Lombard Street’s Charles Dumas charts the overvaluation of the Chinese currency:
More macabre farmyard and less ‘where the WMP things are‘ this time…
It’s a matter of canards and Bertrand Russell’s chicken you see. In other words — if you think China can avoid a financial crisis in the future because it has managed to do in the past, you might get your neck wrung. Read more
The PBOC conducted a 255 bn yuan ($42 bn) liquidity operation on Tuesday, causing money market rates — which had been running very high — to drop significantly.
As Bloomberg noted:
The seven-day repurchase rate, a gauge of interbank funding availability, dropped 88 basis points to 5.44 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It surged 153 basis points yesterday, the most in seven months. The Shanghai Composite Index climbed 0.9 percent today, after closing below 2,000 yesterday for the first time since July.
Here’s the structure you placed your trust in…
(Chart from Barclays. Do click to beat the image size cap we’ve illiberally imposed on our home page) Read more
Where the WMP things still are and are likely to stay. Yields follow interbank movements after all. And we know where they’ve been going…
This is from Reuters and makes a nice little moral hazard gauge for China. The story involves a trust product, called “2010 China Credit / Credit Equals Gold #1 Collective Trust Product” which just screams “buy me” but maybe not “stand behind me when I go bad”:
Industrial and Commercial Bank of China, the world’s largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.
Remember when we wrote, in relation to the seemingly forgiving attitude to shadow banking on display in draft regulations, that “This begs the question, what was the PBoC trying to achieve with the cash squeeze? The guess is that it was using market forces to do what administrative diktat has been unable to.”?
Well, this is worth a moment of your time — it’s a report from the WSJ into the infighting between Chinese regulators which hopes to explain the PBoC’s credit squeeze and the watering down of regulations relating to China’s shadow banks. Read more
Have a chart from BofAML who, like many others, see financial conditions in China remaining tight as the PBoC tries to delever the economy and an inelastic, potentially spirally, demand for credit dominates. Basically, it shows one of the problems that occurs when interest rates are jacked-up. As we’ve written before, there’s probably a reason Chinese companies have been rushing to issue in dollars.
From where this blogger is sitting WMPs do a pretty good job of summing up the different ways of looking at what is going in China at the moment. On the one hand you have those who see WMPs more as “off-balance-sheet deposit rate liberalisation, with a twist of risk” which are a useful tool on the liberalisation path, and on the other hand you have the Weapons of Mass Ponzi-focused brigade. Read more
Just when you think there’s nothing left to say about China’s debt dilemma up pop some more pieces to greet the new year. Two of the most recent saw Soros on the self-contradiction in Chinese policy boat saying that “restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years” and Patrick Chovanec providing a touch more detail about what all that messy debt actually means:
To those who wrote off China’s first banking seizure in June as a fluke, this latest episode [interbank lending market spiked to near 10 percent again last week] appeared to come out of nowhere. They cast about for explanations: Perhaps some seasonal surge in cash withdrawals was to blame, or the U.S. Federal Reserve’s decision to taper its bond-buying policy. Optimists assumed the PBOC was tightening credit on purpose, as a warning to banks to rein in unsafe lending practices. With inflation at manageable levels, they reasoned, the People’s Bank of China had plenty of room to loosen monetary policy again and ease the cash crunch.
The muddy waters of this particular creek have been known to drive good men mad…
From the FT:
The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, opened at 5 per cent, a four-month high and up 150 basis points from the end of last week.
But we also get this: Read more
As we noted a week ago, there was some recent anxiety that Chinese interbank markets were again freezing up, with Shibor rates jumping again as the end of month neared.
A couple of days later, several reports emerged that the People’s Bank of China was coming to the rescue by conducting reverse-repo operations for the first time since February, injecting a net Rmb17bn. Read more
From Reuters on Monday:
China money rates jump at month-end, big banks refrain from lending
Though, apparently it’s all due to month-end factors:
SHANGHAI, July 29 (Reuters) – China’s money rates rose sharply on Monday as small banks scrambled to top up their cash reserves before the end of the month while big banks held off from lending, traders said. A dealer at a foreign bank in Shanghai said that conditions were tight but the community widely expected them to relax slowly over the course of the next few days.
Chart from CreditSights (click to enlarge):
Kate’s post on the June China trade data mentions that commodities imports were the only bright spot (although it’s a somewhat dubious bright spot if it indicates a resurgence in investment). It turns out that copper imports were particularly strong, recording a 9.7 per cent year-on-year increase in June, a rather large change compared to a 14.6 per cent decline in May.
Goldman point us to one compelling reason why that might be the case. It’s basically another case of whack-a-mole financing in China. Hit over-invoicing over the head and up pops ‘Cash For Copper’ (CFC) financing. Read more
China’s State Council made public a guideline from July 1 for changing financing policy over the weekend, which is nice because we wanted an excuse to go looking for a replacement for “Likonomics” anyway. It just doesn’t… snap.
First, a summary of the guideline note from Nomura’s Zhiwei Zhang: Read more
That’s from Barclay’s, via the Economist, and as with most word-mashes we have mixed feelings about passing it along. On the one hand, it’s nice to have a term to use when explaining “the emerging doctrine of Li Keqiang, China’s prime minister” while on the other hand, it sounds kind of annoying and every time you use it you’ll have to
shower vigorously explain it anyway. Ho hum.
Creator credit/ blame goes to Barc’s Yiping Huang, Jian Chang and Joey Chew, who wrote last week that: Read more
The PBOC’s “this is not the liquidity crisis you’re looking for” statement at the weekend may have drawn attention, but it didn’t really manage to reassure equity markets. The Shanghai Composite closed over 5 per cent lower on the day:
Should you panic?
It’s hard to know exactly what degree of control the PBoC has over the events unfolding in China’s interbank markets.
On the one hand, making the smaller banks and shadow finance entities sweat fits with the central bank’s new high-priority goal, introduced late last year, of containing ‘financial risks’, and also with a broader government theme of clamping down on excess. Read more
First a chart from Fitch’s China shadow banking guru, Charlene Chu:
That shows the issuance of Wealth Management Products by Chinese banks slowing down in 2013, driven says Chu by a tightening in regulation and a strong pick-up in credit growth that has propelled a rebound in deposits. But she also estimates that more than Y1.5tn in WMPs – substitutes for time deposits – will mature in the last 10 days of June.
All of which provides a pretty sturdy clue as to why this squeeze by the PBoC might be happening now. Read more
In case it wasn’t clear enough that the People’s Bank of China is mostly okay with the squeeze in interbank liquidity, it came out with another signal today.
To recap – last week, when the key seven-day Shibor repo rate spiked above 10 per cent, the PBoC maybe injected extra liquidity to certain banks. Or maybe, as a source of our FT colleague Simon Rabinovitch tells it, what it *actually* did was just tell the big banks to stop worrying and just start lending, dammit. Read more
We looked earlier on Thursday at whether the PBoC and other Chinese authorities have engineered the recent squeeze in China’s interbank markets (answer: yes) and why they might be choosing this moment to do so (answer: somewhat more complicated).
Chinese interbank rates according to Shibor are incredibly high — and yet, apart from the report of a special ‘targeted liquidity operation’ for the benefit of one, unnamed bank, the central bank appears to be resisting pleas to ease up on liquidity provision.
So, what gives? Read more
The popular explanation for the rise in Chinese repo rates is being linked to the government’s desire to rein in the shadow banking sector. That is to say the tightness is intentional.
But what if it isn’t. What if it has more to do with the unwind of yet another carry trade? Read more
This is really worth watching. China’s money markets have spiked again after the central bank rebuffed pleas to inject more cash in to the financial system on Thursday, according to the FT.
We have the 7-day repo rate jumping 270 basis points to 10.8 per cent, nearly triple where it stood just two weeks ago and overnight money markets hitting silly levels:
It’s getting (a bit) clearer of late that China’s interbank crunch is deliberate policy.
Still, although of course “We cannot use as fast money supply growth as in the past, or even faster, to promote economic growth” sounds very serious, it’s a bit woolly. Why so keen to withhold official liquidity from Chinese banks, and continue withholding it, right now?
Which is why FT Alphaville is pondering the WMP angle again. Read more
The Shibor spike continues, this time with the Wall Street Journal:
The Chinese interbank funding market has seen rates soar since early this month amid slowing foreign-capital inflows and banks’ needs to fulfill investor obligations, among other factors. The squeeze is pushing up banks’ funding costs and could impede a key source of funds for growth even as the economy slows.
Originally, there were suggestions that the increase in China’s interbank interest rates was down to the Dragon Boat Festival holiday season and a resultant search for cash. But rates have stayed elevated as rumoured defaults and auction failures got everyone nervous and liquidity pressures mounted as foreign-capital inflows slowed and those dang wealth-management products demanded feeding. Read more
China Everbright Bank placed itself directly in the firing line of terrible puns last week when reports it had defaulted started to circle.
Thankfully, Anne Stevenson-Yang from J Capital read into the news a bit further than most:
The interbank defaults last Thursday provided definitive, if indirect, proof that the cash coming into China is for financial investment and interest arbitrage. It masquerades as a trade surplus but is not. With the tightening of the domestic central bank credit window, Chinese banks are heavily dependent on these inflows for the cash they need to roll over loans. That is why the banks immediately went into distress when regulators decided to clamp down on fraud on the trade account.