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The Great Fall
Beijing Slams on the Brakes After Securities Sell-Off

The Chinese authorities slammed the brakes on major bond futures trading on Thursday, following a panic-driven sell-off that bodes ill for the Chinese economy. The Wall Street Journal:

Chinese authorities halted trading in key bond futures for the first time on Thursday, as panicky investors sold the securities on concern that a long, credit-fueled bull market was coming to an end amid slowing growth, capital outflows and heightened government concern about asset bubbles.

China’s 10-year and 5-year Treasury bond futures recorded their biggest ever drops in early trading, falling by 2% and 1.2%, respectively, prompting exchange authorities here to suspend the securities. Trading resumed only after China’s central bank injected around $22 billion into the short-term money market. The 10-year government bond yield, which rises when prices fall, meanwhile hit a 16-month high of 3.4%, extending a selloff in Chinese bond markets that began in late November and has accelerated this week. […] 

The U.S. Federal Reserve’s decision to raise interest rates helped trigger the selloff. Chinese investors believe it increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.

China’s latest market panic adds to a growing body of evidence that the Chinese economic model is in serious trouble. The proof has been accumulating all year. Chinese authorities have lately had their hands full in clamping down on increasing capital flight, trying to quietly quash a series of asset bubbles (especially in the housing market), and dealing with thorny demographic issues like pension shortfalls and brain drain in the industrial northeast. Meanwhile, growth is slowing, the renminbi continues to fall, and central efforts to stem the bleeding through capital controls threaten to accelerate the asset bubble problem.      

As each crisis comes up, Xi has shown a preference for ad hoc market interventions over lasting reform, a choice reflected in recent personnel decisions. Even as China pursues its long-promised “market economy status” at the World Trade Organization, Xi’s stewardship continues to demonstrate how far that designation is from reality. And disagreement over that very designation is already stoking trade tensions between China and the West, as the European Union and United States seek to punish China for its dumping of excess steel, and Beijing launches a legal challenge through the WTO to secure market economy status and make such retaliation more difficult.  

It is important to remember, then, that what happens in China won’t stay in China. Beijing’s economic woes, and the decisions Xi takes to deal with them, can rattle world markets and escalate tensions during a politically sensitive moment.  With an incoming U.S. President who has railed against China’s trade practices and promised to “get tough” with Beijing, we could be in for a more combative trade relationship in the years to come.

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  • Andrew Allison

    The big problem here is that, like Russia, as the economy collapses there will be more external Sabre-rattling to distract attention from the fact.

    • JR

      Afraid you hit the nail on the head with this one.

    • Disappeared4x

      China mostly sabre-rattles by building infrastructure in search of resources. Not just artificial islands in the SouthChinaSea, but rail links thru Central Asia and Afghanistan:

      http://indianexpress.com/article/world/world-news/chabahar-corridor-to-give-central-asia-dependable-access-to-global-markets-heart-of-asia-4410274/

      and a copper mine in Afghanistan, where the Taliban have decided protecting infrastructure is better politics than destroying it:

      http://www.dw.com/en/the-taliban-and-chinas-quest-for-afghan-copper/a-36607748
      “…In their statement, the Taliban mentioned motorways, railways and the TAPI pipeline between Turkmenistan and Afghanistan, as well as the CASA-1000 energy project and the Chinese copper mining project Mes Aynak as examples for infrastructure ventures they wanted to protect in the future, because they were in the interest of the Afghan people. Only a day before this statement, Afghan and Turkmen government officials had opened a railway line which is supposed to connect Afghanistan with Europe via Turkmenistan. …”

  • Dale Fayda

    Just waiting for Dhako’s take. Odd that he’s not here yet…

    • Disappeared4x

      Dhako’s handlers roped him in just after DJT took that call from Taiwan’s Tsai. Only seen one Dhako comment here since then, explaining China instead of analyzing America.

      TAI is seeing new Russian commenters. Got my first upvote in Cyrillic.

      • JR

        I’m still partial to Kev. Good old Kev….

      • ——————————

        Perhaps Dhako’s batteries died….

    • f1b0nacc1

      Perhaps they have been paying him in bonds?

  • Angel Martin

    Watch for continuously falling real estate prices. After 2-3 years of falling prices is when you get the big kaboom ! (see Japan 1990 or USA 1929/2008)

  • ——————————

    “China’s latest market panic adds to a growing body of evidence that the Chinese economic model is in serious trouble.”

    TIMBER!!!

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