Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

Bloomberg reports Brazilian Currency Touches Four-Year Low, Prompting Intervention

Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.

“If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.”

Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday.
The currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.”

Real Monthly Chart Shows Intervention Madness



click on chart for sharper image

Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe.

The Financial Times reports Brazil declares new ‘currency war’

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

Check out all these recent reports of Brazilian Real Intervention.

Is this madness or what?

By the way, with the huge slowdown in China (and Chinese demand for commodities plunging), Brazil is going to have a damn tough time stopping the slide in the Real and an equally hard time controlling inflation.

What happened to the alleged nirvana "When the real appreciates, it reduces our competitiveness"?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Epic Glut of Graduates Depresses Wages; Fake Job Offers Taint Hiring Statistics

In response to Pettis on China, Europe, Japan: Bad News for Those Looking for Growth reader "BC" passed on a series of articles about jobs and wages, and matching up graduates with the skills companies seek.

The articles are all in regards to China. Change the names and faces, and the stories sound to me like things you could easily read here.

The problems are universal: too many graduates, trained in fields where there are no jobs or few openings.

Job Prospects for China's Grads Bleak

Business Times says Job Prospects for China's Grads Bleak.

A record seven million students will graduate from universities and colleges across China in the coming weeks, but their job prospects appear bleak - the latest sign of a troubled Chinese economy.

Businesses say they are swamped with job applications but have few positions to offer as economic growth has begun to falter.

The Chinese government is worried, saying the problem could affect social stability, and it has ordered schools, government agencies and state-owned enterprises to hire more graduates at least temporarily to help relieve joblessness.

"The only thing that worries them more than an unemployed, low-skilled person is an unemployed, educated person," said Wei Shang-Jin, a Columbia Business School economist.

Lu Mai, secretary- general of the elite, government- backed China Development Research Foundation, acknowledged in a speech this month that fewer than half of this year's graduates had found jobs so far.

China quadrupled the number of students enrolled in universities and colleges over the last decade. But its economy is still driven by manufacturing, with a preponderance of blue-collar jobs.

Premier Li Keqiang himself led the Cabinet meeting on May 16 that produced the directive for schools, government agencies and state-owned enterprises to hire more graduates, a strategy that has been used with increasing frequency in recent years to absorb jobless but educated youths.

"Any country with an expanding middle class and a rising number of unemployed graduates is in for trouble," said Gerard Postiglione, director of the Wah Ching Center of Research on Education in China at Hong Kong University.

Mish Comment: Well, at least China's middle class is expanding, for now. That's not something we can say here in the US.

Fake Job Offers Taint Statistics

Forbes writes College Grads Are Jobless In China's "High-Growth" Economy

The semi-official Global Times reports that one of China’s hottest businesses at the moment is the forging of employment contracts for students.  Some universities, concerned about the withdrawal of funding due to high unemployment of their grads, will not hand out diplomas before students supply evidence of imminent employment.  The fake contracts, of course, inflate the statistics reported to—and eventually the figures issued by—central educational authorities.

“I just can’t figure out why it’s so hard to get a job this year,” wonders Miranda Zhang, who will graduate from a university in Beijing this spring.

The misery is spread over many fields.  English majors are having a hard time finding work, but so are those receiving degrees in law, computer science and technology, accounting, international trade, and industrial and commercial administration.  In short, Ms. Zhang and her classmates face a tight employment situation partly because the Chinese economy is in fact not moving fast in the much-discussed up-the-value-chain transformation.

Mish Comments: Are fake job offers in China that much different than the University of Phoenix placing someone with a culinary art degree in a job at McDonalds, while padding statistics as a graduate with a job in their field of study?

As for growth in China, forget about it. See the top link if you need convincing.

Chinese College Graduates Play It Safe and Lose Out

The Wall Street Journal reports Chinese College Graduates Play It Safe and Lose Out.

Xie Chaobo figures he has the credentials to land a job at one of China's big state-owned firms. He is a graduate student at Tsinghua University, one of China's best. His field of study is environmental engineering, one of China's priorities. And he is experimenting with new techniques for identifying water pollutants, which should make him a valuable catch.

But he has applied to 30 companies so far and scored just four interviews, none of which has led to a job.

Over the past decade, the number of new graduates from Chinese universities has increased sixfold to more than six million a year, creating an epic glut that is depressing wages, leaving many recent college graduates without jobs and making students fearful about their future. Two-thirds of Chinese graduates say they want to work either in the government or big state-owned firms, which are seen as recession-proof, rather than at the private companies that have powered China's remarkable economic climb, surveys indicate.

Mish Comment: Graduates want to work for State-Owned-Enterprises (SOEs), but SOEs in China are totally out of control, racking up debts that cannot and will not be paid back. SOE need to be dismantled, and they will be (with much pain).

The US equivalent would be hoping to get in on the public union pension-for-life gravy train just as the US public pension system is about to crash.

Employers and Graduates Mismatched

Marketplace.Org has Tales from a Shanghai job fair: Why China's college grads, employers mismatched.

Hundreds of HR managers carefully eye prospective employees who, resumes in hand, crowd the floor at a Shanghai job fair.

Here’s the problem: neither group is interested in each other.

Nicole Li is looking to hire college graduates for her property management company. “We need technicians to fix software problems, but college grads don’t have these skills," says Li, frowning. "We need people for exhibitions who can do presentations in English, but they can’t do that, either.”

Li needs to hire people for 60 high-skilled jobs. She says among the thousands of candidates here today, she’ll be lucky if she finds one.

Tong Huiqin comes to this job fair every Friday. He graduated from the Shanghai Finance University six years ago. Since then, he’s jumped from one job to the next. “It isn’t hard to find a job," says Tong.  "It’s hard to find the right job.”

Tong blames Chinese universities. He says they need to do a better job at preparing people for the country’s rapidly changing labor market.

I turn around and ask 22-year-old Wang Qianmin, who’s about to graduate from Shanghai Normal University with a teaching degree, what she’s looking for at the job fair. "I don’t know," she says with a pout. "Most of the jobs here aren’t really interesting. I’m looking for a company that’ll give me a high salary, money for meals and that’ll pay my rent -- a place where the working hours aren’t too long."

Wang says she wants to be a teacher. Or maybe a wedding planner. She can’t decide.

Mish Comments: These kids have no idea what they want to do, and they blame it on the school for not teaching them.

How is this different than the average liberal arts major in the US expecting the world at their doorstep just because they have a useless degree that prepares them to do nothing more than work as a part-time retail clerk, 25 hours a week, dumped into the Obamacare system?

Yet, we are told education is the answer, without ever addressing the questions "for who? at what cost? in what field?"

These articles were purportedly about China. Change the names and faces and the stories are not much different than you can find right here in the US, in Italy, in France, or anywhere else in a slow-grow global economy.

After growing at an astronomical rate for years, the cost of education is going to plunge. Job statistics will force that outcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Pettis on China, Europe, Japan: Bad News for Those Looking for Growth

Via email here is another update from Michael Pettis at China Financial Markets. What follows is from Michael Pettis.

Special points

• Europe is attempting to resolve domestic imbalances by forcing them onto their trade partners. This will end badly, especially for Germany.
• China’s new lending, exports, investment, housing starts and GDP growth all continued to slow in May. Many of the numbers came in well below market expectations.
• This is par for the course. Although we may from time to time get a “pop” in quarterly growth, the overall trend will be for growth expectations to follow actual growth numbers down for many years. China cannot get credit growth under control at anywhere near current GDP growth rates.
• Even though credit growth slowed more than expected, it is still extraordinarily high, especially for the amount of growth it is generating. Total social financing grew in May by 2.3% of GDP while GDP itself grew by around 0.6%.
• The IMF claims that China’s real fiscal deficit is around 10% of GDP. This limits Beijing ability to expand fiscally.
• Although overall unemployment seems stable, unemployment among university graduates continues to be very high. It is early to say but this might have social implications at some point.

Adjustment Derailed

Away from Europe the US continues slowly to adjust but I worry that this adjustment will be derailed by a weaker external sector. Meanwhile Japan is still struggling with its debt burden and seems to have no real way of resolving it except by forcing down the currency and interest rates, both of which mean that household sector is expected to reduce consumption to support the debt burden without, it seems, any corresponding increase in investment.

In China the good news is that the rebalancing process seems to have become more determined than ever before in the past, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China’s adjustment.

How much slower?

The big worry I have had over the past year is that as China moves to rebalance its economy away from its over-reliance on its investment, with the accompanying investment misallocation, the economy will slow much more quickly than even the reformers expected, so scaring Beijing into backtracking. So far, I am glad to say, this doesn’t seem to have happened.

We keep getting surprised on the downside by the growth numbers, but to anyone who understands the way China’s growth model works and who knows the historical precedents, this should in no way surprise. I don’t think China is yet heading towards an economic crash, but I do think that even current growth rates are too high, and sell-side researchers and the various official entities in China and abroad will continue, as they have in the past, to revise their growth numbers downward almost on a quarterly basis.

And because growth will consistently underperform expectations, many members of the Chinese policymaking elite, and their effective allies among the shrinking but still large contingent of China-bulls, will increasingly argue that the economic rebalancing is being mismanaged, thereby putting pressure on Beijing to go into reverse. This is the real risk. There is no way that China can rebalance its economy even at growth rates of 6-7%, and attempts to keep growth above that level will simply mean that it will take much longer for China to fix the underlying problems in the economy, that the costs will be much greater, and that the risk of a disorderly crisis will increase.

Can China spend its way to growth?

Real debt servicing costs are growing much faster than the debt servicing capacity. Clearly this cannot be sustained. There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article (strangely titled “China doomsayers run out of arguments”).

Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth inn debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.

The slew of economic data released last week will have been much discussed and analyzed in the media so I won’t add much more than I already have. Yes, Chinese growth is slowing, but by now this cannot have been a surprise to any but the most determined of bulls.

Inflation and unemployment

To me far more interesting than these numbers is what has been happening on the inflation front. Consumer price inflation continues to decline, to the extent that you can trust the numbers, but what is really impressive is the producer price index.

The data showed China's producer price index, which measures wholesale inflation, fell 2.9 percent year on year in May, marking the 15th straight month of decline and the steepest drop in seven months.

Part of the decline in PPI is a result of declining commodity prices, of course, which is good overall for Chinese businesses except to the extent that they have stockpiled commodities (although I suspect that direct and indirect stockpiles are pretty high), but this implies that debt servicing costs as a share of total expense must be rising rapidly. China is reducing its heavy financial repression tax on households and subsidies to borrowers, in other words, not by raising interest rates but rather by a sharp decline in nominal GDP growth rates. This, of course, is exactly what should have been expected, and it certainly is the way Japan resolved its own financial repression after 1990.

I am not sure where this leaves us for the rest of the year. Premier Li said on television on Saturday that China’s economy and employment were stable, and that growth was within a “relatively high and reasonable range”, and so it sounds like he is perfectly willing to let growth continue to slow in order to force the economy into a healthier state. I wonder, however, just how much more Beijing can tolerate before we start seeing political friction and rising unemployment.

Last week People’s Daily had an article on unemployment for college graduates that is pretty worrying:

Never before has the nation had so many graduates competing for jobs, particularly when so few are available. As of April 19, less than 30 percent of graduating seniors in Beijing had signed contracts with employers. Shanghai faces a similar situation.

University education used to be the one certain source of upward social mobility in China, but for many students a college education actually now puts you behind in earning power compared to high school graduates who went straight into the work force. I am not sure what social impact this will have, but historically a country with a large and growing population of unemployed college graduates must worry about the political consequences.

Speculation

The explosive growth in Chinese exports at the beginning of this year had very little to do with strong external demand and nearly everything to do with speculative inflows. With borrowing costs in US dollars in the Hong Kong markets roughly two hundred basis points lower than domestic RMB interest rates, large Chinese companies with subsidiaries in Hong Kong were borrowing money in HK and bringing that money illegally into the mainland by over-invoicing exports.

This allowed them to pick up the 200 bp “arbitrage” plus any appreciation in the currency. This, plus the “arbitraging” of credit (borrowing cheaply from banks and lending to businesses that do not have access to credit) is becoming an increasingly important part of the profitability of large businesses, it seems, and that is always a bad sign when “financial engineering” becomes a profit source for businesses. The PBoC has cracked down on this kind of activity, but it should remind us just how porous China’s capital controls really are. Huge amounts of money have been able to enter and leave the country.

In the mean time let’s see how many more months of declining growth numbers Beijing can tolerate before we see steps to accelerate growth. Complaints by disappointed bulls notwithstanding, the longer Beijing waits, the better for China in the medium term.

END PETTIS

Thanks Michael.

If you have not yet read his book, "Great Rebalancing", I suggest it's well worth a look. Here is my review: "Great Rebalancing" Book Review: Two Thumbs Up; Investment Ideas for Unconventional Times.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com