian government to backstop 1MDB’s liabilities. These are signs of Moral Hazard—public taking on more risks in the hope that government will guarantee their actions against potential losses. Creditor’s probably think that the Malaysian government is a perpetual fountain of wealth.

Yet like the Philippines, Malaysia’s government has been draining the much vaunted foreign exchange reserves to defend the currency; the ringgit. This is a sign that there is no such thing as free lunch.

-Because cash generated by 1MDB (860 million ringgit) represents only 53% of interest costs (1.62 billion ringgit), the company resorts to Ponzi Financing dynamics of DEBT IN-DEBT OUT complimented by sale of assets (proposed IPO). This dynamic can only be maintained for as long as interest rates remain low. Yet what is unsustainable won’t last.

-This stirring comment by opposition leader Anwar Ibrahim “culture of accumulating debts” echoes on Malaysia overall debt conditions. Such signifies not only risks for 1MDB or for the government alone but for the entire Malaysian economy as well. Malaysia’s debt stock as % of GDP has even been larger than China! And this has been mostly due to household debt thus the Mr. Ibrahim's association of debt with "culture".

Rising inflation rates and weakening currency which adds to inflation (via import prices) are signs that credit boom days of Malaysia’s bubble economy have reached a maturity phase. Such has been partly reflected on rising 10 year bond yields.

Yet since the Malaysia’s financial system increasingly depends on the rolling over her fast mounting debt, not only will the use of Ponzi financing for both the private sector and for the government deepen or intensify, but accounting skullduggery will most likely serve as another route. The Malaysian government’s debt accounting transfer from official to contingent liabilities in order to dodge the debt ceiling seems like an example.

As Greek historian Herodotus (484-425 BCE) aptly observed in his observation of the Persian empire: (I am quoted this on my latest outlook)

The most disgraceful thing in the world, they think, is to tell a lie; the next worst, to owe a debt: because, among other reasons, the debtor is obliged to tell lies.

But who cares about all these risks which may morph into an ASEAN Black Swan? Don't you see, stocks have been destined to rise forever!

Thai Central Bank Hopes that More Bubble Blowing will Solve Political-Economic Woes

Thailand’s politics has been in a mess since the last semester of 2013. 

But politics has only been an aggravating factor to what has been a slowing statistical economy for Thailand (annualized). 

Except for the anomalous one time spike, Thailand’s economy has been largely performing below the average at 3.77% (calculated by tradingeconomics.com based from 1994 until 2013) from 2012-2013. The World Bank says that Thailand economy grew by only 3% in 2013 

So given the growing slack in the economy worsened by a political crisis that has rendered the incumbent government paralyzed, what recourse has the Bank Thailand recently taken to provide cushion to her economy?

The answer from the Wall Street Journal Real Times Economics Blog:

After holding policy steady for months as the country’s disintegrating political situation took its toll on the economy, the Bank of Thailand finally reached its breaking point Wednesday, cutting overnight rates by a quarter-percentage point in a close vote.

Wednesday’s decision takes the benchmark rate to 2.0% from 2.25%, and comes as the BOT said economic growth won’t even reach the central bank’s 3% target this year – after it was forecast at 4% as recently as November. Economic growth already has slowed from 6.5% in 2012 to 2.9% in 2013, bottoming out at just 0.6% in the final quarter of the year.

That illustrates the depths to which Thailand’s economy has sunk as massive demonstrations seeking the overthrow of Prime Minister Yingluck Shinawatra enter their fifth month.

Price pressures were seen as one reason the BOT remained on hold in preceding months: While inflation wasn’t high enough to warrant a rate increase as in India or Indonesia, it wasn’t quite benign enough to allow the central bank to ease policy either.

As I pointed out in January 2013, Thailand has a credit bubble.

And to give you an update on what Thailand’s low interest rates regime have engendered aside from a stagnating economy…

Loans to the private sector continues to massive inflate. In my estimates, through 2013 until January 2014 credit growth ballooned by about 9%

Such rate of growth has likewise been reflected on money supply growth. Thailand’s M3 jumped by an estimated 9.8% over the same period. 

Thailand credit and money growth has been thrice the rate of the economic rate of growth. So the question is where has all these money creation been spent or invested? 

I have no updates on the Thailand’s housing statistics. But the World Bank figures gives some clues.  Growth in the construction growth sector remains positive but may be on a seminal downtrend. 

On the other hand, note that growth in real investment and equipment has been on a decline since the 4Q of 2012 and has turned negative during the 2nd Q of 2013. In other words, Thailand’s economy has been materially slowing even prior to the outbreak of the political crisis. 

Additionally while growth in housing loans appear as slowing down, % of housing loans relative to the economy remains at near the record 80% level. 

And the more important factor has been the surge in Non-performing loans (NPL) from 2012-2013.

And Thailand’s slowing exports as I noted earlier, has only swelled her balance of trade deficit and shrank her current account surplus. And this implies that part of her trade deficit may have been financed by the growth in private sector debt.

And it is not just the private sector, Thailand government’s external debt has ballooned by about 35% since January 2012 through the 3rd Q of 2013.

The other possible channel for excess credit growth and money creation has been to balloon a massive denial rally in Thailand’s stock market as measured by the SET (stockcharts.com) since the post New Year crash of 2014.

In sum, Thailand’s central bank intends to prevent a surge in NPLs from becoming a systemic risk by keeping interest rates low. The Thai central bank may also be desiring to keep the construction boom (or even the stock market boom) afloat in order to maintain the picture of positive statistical growth.

The question is how feasible and lasting will this be? Without productive growth, there will be lesser resources generated to pay for existing liabilities. Worst, zero bound rates will induce more borrowing, which should add to Thailand’s debt burden.

Thailand’s currency, the baht, vis-à-vis US dollar has recently been rallying and so as with her bonds whose yields have reached the lows of post-taper turbulence in June 2013. 

The rallying baht and sinking yields has given the impression of a relief in “inflation” pressures, thus justifying the trimming of official rates.

But my guess is that Bank of Thailand (BoT) may have partly used her foreign currency reserves to attain such picture of calm. The BoT’s forex reserves has shrank from July 2013 which adds to the earlier decline.

In short, the BoT applied financial band aids to what has been a debt cancer.

Nonetheless with even more borrowing for households to speculate, which will be also manifested in her elevated money supply figures, the pressures on the baht will resurface in the near future, and so will such be reflected on the inflation data as well as in her bonds via rising yields.

And Thai’s debt problem will be further exposed by higher bond yields in the developed economies or even by a slowdown or a meltdown in China.

By the way, New Zealand has been the first among developed nations central banks to raise interest rates.  

As one would note, like all the rest of her peers, the Thai central bank thinks that policies that promote and support debt will solve their nation's economic problems. The problem is these officials keep applying the same panacea without generating the desired results, so they keep on adding more. Either this or they are just kicking the proverbial can down the road.

Yet the problem with “kick the can” policies is that this only increase the imbalances in the system that magnifies the potential harm from a blowup. 

For central banks, one must provide more alcohol to solve the problem of alcoholism.

EM Contagion: Based on Exports, Global Economic Growth appears to be Downshifting Fast

I have pointed to the recent collapse of exports by China and by Japan as potential harbinger of a substantial downshift in the growth rate of the global economy. 

Signs are that the world will be faced with a dramatic decline in the rate of growth if measured in exports. 

First of all here is the list of the top 15 exporting countries as provided by wikipedia.org

These countries, whose estimated US dollar priced exports at $13.885 trillion for 2013, constitute a substantial share in the (non-fixed) pie of global exports.

I have no figures for total world exports in 2013. So while this would be apples to oranges, if I use the above to compare with 2011 global export data then the top 15 countries would account for about 78% of global export share. A WTO report says that the share of the top 5 exporters represents 36% in 2012 almost equal to the trading volume of regional trading blocs. The point is to show the importance of the share of the above exports relative to the total.

Now aside from China and Japan here are the export trends of the other top 15 exporters

Eurozone exports have been in a sharp decline over the past (3 months) quarter.

But Eurozone performance have been unequal. Seen in the context of some of the Eurozone members within the top 15 ranking, German exports (ranked 3rd in the world) remain buoyant although markedly down from September highs. French exports (ranked 5th) have stagnated through most of 2013 compared to 2012 level. Spanish exports have substantially declined over the past 3 months while Italian exports marginally slowed over the same period.

Meanwhile US exports have been slightly down

South Korean exports have also been in a substantial downtrend. February exports plummeted by 5.7%. February data signifies a decline of 8.5% from October highs

Netherland exports fell sharply down by 5.3% in December (no latest updates yet)

Russia’s exports, ranked 8th in the world, have collapsed last January! Russian exports cratered by 19.8% (m-o-m), and have essentially mirrored China. 

Meanwhile Hong Kong exports have been marginally down.

Ninth largest exporter, the United Kingdom broke the 5 month declining trend with a 2.1% (m-o-m) gain last January. Has this been a quirk or a recovery?

11 spot Canadian exports has also shown a marginal decline over the past 5 months. 

13th ranked Singapore exports posted a modest increase (2.86% m-o-m) in January but the gains have been far off from the highs of October. 

Saudi Arabian exports have been strong as of the third quarter of 2013

15th spot Mexican exports tanked by 15.73% (m-o-m) in January! 

To have a better view of emerging markets where we can see the extent of the recent damage, let us take a look at the export data of the other majors. 

Brazil’s exports have stagnated in February following a 23% crash in January.

India’s export trend has been in a moderate decline over the past 5 months.  

In Southeast Asia, Malaysia’s exports though posting a marginal decline in January, has remained robust relative to most of 2013.  

Meanwhile Thailand’s exports have fallen sizably over the past 5 months.  

And after a spike in December exports, Indonesia’s January data plunged by 14.63%. Indonesian exports collapsed in August 2013 but recovered until December.  

Following September and October highs Philippine exports have moderately declined over the past 3 months

In sum, for the top 15 only Saudi Arabia, Germany, UK and Singapore have shown recent export (marginal to modest) gains, whereas the export declines have been pronounced in emerging markets (e.g. Russia, Mexico, South Korea). And this has become even more evident with the inclusion of Brazil, Indonesia and Thailand.

The dramatic fall in Japan, the marked slowdown in the Eurozone and the recent downshift in US exports may be signs of the deepening emerging market contagion. 

Emerging market financial market disruptions seem to have now been manifesting real economic effects through the global economy.

Yet the current rate of decline in exports of emerging markets seems alarming. 

[As a side note, this is a treatment of aggregate exports without delving into their details]

And they seem to be reinforcing my fears and suspicions. As I wrote early February, 

If emerging markets has been attributed by some as having pulled out the global economy from the recession of 2008, now will likely be the opposite dynamic, the ongoing mayhem in emerging markets are likely to weigh on the global economy and equally expose on the illusions of strength brought upon by credit inflation stoked by inflationist policies.

All these comes as major stocks markets seem to be in various stages of a mania (either from record highs or for those bourses fighting off the bear markets with violent denial rallies).

It is interesting to see if there will be a collision course between global real economy and the steroid dependent stock markets hoping for a sustained economic recovery.

P.S. Thanks to the wonderful tradingeconomics.com for all the charts and the very helpful data they provide.

China’s First Default and Export Collapse; Russia’s Financial Meltdown

China’s First Default and Export Crash

A few hours after the close of the Friday’s trading session in Asia, news announced of the first China onshore default on bonds[1]. While the manic US stock markets seem to have shrugged this off, it is unclear if Asian markets will also disregard this. 

Even worse, after the close of the trading hours in US, the Chinese government announced[2] of a steep 18.1% decline in exports!!! I would say that 18% EIGHTEEN PERCENT represents a collapse and not just an ignorable drop.

The export crash has brought about China’s trade balance into a massive deficit. Yet both the degree of export volume breakdown and the scale of deficits matches or has even been larger than during the global crisis of 2008 (see red ellipses). Whether this represents an anomaly or signs of the deepening and acceleration in the deterioration of China’s economy has yet to be established. But I suspect the latter.

Why?

Because as I have been pointing out, such is how the bubble cycle unfolds.

The first stage; financial market disruption. Then, liquidity squeeze. Lastly, either a financial crisis that brings about an economic crisis or vice versa. The Chinese markets had her financial market disruption episode in June 2013. Then the attendant spike in interest rates underscored on the liquidity squeeze which the Chinese central bank has been intensely firefighting with liquidity administration[3].

Now the real world contagion.

In 2014, we seem to be witnessing the combination of financial market disruption and real world economic problems, particularly, the first trust bailout[4] in late January, the unreported January quasi-‘bank run’ on three cooperatives which just surfaced last week[5], the reversal of the one way yuan trade[6] and now both the first default and export meltdown. In barely three months, accounts of financial-economic convulsion appear to be increasing in frequency and intensity.

Remember, Chinese ‘zombie’ non-financial companies with debt-to-equity ratio exceeding 200% have reportedly jumped from 57% to 256 from 163 in 2007 according to a report from Bloomberg[7]. This implies of the potential scale of the risks of defaults, not to mention the risks from $3 trillion of local government debt and China’s shadow banking industry estimated[8] between $7.5 trillion (JP Morgan) and $15 trillion (Fitch’s controversial Charlene Chu)

So aside from higher cost of funding which results to dislocations in economic operations and subsequently engenders an economic slowdown, a feedback loop of slowing economic growth magnifies on the debt problem by aggravating access to funding which translate to higher costs of financing.

This is why the first default has been analogized by some mainstream pundits as China’s ‘Bear Stearns moment’ as climbing rates and the risks of payment delinquency will pose as major roadblocks to interbank lending that increases default risks. 

And it is important to point out that in contrast to the external account talisman that the mainstream uses to justify their worship of bubbles, in China’s case surpluses dramatically morphed into deficits. In addition, China’s record forex reserves hardly serve as an adequate shield to a DEBT problem issue.

As I have projected at the start of the year, China’s unwieldy debt conditions may trigger a Global Black Swan event[9].

Evolving events have been indicative towards such direction.

Russian Financial Markets Meltdown

And this has not just been a China affair. Financial strains in emerging markets have been sporadically spreading. While ASEAN’s pressures may seem to have eased (I say temporarily), Russia suffered a financial market meltdown last week.

It would be misguided to treat or impute Russia’s problems to entirely the Ukraine standoff. As I pointed out earlier, in contrast to mainstream understanding which views the weakening Russian ruble as foreign money instigated[10], this has been mostly a resident capital flight phenomenon[11]. The falling ruble existed even prior to Russia’s troop build up in Crimea.

The intervention by the Russian government has only aggravated such conditions. And in trying to preempt the outflows from a deepening corrosion of sentiment, Russia’s central bank Bank Rossii hiked interest rates by 150 basis points. The result has been a horrific (12%) one day crash in stock market, bond markets and even the ruble[12]. All the stock market gains accumulated from June of 2013 vanished in just one day. Russia’s stocks as measured by the MICEX closed the week down 7.29% which means about 40% of the losses have been recovered. Dead cat’s bounce, perhaps?

And all it takes is for political maelstrom to expose on the real issues: DEBT.

And again despite the huge forex reserves of both China and Russia, worsening credit conditions have overwhelmed or negated any so-called advantages.

And to put into perspective from the heavily biased reporting seen in most of mainstream media about the geopolitical impasse between the US and Russia, under the previous terms and agreement by Ukraine and Russia, Russian troops “has been allowed to keep up to 25,000 troops on the Crimean Peninsula”[13]. Now whether troops operating outside the bases are legitimate or not is subject to anyone’s interpretation.

But so does interpretative conundrum apply to the historical attachment of Crimea with Russia. Crimea had been a part of the Russian empire in 1783 way until the General Secretary of the Communist Party in Soviet Union ‘Ukrainian’ Nikita Khrushchev transferred in 1954 “the Crimean Oblast from the Russian Soviet Federative Socialist Republic to the Ukrainian Soviet Socialist Republic” notes the Wikipeida.org[14]. Ukraine became independent[15] from the Soviet Union following the latter’s dissolution in 1991.

So the Crimean political crisis is a complex issue being oversimplified by media.

I would like to also further note intervention has been a two party affair. Early February news leaked of the hacked phone conversation between US Assistant Secretary of State Victoria Nuland and US Ambassador to Ukraine Geoffrey Pyatt in actively plotting over the ouster of the previous Ukraine leadership[16] and of the prospective instalment of their candidates.

And Ms. Nuland also reportedly confirmed according to UK’s Guardian “that the US had invested in total "over $5 billion" to "ensure a secure and prosperous and democratic Ukraine" - she specifically congratulated the "Euromaidan" movement[17].”

So the pot calls the kettle black.

The Contagion Link

 

Going back to economics, in terms of trading linkage, ASEAN represents the fourth largest trading partner of China[18] (left window). The EU has been both the largest trading source for China and Russia. China is the second biggest trading partner of Russia[19] (right window). So a China and a Russian economic downturn imply that the biggest damage will be on the EU.

And that’s just the context of trade and doesn’t cover capital flows.

The implication of China’s export meltdown is that the global economy may have taken a sharp downturn in February. This will be reinforced by Russia and all other Emerging Markets (Turkey, Brazil, India, ASEAN and etc…) recently hit by the yield spread disorderly adjustments.

And as of December 2013, according to the Philippine National Statistics office, China has been the largest source of Philippine imports[20] and the second largest export market[21].

And as I previously mentioned US and European banks have intensely increased bank lending to emerging markets[22].

So should China and or Russia’s financial-economic turmoil escalate, the idea that the ASEAN or the Philippines will be immune from this will just seem utterly delusional. Or the fugazi.

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[1] See China’s First Onshore Default! March 7, 2014

[2] Bloomberg.com China’s Feb. Exports Unexpectedly Decline in Blow to Confidence March 9, 2014

[3] See PBoC Injects 255 Yuan to Calm Debt Jitters, Asian Stock Market Celebrate January 22, 2014

[4] See China Rescues Troubled Trust Product January 28, 2014

[5] See China’s Bear Stearns Moment? First Bond Default Looms March 6, 2014

[6] See Has the Falling Yuan and Tumbling Chinese Stocks Been Signs of Capital Flight? March 3, 2014

[7] Bloomberg.com Zombies Spreading Shows Chaori Default Just Start: China Credit March 7, 2014

[8] See Global Markets: How Sustainable is the Recent Risk ON? February 17, 2014

[9] See Will China Trigger the Black Swan Event in 2014? January 20, 14

[10] See Behind Russia’s Central Bank’s “Unlimited Intervention” January 31, 2014

[11] See Emerging Market Turmoil: The Fallacy of Foreign Currency Reserves as Talisman February 3, 2013

[12] See EM Crisis Over? Explaining the Meltdown in Russian Financial Markets March 4, 2014

[13] Voice of America Russian Forces in Crimea: Who Are They, Where Did They Come From? March 5, 2014

[14] Wikipedia.org Crimea Early History, Independent Ukraine

[15] Wikipedia.org Ukraine independence

[16] Euronews.com US embarrassed by apparent hacked phone call dismissing EU on Ukraine February 7, 2014

[17] The Guardian Ukraine crisis is about Great Power oil, gas pipeline rivalry March 6, 2014

[18] Wikipedia.org List of the largest trading partners of China

[19] Wall Street Journal Lawmakers Pass Russia Trade Bill November 16, 2012

[20] Philippine National Statistics Office External Trade Performance: December 2013

[21] Philippine National Statistics Office Merchandise Export Performance : December 2013

[22] See Emerging Markets: Why Adjustments For Relative Yield Spreads has been Disorderly February 17, 2014