A new and scary note is out about China’s risk from GMO’s Edward Chancellor and Mike Monnelly, who make a good argument that China’s financial system is showing many of the hallmarks of a not-too-distant bubble:
China’s thriving shadow banking system has much in common with the American version, which thrived before Lehman’s collapse: trust loans that finance cash-strapped property developers have a whiff of the subprime about them; wealth management products that bundle together a miscellany of loans, enabling the banks to generate fees while keeping loans off balance sheet, bear a passing resemblance to the structured investment vehicles and collateralized debt obligations of yesteryear; while thinly capitalized providers of credit guarantees are reminiscent of past sellers of credit default insurance.
Markets in Asia were apparently very skittish earlier today in partdue to fears that earnings could be affected by tensions between Japan and China over the Senkaku/Diaoyu islands. This in turn was no doubt exacerbated by the news that not only are the big four Chinese banks skipping this week’s IMF meeting in Tokyo, but the PBoC governor and the finance minister are also sitting it out, instead sending along their respective deputies.
From Bloomberg: Read more
China’s balance of payments deficit in the second quarter was its first such deficit since 1998, and it attracted a lot of attention. Together with other bits of data about currency flows, it heightened fears about whether there was some kind of capital flight out of the country, and what it would mean for domestic monetary policy just as the economy became slightly stretched — but still somewhat inflationary.
But it’s not so bad, Societe Generale’s Wei Yao says. Yao looked through the details of the State Administration of Foreign Exchange data from Q2 and reckons most of it can be explained by fairly normal changes associated with the authorities’ tentative steps towards renminbi internationalisation: namely, an increase in private foreign currency deposits (as opposed to the official reserves), and credits to foreigners on domestic banks’ balance sheets. Read more
Don’t say we never do anything nice for you. We found four positive signs this week, and while at least three of them might raise more questions than they answer, China bulls should probably just enjoy the moment.
1. New loans data for August looks positive Read more
Not our words but Societe Generale’s, or at least their China macro strategist Wei Yao, who believes credit risk is worse than official non-performing loan data suggests. So much worse that — while government intervention will prevent an outright crisis — a “multi-year and bumpy” landing is now expected by SocGen.
Non-performing loans are still at a fairly low level of 0.9 per cent across China, notes Wei, although about three times that amount are “special mention” loans, or those in doubt but still performing. Rates can also rise quickly, thanks in part to China’s tangled shadow banking system: in one year, Wenzhou went from the lowest rate of any Chinese city at 0.37 per cent to 2.85 per cent at the end of July. Read more
As we noted earlier, the People’s Bank of China is continuing to inject huge sums of liquidity into the monetary system via so-called “reverse repos” (the equivalent of conventional central bank repos elsewhere). According to Chinascope, the latest round of easing supplied a record Rmb220bn to the market in exchange for collateral.
The seven-day operation was priced at 3.40 per cent (Rmb150bn) while the 14-day operation was priced at 3.60 per cent (Rmb70bn). Read more
The People’s Bank of China helped Asian stocks rally on Tuesday with a reported record liquidity injection via reverse repos. From Bloomberg:
The People’s Bank of China conducted 220 billion yuan ($34.6 billion) of reverse-repurchase operations, the most in a single day, according to a trader at a primary dealer required to bid at the auctions. The government may introduce new policies to boost consumers’ borrowing and spending this year, the Economic Information Daily reported today, citing an unidentified person. Read more
Oh yay, Chinese consumer price inflation for July came in at a nicely subdued looking 1.8 per cent. And industrial production growth continued to slow. Q2 wasn’t the bottom after all. More easing ahoy! Right?
Not so fast… Read more
Could it be true? Did China’s USD FX reserves really fall in the second quarter?
Certainly seems so. Here are the details via ChinaScope on Wednesday: Read more
Mitt Romney, aspiring US president-to-be, has notoriously declared that if he ever takes office he will immediately name China a “currency manipulator”.
This, of course, is an ironic turn of events, given that China stopped being an outright currency manipulator a while ago. Read more
One of the enduring arguments about China is that the government has ample firepower to sort out the country’s economic challenges. All that fiscal surplus, all those USD reserves. Firepower to burn.
Yet it’s looking increasingly difficult for policymakers to ward off a hard landing without re-igniting inflation and of course, enhancing the country’s already extreme concentration on investment rather than consumption. Read more
Everybody’s talking about China’s unexpected rate cut. But here’s why this particular rate cut is a little bit different.
It is, as Chinascope explains on Friday, asymmetrical: Read more
First, in a sign that Chinese woes are definitely rising and that authorities are now sufficiently concerned, we bring you news that China cut rates on Thursday (via Bloomberg):
China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth. The one-year deposit rate will drop to 3.25 percent from 3.5 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will fall to 6.31 percent from 6.56 percent. Banks can offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent. Read more
We noted last week that there was a rising tussle over dollars in China, spurred by capital outflows and RMB-denominated selling on signs that the world’s key economic powerhouse may be slowing. A situation which was arguably thrusting China into a dollar short position.
While that might seem counterintuitive given China’s substantial longer-duration dollar assets, it is possible because of China’s substantial short-term dollar liabilities. Essentially, we’re talking about a dollar-denominated duration mismatch on the mainland at a time when China is running one of its largest outstanding external debt positions for 27 years. Read more
Pretty much every China watcher, including us, has written in recent months about how reserve ratio requirement (RRR) cuts by the People’s Bank of China are not necessarily about credit easing. In fact these days, an RRR cut is not so much a move to make more credit available as it is to avoid reductions in liquidity.
Mark Dow, portfolio manager at Pharo Management, has a nice explanation of how this is, and where the RRR fits into the PBoC’s broader monetary policy. It starts with the policymakers’ credit expansion targets, which are believed to be about Rmb8tn to 8.5tn this year: Read more
That’s pronounced a bit like “Joe”, but with a softer ‘g’ sound. According to Standard Chartered you need to start practising – because People’s Bank of China governor Zhou Xiaochuan is “the world’s central banker”.
StanChart note that everyone already knows China has the world’s largest stock of M2 money. Read more
China Investment Corp hopes to gain continued funding from the Chinese government, matching the financing of ‘mature’ sovereign wealth funds in the west, its executive vice president Wang Jianxi has told the WSJ. CIC has just received a $30bn capital injection to pursue further overseas investments. A regular stream of funds would make CIC more important still in diversifying China’s vast FX reserves. Zhou Xiaochuan, governor of the People’s Bank of China, has in the meantime indicated that the renminbi’s trading band might be widened in the near future, the FT says. Read more
On Saturday, China’s central bank cut its reserve requirement ratio (RRR) for the second time in less than three months, a move which was expected — though just not now.
Societe Generale’s Wei Yao earlier this month said a cut was unlikely before March, given the fuzzy picture painted by data affected by the lunar new year. Wei believes Saturday’s move was unlikely to have much of an effect, because of the leverage limits applying to smaller banks: Read more
Bank of America Merrill Lynch’s global rates teams has interesting note out on Friday regarding Chinese repo rates.
As they point out, the seven-day rate currently implies something of a liquidity crunch in the market. While much of this is naturally down to the routine dash for cash ahead of the Chinese New Year, the rate rise has, nevertheless, been pretty significant and sharp when compared to previous years: Read more
Shibor, shibor everywhere and not a drop of cash to spare.
Bank of America Merrill Lynch rate strategist Bin Gao has a short note out on Tuesday entitled “A possible funding crisis in China?” Read more
FT Alphaville has talked volumes about China’s cash-for-copper collateral obsession.
Recently, however, speculation has picked up that these trades have started to be unwound — mainly because the Chinese government caught up on the funding loophole, and moved to restrict it. Read more
So here it is — the fifth Chinese rate hike since October last year.
As Reuters reported on Wednesday: Read more
The People’s Bank of China said it won’t sterilise its biweekly open market operation on Thursday, after money market rates more than doubled in the past six days alone.
Lots of rubber-necking on the Uncle Sam-deficit section of global imbalances this week, not so much on the China-surplus side.
Let us correct that injustice. Read more
This is interesting from BNP Paribas on Monday:
Here’s something for anyone who thought last week’s bank lending figures from the People’s Bank of China showed the country was succeeding in its tightening efforts.
It’s a statement from PBoC member Sheng Songcheng. Read more
And last week’s cash crunch in Chinese interbank markets…
The new trading week got off to a cautious start as a surge of fresh concern regarding the impact of China’s monetary policy pushed against the long-established bullish undertow, reports the FT’s global market overview. The FTSE All-World equity index was down 0.3 per cent, industrial metals were softer and the dollar was stronger as risk trades were reassessed following the recent strength, which last week saw the S&P 500 in New York hit a 27-month year high and the CRB commodities benchmark touch its best levels since October 2008. Asian markets, meanwhile, had their first chance to respond to Friday’s late news that the People’s Bank of China had raised banks’ reserve requirement ratio by 0.5 percentage points. The reaction has not been good, with Shanghai stumbling 3 per cent –- a dive that was damping sentiment in Europe. Read more
To tell the story of China’s biggest bank account it helps, perhaps, to start with a story about certain, smaller, Chinese bank deposits. So. Meet Zhang Meifang.
Ms Zhang is, or rather was, an official at the Jiangsu Province Finance Bureau. Read more
We’re used to seeing both dovish and hawkish displays at any one time from monetary policy committee members in the west.
But it’s always been much rarer to see conflicting views from high-ranking members of the People’s Bank of China. Read more