China has developed a serious capital outflow problem which has developed and gotten progressively worse over the past year. It most likely reflects the significant slowdown in the country’s exports growth, reducing the incentives for foreigners to invest in Chinese manufacturing capacity. In addition, the end of the property boom in China, combined with the anti-corruption campaign, may be causing more Chinese to invest abroad. Let’s have a look at the most recent data:

(1) Exports & imports. Merchandise exports have stalled around $2.3 trillion (saar) since early 2013). Imports also stalled starting in early 2013 and turned weaker this year.

(2) PPI, profits, & output. The trade surplus (in dollars) has widened to a record high because imports have been weaker than exports. However, both suggest that foreign investors are finding fewer good opportunities in China, especially since there has been a glut of manufacturing capacity, as evidenced by the 42 consecutive months of declines in the PPI. This pervasive deflation suggests that profits are hard to come by in China, which explains why the growth rate in industrial production has plunged from a record high of 20.7% y/y during February 2010 to only 6.2% during August.

(3) Retail sales & stock prices. Inflation-adjusted retail sales rose 8.8% y/y during August. The days of double-digit growth seem to be over. The recent boom and bust in the stock market probably didn’t directly impact very many Chinese, but it can’t be good for consumer confidence.

(4) Social financing. Over the past 12 months through August, China’s bank loans are up 15.7% (Fig. 13). A year ago, when the Chinese government was hoping to make the economy less dependent on debt, this growth rate was 13.3%. Over the same period, total social financing, which includes bank loans, rose $2.5 trillion.

China’s economy seems to getting a lot less bang per yuan for all this debt partly because of the worsening of its international capital account.

Today's Morning Briefing: China: Warning Label. (1) International reserves data: Use with caution. (2) Soaring dollar depressing dollar value of international reserves, exports, and lots of other global indicators. (3) Practice what you preach. (4) Capital flow proxy for China, adjusted for strong dollar, still showing big net outflows. (5) The Great Stall of China. (6) China’s exports have lost their mojo. (7) Foreigners see less reason to invest in China, while Chinese see more opportunities abroad. (8) China is getting much less bang per yuan of social financing as a result of capital outflows. (More for subscribers.)

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What’s in a name?

An entire sea, says Chinese Vice Admiral Yuan Yubai.

On Sept. 14, at a defense conference inLondon, Yuan said that “the South China Sea, as the name indicates, is a sea area that belongs to China,” according to defense media.

The commander of the Chinese navy’s North Sea fleet added that the vast waterway has been Chinese from the time of the Han dynasty, which ruled from 206 B.C. to A.D. 220.

China claims nearly all of the South China Sea’s rocks, shoals, reefs and islets as its own, carving out the waterway with a so-called Nine Dash Line that extends southward toward Borneo to include 2 million sq km of sea.

However, five other governments — those of Taiwan, Vietnam, Malaysia, Brunei and the Philippines — are also vying for ownership of various bits of sand and rock in the resource-rich waters.

Maritime clashes over these shoals and reefs have, over the decades, claimed dozens of lives.

Tensions have escalated again over the past 18 months, as China has expanded the disputed territory it controls by reclaiming land around tiny islets. While other countries have also engaged in island-building, China’s efforts far outstrip those of other claimants.

Defense analysts believe the People’s Liberation Army will be able to land fighter jets on these artificial islands, turning them into what U.S. Pacific Command commander Admiral Harry Harris characterized as potential forward operating bases during possible combat situations. This summer Harris called China’s island expansion “changing facts on the ground [by] essentially creating false sovereignty.”

While the U.S. says it takes no side in the dispute, Washington has defended freedom of navigation in the South China Sea and has called on Beijing to try to resolve territorial disputes through international arbitration. This summer, in fact, the Philippines took China to court in the Hague, through the U.N. Convention on the Law of the Sea. But China has refused to participate in the court proceedings, arguing that the South China Sea dispute is not covered by the U.N. treaty.

Meanwhile, there is no word as to whether Vice Admiral Yuan thinks the Indian Ocean belongs to India — or the Gulf of Mexico to Mexico — simply because of their names.

SEE ALSO: China is continuing to militarize the South China Sea despite promising to stop

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NOW WATCH: China has been upgrading its military and is now stronger than ever

Beijing to the world: Jump on in, the water's fine.

That was the message out of China Tuesday as officials laid out plans to reform the country's debt-laden, mostly state-backed corporate sector.

This reform was always in the cards as part of China's New Normal plan to move its economy from one based on foreign investment to one based on domestic consumption.

According to the plan, the government sells off assets that are "zombifying" companies, steps away, privatizes, and allows the market to have a free hand.

The thing is, no one thought this massive reorganization would have to be done with the Chinese economy sending out warning flares as it is now.

Ideally, the corporate sector was supposed to undergo this reform with GDP growth humming along at a pretty 7%, with a booming stock market, and a stable currency.

But that's not what China looks like right now. In fact, it looks like the opposite.

As a result, China's statements about foreign investment in its evolving corporate sector are incredibly confusing. On the one hand, the government wants to continue on a path that limits foreign investment in favor of domestic ownership.

On the other hand, China needs cash.

An invitation

"China should be committed to attracting foreign investment and expertise and improve opening-up policies," President Xi Jinping said Tuesday, addressing the 16th meeting of the Central Leading Group for Deepening Overall Reform.

Sounds good. This doesn't sound like the New Normal, but fine. More foreign investment. Everyone in the China pool.

Conversely, in the same statement Xi also said that his "government will not change its policy toward foreign investment."

Under those unchanged policies, foreign direct investment in China declined 26% in the first half of 2015. Investors know that they're invited, but they're not attending the party.

Confused? Understandable. On the one hand, Xi's saying that the country will improve its policies and open up to the world (please send us money).

But on the other hand, he's saying China's policies on foreign investment will stay the same (the state is still going to have a heavy hand in the market). The party will continue as usual.

That dissonance is also clear in the reform plan the government outlined. The reform process will consist of the government choosing which underperforming assets of so-called "zombie companies" will be sold.

That money "will be used by companies that need it more," said Zhang Xiwu, deputy chairman of the state-owned Assets Supervision and Administration Commission.

Of course, the government will determine what "need" means.

It will also develop a "negative list" of sectors that are forbidden to investors.

So why the double talk? It all boils down to the fact that China is going to need the world's help with this one. And that is because everything it was depending on to make this reform process work has fallen apart in the last few months.

Summer happened

See, the ideal situation for China would have been to finance this reform process domestically. That is why for the last year and a half the government encouraged regular Chinese people to get into the stock market.

As a result, until June, both mainland indices — The Shanghai Composite and the Shenzhen — exploded 150%. It was exactly what the government wanted. Companies were able to raise capital with ease. They had the cash to handle their debt loads while reorganizing assets.

Then on June 12 the stock market started to fall apart. Total bloodletting. Now, the Shanghai Composite — which had been up 60% year-to-date before the crash — is down over 7% for the year.

China's markets are still whipsawing. The government did everything it could to stop the bleeding. It froze IPOs and new share issues, went after "malicious" actors — think: short sellers — in the markets, and has thrown at least $240 billion at the markets since June.

Debt is still an issue, guys

What's more, China devalued its currency August 12. This is key because it means any dollar- or euro-denominated debt companies are holding is now more expensive.

And they're holding.

Bloomberg estimates that China's $529 billion in offshore euro- and dollar-denominated debt jumped by $10 billion after the yuan was devalued by 1.9%. At this point, the yuan has now depreciated by about 4% against the dollar.

The government has promised to defend that position, but in August alone doing so cost it up to $110 billion according to analysts at Société Générale. It can't maintain the yuan forever, and the fact that the government had to use so much money to defend it for half a month shows that market forces are trying to drag it down.

Meanwhile, China's corporate sector is still struggling with PPI deflation, which means profit margins are thinning. Debt was already getting hard to pay back.

Don't you want in?

It's not like investors don't know this stuff already. Confidence in China's ability to navigate this period is at an all-time low. Hard-landing-scenario news stories are everywhere now.

Plus, indicators from fixed asset investment (down to 9.2% in August) to industrial production (up only 0.1% in August to 6.1% — expectations were for 6.5%) have disappointed across the board.

That's especially worrisome, since the the government ratcheted up stimulus, with on-budget spending up 27.1% year-on-year in July and 28.4% year-on-year in August. It's spending the cash, but the economy isn't responding yet.

This is the worst-possible time for China to ask foreign investors to jump in, but it doesn't really have much of a choice if it wants to get on with this already.

SEE ALSO: China just gave the game away

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NOW WATCH: The startling theory about why Chinese people save so much more than Americans

The chief of China's largest brokerage firm is now being probed by authorities in the country, according to Kyoungwha Kim and Alfred Liu at Bloomberg.

Cheng Boming, the president of Citic Securities Co., is the latest executive at the firm to be probed by the government.

According to state-run Xinhua News Agency, managing directors Xu Gang and Liu Wei have already admitted to illegal trading and the spreading of false information.

Citic Securities is part of Citic Group, a state-owned investment corporation.

The Chinese government has been searching for the "source" of market panic — targeting "malicious" short sellers. 

Shares of Citic Securites have fallen more than 60% since April, Bloomberg reported.

Read the full Bloomberg article here.

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NOW WATCH: Here are some incredible toys hedge fund boss Steve Cohen has bought with his billions

The parlor game of the moment is laying odds on the Federal Reserve’s decision to raise rates, leave rates unchanged, or (gasp!) hint at future stimulus. There are certainly a multitude of inputs to the Fed’s decision, and a variety of potential consequences, but only one really matters: the effect on foreign exchange/currency markets.

It’s not that difficult to understand the one dynamic that matters. If the Fed raise yields/interest rates in the U.S., that makes the U.S. currency, i.e. the U.S. dollar (USD), more attractive.

Higher yield = more attractive, especially when coupled with the liquid market for U.S. Treasuries and the relative safety of the dollar vis a vis other currencies issued by falling-into-recession nations and trading blocs.

What happens when the Fed makes the USD more attractive to global capital? Capital flows even faster out of emerging economies and China. The tidal flow of capital out of emerging markets and China threatens to surge into a veritable tsunami should the Fed raise rates.

What happens as capital flees emerging markets and China? Bad things. Lots of bad things.

Number 1 Bad Thing: The currencies of emerging market nations weaken as capital flees, forcing the issuing nations to defend their currencies (a losing proposition, as we saw in the Asian Contagion of 1997-1998) or devalue their currencies.

We caught a whiff of what happens when China is forced to devalue the RMB/yuan–global markets went into a free-fall.

Number 2 Bad Thing: Investors sell emerging market stocks and bonds to escape the downside of currency devaluation. This crushes the stock and bond markets in emerging economies–and China, however you wish to categorize it.

Number 3 Bad Thing: Investment in emerging market economies dries up.

Global growth largely depends on the rapid expansion of emerging economies, which in good times can grow 5% to 8% annually, while developed economies register 1% or 2% growth at best.

Once capital flees, investment in fast-growing economies dries up and as a result, so does growth. The inevitable result is a global slowdown, a.k.a. global recession.

Number 4 Bad Thing: As the dollar strengthens versus emerging market currencies, a self-reinforcing feedback loop is established: the more the USD rises, the more capital flees emerging markets, pushing those currencies down, which then forces more liquidation of stocks, bonds real estate, etc. denominated in those depreciating currencies.

The USD strengthening since last July is the core driver of the global recession.Is the Fed insane enough to deepen the global recession by raising rates and pushing the U.S. dollar even higher? Who wins if the USD strengthens due to the Fed raising rates?

In a globally interconnected economy, nobody wins.

SEE ALSO: China has a capital outflow problem

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SINGAPORE/CAIRO (Reuters) - China is trying to sell two submarines to Egypt that are cheaper than vessels on offer from Germany, industry sources told Reuters, as Beijing looks to expand weapons exports beyond its traditional customer base in Asia.

Beijing has sought to undercut Western submarine makers on price and by offering attractive export-credit terms for sales in Asia, the sources said. It has won deals with Pakistan and Bangladesh so far.

China displaced Germany as the world's third-largest arms exporter, the Stockholm International Peace Research Institute (SIPRI) said in March, though nearly 70 percent of those weapons went to Pakistan, Bangladesh and Myanmar.

An Egyptian military source said China had offered to sell submarines to Cairo.

"We are studying it, but it is not an easy decision," said the source, who declined to give details or be identified because he was not authorized to talk to the media.

An Egyptian military spokesman said he "had no official details" on the issue. China's Defense Ministry did not respond to a request for comment.

Two industry sources familiar with the matter said Cairo wanted two more submarines after ordering an initial two from ThyssenKrupp Marine Systems (TKMS) of Germany in 2011 that are set to be delivered in 2017. TKMS has been in talks with Egypt for the additional two, they said.

While TKMS declined to comment, Germany's Economy Ministry said it had authorized the construction of the two additional submarines for Egypt.

In a sign of developing ties, German company Siemens signed an 8 billion euro ($9.05 billion) deal with Egypt in June to supply gas and wind power plants.

Beijing had asked Egypt to consider its newer submarines as a lower-cost alternative, the sources said, adding they did not know the type of vessel China had offered or the precise pricing terms.

"Submarines are definitely on the cards, even though Egypt has been talking to Germany about the additional boats for a while," said one of the industry sources.

Chinese submarines are built by Wuchang Shipbuilding, which is part of state-run China Shipbuilding Industry Corp [CSBIC.UL]. Neither company responded to a request for comment.

LONG HISTORY

China and Egypt have long had friendly ties, and China supplied Egypt with four Ming-class diesel-electric submarines in the 1980s.

Egyptian President Abdel Fattah al-Sisi told Chinese President Xi Jinping during a trip to Beijing in December that he wanted more military and security cooperation with China, according to the official Chinese account of the meeting.

Xi made similar comments to Sisi when the Egyptian leader visited Beijing this month to attend a military parade marking the 70th anniversary of the end of World War Two. Chinese and Egyptian warships also held their first joint naval drills this month.

Sina News, a popular Chinese news site regulated by the government, said in a commentary last month that China's submarine builders must "make preparations" to meet growing demand from Egypt and other countries in Africa.

China was Egypt's best option for buying submarines because of Cairo's budget constraints, it said.

Pakistan approved a deal to buy eight submarines from China earlier this year, while Beijing has also sold two submarines to Bangladesh.

In July, Thailand put on hold a plan to buy three Chinese submarines, citing the need to evaluate if its navy really needed the vessels.

China operates a fleet of some 70 submarines, allowing Beijing to project power throughout Asian waters.

PRICE IS RIGHT

China was proving a tough competitor for Western defense contractors in submarine tenders, the second industry source said.

"Their prices are much lower ... and the Chinese export credit terms are extremely attractive for military products," said the source, declining to be identified because of the sensitivity of the issue.

Security experts said they believed China was mainly offering a version of its Song-class submarine for sale on international markets. The vessel is a modern diesel-electric attack submarine that experts say incorporates Chinese adaptations of German and French systems.

The larger and newer Yuan class boat has a Chinese-designed air-independent propulsion system, according to Chinese news reports, which means it doesn't need to surface as often as other diesel submarines. It also has a smaller acoustic signature, making it harder to detect.

Several experts, however, questioned how capable the propulsion systems and batteries are, and if they have kept up with Western submarines.

The Chinese might not have the best submarines on the market, but price was important for developing countries such as Egypt, said Richard Bitzinger, a regional security expert at the S.Rajaratnam School of International Studies in Singapore.

"It may be a challenge to coordinate operations when you have submarines manufactured by different countries, but that is not a concern for these developing countries as they are more bothered about what is the best deal for them," he said.

($1 = 0.8843 euros)

(Reporting by Siva Govindasamy and Ahmed Mohamed Hassan, with additional reporting by Ahmed Aboulenein in CAIRO, Megha Rajagopalan and Ben Blanchard in BEIJING, Georgina Prodhan in FRANKFURT and Gernot Heller in BERLIN; Writing by Dean Yates; Editing by Ian Geoghegan)

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As economic growth slows in mainland China, policymakers are left with only two choices - hard landing or a financial crisis, Kevin Lai, Daiwa Capital Markets' chief economist for Asia ex-Japan, warned yesterday.

Lai said rounds of monetary easing, doubts over the true level of overseas debt held by domestic companies, and a strengthening US dollar on the horizon meant the world's second-largest economy was coping with thornier issues than headline figures suggested. His long-held pessimistic views on China have earned him the nickname "Yuan Bear" and, two years ago, he was among the first to predict the yuan's depreciation.

"The debate in the market now is between a soft landing and a hard landing," Lai said. "But I think the real debate should be either a hard landing or a possible financial crisis."

In his latest report - "Crowded entry, jammed exit" - Lai slashed his target for the yuan from 6.83 to 7.50 against the US dollar by the end of 2016.

That contrasts with more positive views in the market. On Monday, ING raised its yuan forecast against the US dollar to 6.40 from 6.55 by the end of the year, citing the recent firming trend of the currency, as well as Premier Li Keqiang's soothing remarks at the World Economic Forum in Dalian last week.

Analysts at Capital Economics also noted on Monday that signs were emerging that economic activity would improve, with more fiscal spending and credit growth on the cards. "While China is still undergoing a structural slowdown as part of its transition toward a more consumption-driven economy, we believe that the short-run downside risks are overstated," they said.

Lai said the People's Bank of China has followed the US Federal Reserve in easing monetary policy since the global financial crisis, with most of the additional US$3 trillion printed by the PBOC between August 2008 and July 2015 having been used to purchase US bonds, allowing companies and individuals to borrow US dollars at ultra-low cost.

The result of such leverage was that the true level of overseas debt held by mainland Chinese entities could be much larger than expected. Lai estimated the real US dollar debt raised by mainland entities should be close to US$3 trillion, rather than the US$1 trillion shown in Bank of International Settlement data on cross-border claims to emerging economies.

"Hong Kong and Singapore have amassed a large pile of dollar debt over the past six to seven years," he said. "Why would such small economies need so many debts? They are essentially raised by Chinese companies' offshore subsidiaries."

Beijing had been fighting capital outflows, as shown by record falls in recently released foreign currency reserve and forex purchase position data. The intervention was risking a credit crunch, Lai said, as the mainland's monetary base has been declining in recent months despite rounds of rate reductions.

Using foreign exchange to defend the yuan from depreciating called on the PBOC to print more money, which would in turn put more downward pressure on the yuan, he said. Letting the yuan slide would sharpen capital outflows and likely result in enormous defaults on US dollar debts. Lai said those were the trade-offs that Beijing had to consider.

"Policymakers are running out of ammunition," he said. "The end-game for China is either domestic debt deflation or a currency crisis. But China could also muddle through, which we think is the most likely case.

"In such a scenario, the government would try to manage an 'orderly' downward adjustment for the yuan, and in the meantime slow the pace of monetary easing. But this will also mean tightening capital controls."

SEE ALSO: China has a capital outflow problem

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Following the weakness on Monday and Tuesday, and after languishing for most of the day in quiet trade, stocks in Shanghai on Wednesday staged another late rally in trade to finish up 4.90% and record their biggest gain since late August.

Volumes and trade were light for most of the day until the last hour of trade, when the buying ignited and the market roared 147 points to close at 3,152.

Every sector of the Shanghai Composite was higher, and Reuters reports that more than 1,000 stocks closed limit up at 10% on the day. Stocks in the CSI300 index were also higher, rising 4.98%, while shares in Hong Kong posted a more subdued 2.69% gain.

It's not clear what drove the surge in the indexes, but late rallies have become common with China's so-called national team of financial institutions corralling their resources to support stock prices.

The South China Morning Post reported that authorities were considering easing restrictions on margin lending that were introduced when the market started crashing. If it goes ahead, it will inject significant extra liquidity into the market.

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NOW WATCH: Forget work-life balance and focus on inner balance

Goldman Sachs CEO Lloyd Blankfein has been bullish on China for years, but at a briefing hosted by The Wall Street Journal on Wednesday morning he slammed the country's handling of market forces as amateurish.

Blankfein said it was a "ham-handed way they dealt with the collapse," referring to government intervention when the country's stock market collapsed twice this summer.

"They don't have a lot of experience at this market stuff."

These are the harshest words about the Chinese economy we've heard from the generally optimistic Blankfein, and they get to the heart of how investors' views on China have changed over the past few months.

Investors are starting to question how the Chinese government is managing its unique system.

But back to Blankfein. In an interview with Bloomberg TV back in July, he sounded more like his usual bullish self and asked host Stephanie Ruhle:

"Just as a thought experiment, thinking in the short-term and long-term, if I said you have to — Would you invest in China for the next year? — think of your answer to that question. And then if I said to you, you had to invest within, for 20 years, but you couldn't touch it for 20 years — it was for your children — would you invest in China for the next 20 years?"

His point was that China was a great investment opportunity. That's the standard line.

Back in 2013, when Goldman sold its stake in Chinese bank ICBC, he went on a media tour reiterating the bank's bullish stance on the country's future.

A year later, he told Charlie Rose that China's rise already meant a new world order.

"Well, you know, you can look at it in the worst terms," he said. "US has a competitor. In the best terms, there's no locus."

But on Wednesday he sounded less optimistic, painting a picture of a clumsily managed economy.

China is focused on "10% growth at any cost," he said.

It's a target out of reach for the foreseeable future. Most Wall Street analysts have Chinese gross-domestic-product growth sitting at around 6.5%. Others say it's actually somewhere around 4% to 5%.

Blankfein continued: "They'll put a smoke belching factory in the middle of a city ... In China, when they want to pump up their economy ... they build 82 airports."

He added that 30 of them would be in the wrong location.

Blankfein has always recognized that this way of allocating resources for growth is fundamental to the Chinese model. The question now is whether it's a model the government can manage effectively.

At the briefing on Wednesday, one attendee asked Blankfein about China's role as the biggest holder of US debt. He responded that he would rather the Chinese have a stake in America's future than vice versa.

"I'd rather they hold our debt than we hold their debt," he said. "I'd rather owe money to the Chinese; they have a stake in our success. During the financial crisis they were worried about us. We weren't worried about them."

But a lot of things have changed since then.

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NOW WATCH: A deadly Wall Street bombing still remains unsolved 95 years later

Didi Kuaidi, Uber's No. 1 rival in China, holds the majority share of the Chinese market, and it's heavily armed with venture capital money — the ride-hailing company just closed a massive $3 billion round of funding last week.

But two documents  — first surfaced by the Financial Times last week and also seen by Business Insider — appear to show that while Didi Kuaidi is growing fast throughout the country, it's spending buckets of money getting drivers on board.

One of the documents appears to be a pitch deck, the other a document that an outside accounting firm put together. The documents did not come from Didi, and Didi had no comment on the documents or the numbers in them. 

An unusual definition of "net revenue"

Didi Kuaidi was created in February, when competing apps Didi Dache and Kuaidi Dache merged to cut the costs of competing with each other — and more importantly, with Uber. Didi Kuaidi is currently outstripping Uber in company size — Didi has about 4,000 employees, and Uber employs about 200 in China, according to the Wall Street Journal.

According to the financial report obtained by Business Insider, which breaks down revenues and losses for Didi Dache and Kuaidi Dache, each entity recorded operating losses for $305 million and $266 million, respectively, in the first five months of 2015.

It's not unusual for a growth-stage company to operate at a loss. It certainly doesn't mean the company is in danger. Many tech companies that raise a lot of money aren't profitable, and many go public while they're in the red.

The companies' "net revenues" for the same time frame were $141 million and $44 million, respectively, according to the document.

But those "net revenue" numbers seem a little odd. According to numbers in both the PwC report and the investor deck, the company is calculating revenue by looking at gross bookings, without subtracting driver subsidies. That could be misleading to investors. (Uber, in private presentations leaked to various media outlets, deducts driver payments from net revenues.)

Also, the business seems to be spending a lot of money getting drivers on board — Didi Dache spent $227 million on driver payments and subsidies in the first five months of 2015, according to the document. That's more than the $141 million it collected from all trips.

Kuadi Dache spent $103 million on driver payments and subsidies, versus the $44 million it collected from all trips.

Only half of requested trips are completed

The investor deck shows Didi Kuaidi is growing like crazy in China — between August 2014 and May 2015, Didi Kuaidi's private car requests grew 16 percent every week.

The investor deck also shows that Didi Kuaidi's request-to-complete ratio is approximately 50 percent, meaning that just 50 percent of trips that are requested on Didi Kuaidi's platform are completed.

In addition, according to its investor deck, Didi Kuaidi cites "requests" instead of "trips," which accounts for requested trips that weren't fulfilled or completed. This could be artificially inflating Didi Kuaidi's volume of business.

Competition in China is fierce

Uber's three most popular cities — Guangzhou, Hangzhou, and Chengdu — are all in China. And Uber’s service is taking off in China much faster than it did in the US; nine months after launching in Chengdu, Uber had 479 times the trips it had in New York after the same amount of time.  

Uber's China branch recently closed a $1.2 billion round of funding. Uber is aggressively expanding its Chinese footprint, with plans to operate in 100 more cities in the country in the next year.

Interestingly, Didi Kuaidi also reportedly invested in Lyft — Uber's biggest US rival — earlier this year, The Wall Street Journal reports. Citing sources close to the matter, The Wall Street Journal reports that Lyft has "discussed ways to work with its Chinese investors to compete strategically with Uber, including sharing product plans."

Didi Kuaidi says it controls 80 percent of China's ride-hailing market. Meanwhile, Uber CEO Travis Kalanick recently said Uber has increased its market share in China from one percent to "30 to 35 percent market share." Market share inherently can't exceed 100 percent, so at least one company is being overly optimistic with its estimates.

SEE ALSO: Here’s everything you need to know about Uber's plan to turn China into its biggest market

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SHANGHAI (Reuters) - China is asking some U.S. technology firms to directly pledge their commitment to contentious policies that could require them to turn user data and intellectual property over to the government, The New York Times reported.

Citing unidentified sources, the report said Beijing had distributed a document to some U.S. firms earlier this summer asking them to promise they would not harm China’s national security and would store Chinese user data within the country.

The NYT report, which comes just ahead of President Xi Jinping's first state visit to the United States, did not identify which companies had been asked to make the pledge.

The document also asked the companies that their products be "secure and controllable", a phrase that industry groups said could be used to force companies to build so-called back doors that would allow third-party access to systems, it said.

Officials at the Cyberspace Administration of China did not respond to a faxed request seeking comment.

Sources told Reuters last month that China had resumed work on a set of banking cyber security regulations it suspended earlier this year.

The previous regulations - containing provisions that required Chinese banks to buy more domestic IT equipment and Western tech vendors to disclose secret source code if they sell to lenders - drew strong protests from foreign business lobbies, the U.S. and European governments.

China regulators suspended the plan in April, saying they would consider feedback from domestic banks. The suspension was seen as a diplomatic victory for the Obama administration, coming shortly after visits to Beijing by Treasury Secretary Jack Lew and Commerce Secretary Penny Pritzker.

In July, China's legislature adopted a sweeping national security law that said all key network infrastructure and information systems must be "secure and controllable".

(Reporting by Kazunori Takada; Additional reporting by Adam Jourdan; Editing by Paul Tait)

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TOKYO (Reuters) - The head of Sony Corp's gaming division said sales of PlayStation 4 in China were challenged by strict censorship rules, showing the country remained a tough market even after it ended a ban on foreign gaming consoles last year.

"We are still challenged somewhat with a censorship regime that we have to work with. This can be time-consuming," Andrew House, chief executive officer of Sony Computer Entertainment, told Reuters in an interview on Thursday. "The challenge is to work with their censorship constraints."

Sony started selling PlayStation 4 consoles in China in March, hoping to capitalize on the end of the 14-year ban. But Beijing's tough censorship rules have limited the number of gaming titles. 

(Reporting by Makiko Yamazaki and Reiji Murai; Editing by Chang-Ran Kim)

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The Bank of England has a great post on its Bank Underground blog which helps explain just how big the Chinese stock market rout is.

The post, by Fergus Cumming in the Bank’s Monetary Assessment and Strategy Division, breaks down the £1.7 trillion ($2.6 trillion) wiped off the Shanghai and Shenzhen Composite indexes in the initial 22-day summer market rout this year.  

The scale of China, and the amounts of money flowing in and out of the market, is truly mindboggling. 

The £1.7 trillion loss is equivalent to:

• the total value of goods and services produced in the United Kingdom in 2013
• more than the total outstanding stock of lending to UK households
• more than a third of the value of all gold that has ever been mined
• more than double the value of Euro notes and coins in circulation
• seven and a half times the nominal value of outstanding Greek government debt

Perhaps even more incredible is the £3.6 trillion ($5.6 trillion) the Chinese markets added in the 12 month run-up to the June.

In that one year, Chinese markets grew by a bit more than the combined market capitalization of every single company listed on the Japanese stock market.

Here's what that looks like:

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HONG KONG (Reuters) - China's apparent construction of a third airstrip on its man-made islands in the disputed South China Sea could fill a gap in Beijing's anti-submarine defenses, complicating operations for the U.S. Navy and its allies, Chinese and Western experts said.

While most attention has been on the power projection China would get from its new islands in the Spratly archipelago, China could also use them to hunt rival submarines in and beyond the strategic waterway, they said.

Possessing three airstrips more than 1,400 km (870 miles) from the Chinese mainland would enable Beijing to extend the reach of Y-9 surveillance planes and Ka-28 helicopters that are being re-equipped to track submarines, the experts added.

A Pentagon report in May noted China lacked a robust anti-submarine warfare capability off its coastline and in deep water.

Strengthened anti-submarine capabilities could also help China protect the movements of its Jin-class submarines, capable of carrying nuclear-armed ballistic missiles and which are at the core of China's nuclear deterrence strategy, said Zhang Baohui, a mainland security specialist at Hong Kong's Lingnan University.

"That would provide greater security for China's nuclear submarines to survive ... and if necessary to execute their orders in wartime," Zhang told Reuters.

"They would be safer than in open oceans where China cannot provide adequate support."

The artificial islands, built on seven reefs over the last two years, will be high on the agenda when Chinese President Xi Jinping has talks with President Barack Obama in Washington next week.

Washington has criticized the reclamation and construction.

China, increasingly confident about its military firepower, has repeatedly stressed it has "indisputable sovereignty" over the entire Spratlys, saying the islands would be used for civilian and undefined military purposes.

Foreign Minister Wang Yi on Wednesday said "necessary" construction work would improve conditions on the islands.

TRIANGLE OF AIRSTRIPS

Satellite photographs show construction is almost finished on a 3,000-metre-long (10,000-foot) airstrip on Fiery Cross Reef.

Recent images showed Subi Reef would also have a 3,000-metre airstrip, Greg Poling, director of the Asia Maritime Transparency Initiative at the Center for Strategic and International Studies think tank in Washington, said on Monday.

Poling, citing images taken last week, said China also appeared to be doing preparatory work for an airstrip on Mischief Reef.

Together, the three islands form a rough triangle in the heart of the Spratlys, where the Philippines, Vietnam, Malaysia, Brunei and Taiwan all have competing claims.

While a noisy and relatively shallow operating environment for submarines, the South China Sea has several deep water channels giving access to the Indian and Pacific oceans.

Asked if Washington was concerned the airstrips would enhance China's anti-submarine capabilities, a Pentagon spokesman, Commander Bill Urban, said the United States was monitoring events in the South China Sea.

In a speech on Wednesday, U.S. Defense Secretary Ash Carter said the United States would "fly, sail, and operate wherever international law allows".

"Turning an underwater rock into an airfield simply does not afford the rights of sovereignty or permit restrictions on international air or maritime transit," Carter told a U.S. Air Force conference.

One mainland-based naval analyst said China was trying to improve sonar and other detection equipment carried aboard its Y-9 patrol planes and Ka-28 helicopters.

China was also expected to put detection devices on the seabed around the new islands, creating "an electronic gateway", he added.

NUCLEAR DETERRENCE

Zhang has previously said ballistic missile submarines are more important for China's nuclear deterrent than other powers given Beijing's policy, dating back to the 1960s, of only using nuclear weapons if attacked with them first.

This means China's land-based weapons would be vulnerable to a first strike if Beijing stuck to its "no first use" policy in a conflict.

Chinese media and international military blogs this year have shown photographs of Jin-class submarines operating from a naval base on Hainan Island off southern China.

It's unclear if they have been armed with long-range JL-2 nuclear ballistic missiles.

The Pentagon report said four Jin-class submarines were operational, with a fifth expected to be added.

"China will likely conduct its first (submarine) nuclear deterrence patrol sometime in 2015," the report said.

The importance of that deterrence means China is likely to eventually impose an Air Defence Identification Zone (ADIZ) over part of the South China Sea, security experts say, mirroring its declaration of such a zone over the East China Sea in late 2013.

In a return to Cold War-style cat-and-mouse operations undersea, rival submarines were already trying to track each other, said Western and Asian naval officers with experience of anti-submarine warfare.

They said the United States would be trying to identify and track individual Chinese submarines, just as it stalked then-Soviet Union missile submarines across the Pacific and Atlantic oceans during the Cold War.

Japan's ultra-quiet diesel-electric submarines were also increasingly active while, over time, Vietnam's emerging fleet of advanced Russian-built Kilo-class submarines would be another headache for China.

"We're looking at them, and now increasingly they are looking at us," one retired Asian-based naval officer said of China's growing undersea operations. 

(Reporting by Greg Torode in HONG KONG; Additional reporting by David Brunnstrom and Andrea Shalal in WASHINGTON; Editing by Dean Yates)

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Resource investors, take note: By 2025, just 10 years from now, energy consumption in Asia will increase a whopping 31 percent. A whole two-thirds of that demand, driven largely by China and India, will be for fossil fuels, most notably coal.

That’s according to a new research piece by financial services group Macquarie, which writes that the estimated rise in fossil fuel demand is equivalent of “three times Saudi Arabia’s current (all-time-high) oil production.”

Macquarie’s research is in line with BP’s “Energy Outlook 2035,” released earlier this year, which predicts that more than half of the world’s energy consumption will come from China and India by the year 2035.
It’s true that coal demand in China has declined a huge 6 percent so far in 2015, the result of anti-air pollution laws that temporarily restricted not just coal use but also factory operations and the amount of driving you can do. Last month I shared a striking photo of a man cycling through Beijing, a brilliant blue sky overhead—something I’ve personally never seen in my 25 years of visiting the city. As most people know, Beijing is notorious for its noxious yellow haze, and the government has been pressured lately to act. In Shanghai, authorities plan to close and relocate 150 factories in preparation for the proposed Shanghai Disneyland, the thinking being that the “Happiest Place on Earth” must have clear blue skies. Many readers might approach this news with a healthy dose of skepticism. Haven’t we been told that fossil fuels are falling out of favor? Aren’t governments placing caps on coal use to appease environmentalists and climate change crusaders?

I think we all agree that clean air is preferable to smog, but there needs to be a balanced approach to environmental policy that’s also business-friendly.

“Coal producers within China are definitely facing a consistent push by the government for clean energy,” says Xian Liang, portfolio manager of our China Region Fund (USCOX).

To get a better sense of the biblical quantity of raw materials China currently consumes, check out this infographic courtesy of Visual Capitalist.

Can India Pick Up China’s Slack?

Today, China and India collectively consume about 60 percent of all coal produced in the world. In absolute terms, consumption is expected to continue expanding as their populations balloon and the energy-thirsty middle class expands. In other words, as the energy pie gets much bigger, each slice should likewise grow.

By 2025, Macquarie writes, coal will still play a dominant role in China’s energy mix.

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

"Although all energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans."

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

Follow the Smart Money

With prices at multi-year lows and coal producers under pressure, some big name investors have used this as an opportunity to accumulate shares in depressed stocks. Recently I shared with you that influential billionaire investor George Soros just took a $2-million position in coal producers Peabody Energy and Arch Coal.

Maybe he’s on to something, if Macquarie’s research turns out to be accurate.

No one can deny that fossil fuels, and coal in particular, face many headwinds right now, including government policies intended to limit their use. The strong U.S. dollar has created havoc for commodities such as oil and coal, just as it has for American companies with business activities in foreign countries. And with many central banks around the globe continuing to devalue their currencies against the dollar, a strong greenback might be the “new normal” for a while.    

Also like oil, coal is facing oversupply issues, as producers had not anticipated a slowdown in emerging markets.

But there and elsewhere, coal will continue to play a vital role in providing affordable, reliable energy for decades to come.

SEE ALSO: The oil age will end before the well runs dry

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The biggest interest rate policy announcement in years is almost here.

At 2:00 p.m. ET on Thursday, the Federal Reserve will announce the outcome of its two-day monetary policy meeting, and they will reveal whether or not they chose to raise interest rates for the first time in nearly a decade.

When it comes to the Fed's decisions, its main concern is the US economy. So often times it downplays what's happening overseas.

However, this time around, things are a tad different as what's happening overseas is materially affecting businesses that make up the US economy.

Over the summer, China has been front and center with its volatile stock market, its newly devalued currency, and its slowing economic metrics.

And US businesses are speaking up as reported by the the Beige Book, the Fed's collection of business anecdotes from across the US.

"Relative to the last FOMC meeting (in June), US data have provided no smoking gun in either direction. But new axes of uncertainty are emerging," writes UBS strategist Themos Fiotakis. "Market volatility and risks to growth associated with the economic slowdown in China. 'China' was a frequent reference in the Beige Book of economic conditions prepare for the September meeting."

As seen in the chart below, the spike in the number of China references in September's Beige Book is a quite noticeable.

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Short-seller Jim Chanos, founder of the hedge fund Kynikos Associates, has been a huge China bear since 2009, and the bet is finally starting to pay off.

The Wall Street Journal's Juliet Chung reports that his Opportunity fund, which bets on stocks, gained 4% in August and was up about 10% for the year through the beginning of September.

Kynikos' Ursus and Kriticos funds, which only short stocks, were up 6.2% and 8.2%, respectively, in August, the report said.

Chanos' negative bet on China played a role in those fund returns. The Opportunity and Kriticos funds have about 20% of their funds dedicated to short bets in China, the report said.

Chanos lost money in each of the past three years, according to the report.

From 2012 to 2014, short-biased hedge funds got crushed, falling more than 37%, as the market surged, with the S&P gaining more than 63% during that time period.

The average short-biased fund was up 4.36% in August, according to Hedge Fund Research. For the year, they are up about 2.5%.

Meanwhile, the average hedge fund fell 2.21% in August and is down about 1% for the year, compared with the S&P 500, which fell 6.2% in August. The S&P was down 7% for the first eight months of the year.

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Sperm banks in China are taking advantage of Apple’s popular iPhone to help recruit donors.

"No need to sell your kidneys - you can easily have a 6s," an online ad from Renji Hospital in Shanghai states, according to a report from Changjiang Times.

Prominently featured at the top of this particular ad are images of Apple’s iPhone 6S in rose gold.

These sperm banks are not giving away iPhones in exchange for sperm. Instead, the Shanghai sperm bank and others are trying to entice donors by saying they can earn money by participating in the program to ultimately help fund the purchase of a new iPhone 6S.

According to the ad mentioned above, qualified participants can earn as much as 6,000 Yuan ($940) for a series of sessions, which is easily enough to pay for Apple’s upcoming iPhone.

But getting chosen to be a donor doesn’t sound quite as simple. To become a donor, applicants must have a college degree, be at least 5.4 feet, and donate at least 17 ml of sperm within a six-month time frame. 

Hat tip: BBC

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If China's economy is growing at 7% or more per year, why has the price of cement there dropped by 25% in the last two years?

You can't build anything permanent without cement. It's a great indicator of how the underlying, real economy is actually doing: If people are buying a lot of cement then it means they have the cash to build large, new, permanent objects. Houses, roads, bridges and cities. If building and construction are on the decline then the price of cement should fall.

This is what Chinese cement looks like right now, according to a fantastic note to investors from Macquarie's Chief China Economist, Larry Hu:  

The Chinese government is "serious" about keeping GDP growth at 7%, says Hu. 

Macquarie reckons "fixed asset investment" growth — spending on infrastructure and buildings basically —   should be steady at about 20% growth each period since 2013. Official numbers say China GDP remains above 7%:

This doesn't make sense ... unless you are one of those people who believe that China is lying about its GDP growth. Outside observers suspect it may be as low as 4% in reality. That's still pretty good growth in an economy of that size.

But China's stock market is collapsing, it has a massive debt overhang, objective indicators like electricity consumption look soft, and the country is about to go through a generational reversal that will erase its population growth advantage. 

And now cement prices have collapsed at about the same time as ... Chinese metal prices, as Goldman Sachs noted recently:

None of this looks good, unless you believe that the Chinese have figured out a way to grow their economy at 7% a year without using concrete or metal.

SEE ALSO: If China's GDP is so amazing then why have Chinese metal prices collapsed?

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China's air is notoriously polluted, full of gray smog that covers the sky. 

The health problems associated with that pollution are the reason for 1.6 million deaths a year, or about 4,000 people a day.

But for a couple of weeks, the sky was bright blue. 

In honor of a military parade to celebrate the 70th anniversary of the end of World War II, Beijing managed to clean up its air. They've done this before, notably in advance of the 2008 Summer Olympics.

Here's how they pulled it off.

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Here's how Beijing looked on a particularly high pollution day in August, exactly a month before the parade.

... And here's how the skies looked on the day of the parade, September 3. Residents nicknamed the color of the sky "parade blue."

China's had a pollution problem for years, as a result of rapid industrialization that started in the 1950s. In some areas, it's gotten so bad that its impact on your health is equivalent to smoking 40 cigarettes a day.

(Source)

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