China’s central bank has rushed to pump money into the stalling banking system but markets across Asia still fell sharply amid fears that the world’s second-largest economy faces a credit crisis.
Cash rates on China’s money markets jumped after the move by the People’s Bank of China (PBOC) to ease a liquidity squeeze on banks. Both the Shanghai Composite Index and Hong Kong’s Hang Seng Index also fell amid concerns over structural problems in China’s financial system.
The Chinese seven-day bond repurchase rate, which essentially measures liquidity in the financial system, climbed to 7.6pc its highest since fears over a banking crisis in China first emerged over the summer.
State media in China had reported that the PBOC has unexpectedly pumped $33bn (£20bn) into the domestic money market through what it refers to as “short-term liquidity operation”.
“The focus is again on China where there is plenty of discussion on the squeeze in interbank funding markets,” said Deutsche Bank in a note to investors Friday. “The repo rate is now higher than yesterday amid market talk of a missed payment at a local Chinese bank. This is something to monitor over the next few days.”
Fears over a looming Chinese debt crisis spurred by a poorly regulated and opaque financial system stoked fears over the summer that the Asian powerhouse could finally be on the brink of a sharp slowdown in growth.
Much concern also surrounds what has become known as the “shadow banking” system that allows the Chinese to borrow money beyond their means.
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A blast of money from China’s central bank has failed to stem a deepening cash crunch in the country as liquidity dries up and struggling lenders hoard funds.
One-week borrowing costs in Shanghai jumped 119 basis points to 8.643pc, the highest since the cash crisis in June that sent minor tremors through the financial system. Though less volatile, the crucial 3-month ‘Shibor’ rate watched for signs of trouble in the shadow banking sector has climbed 80 points to 5.52pc since the beginning of the month.
Fitch Ratings says the biggest risk may lie in China’s wealth management products, a “hidden second balance sheet” of the banks alone worth $2 trillion.
Half of all liabilities have to be rolled over every three months and a further 25pc every six months. There are reports that some are already under water.
If rates remain at current levels for long, weaker funds could be caught in a squeeze akin to the shock that hit Northern Rock and Lehman Brothers in the West when the capital markets seized up.
Four years ago I predicted that China would fragment.
The utterly corrupt, booming golden triangle
would dump the dirt poor hinterland.
In China today vast, mega-mega cities are growing
in an uncontrolled way with rural workers flooding
into these cities.
Result? lawlessness, destructive pollution, slave labour
and mini oligarchies.
The collapse of China will be a black swan.
It will come suddenly.
One final nail in their coffin.
You cannot pay off real debts with paper money
and theory assets.
Four years ago I predicted that China would fragment.
The utterly corrupt, booming golden triangle
would dump the dirt poor hinterland.
In China today vast, mega-mega cities are growing
in an uncontrolled way with rural workers flooding
into these cities.
Result? lawlessness, destructive pollution, slave labour
and mini oligarchies.
The collapse of China will be a black swan.
It will come suddenly.
One final nail in their coffin.
You cannot pay off real debts with paper money
and theory assets.
The probability is that China will probably get through a crash without too much trouble as this things are always overplayed by the doomsters among us. There is a massive bubble in property and most of the state run companies are making huge losses, but there are a lot of positives as well, not the least of which is that the Chinese are talented and sophisticated.
The question is really about the communist party and whether they can make the transition to allowing people more freedom and rights by allowing private business and land ownership to replace the loss making state monsters and to continue the boom. The recent plenum seemed to say this would happen. The concern is that a legally empowered wealthy class and their middle class entourage will demand democracy, replacing the communists, this could lead to civil war.
The Chinese are reportedly studying Edmund Burke, the English philosopher, to see how the UK moved from a autocratic monarchy to a democratic one without losing the monarch or any of the other institutions of state. The communist party would like to stay at the head of things in much the same way.
the talk of 'hot money' flowing in and out of China is misleading. The closed capital account means that the currency cannot be bought and sold the same was as a country with an open capital account ie UK, meaning there is no hot money.
This spike in Chinese domestic rates is a quarterly phenomenon with it's roots of the credit expansion programme following the collapse of growth following Lehman's in 2007. As much of the credit found it's way into State Enterprises the loans were directed into property (then a hot ticket) or unproductive investments. how much is debatable as no reliable statistics are available. These loans, and RRR requirements are refunded quarterly hence the spike in rates.
The rise in rate is getting more pronounced each quarter indicating a lack of cash, partially caused by an ineffective and immature financial system.
My guess is that there will be more domestic reforms and printing of cash. A direct threat to global financial system is overblown, however indirectly a dysfunctional Chinese financial system has implications of social unrest, poltical instability, and Asian contagion.
Hot money has been pouring into the country on a wave of optimism after the Communist Party’s Third Plenum in November, which promised a blitz of reforms. This raises the likelihood of even more violent outflows if the music stops, a risk that has risen since the US Federal Reserve began winding down dollar stimulus last week." Mr. Evans-Pritchard, the RMB is not a fully convertible currency. The People's Bank of China can arrest capital flows both ways at a stroke with a telephone call to the heads of the major Chinese banks, which are all head-quartered in Beijing. As easy as that if any foreign idiots start playing around like they are allowed to in the West. Having said that, the current new leadership has inherited a quite potential disastrous shadow banking crisis, linked to a huge property bubble.
The Chinese only hold $1.3 trillion in US bonds, which are hardly worthless. Japan holds roughly $1.17 trillion in US bonds and will surpass China as the major holder of US treasuries in the near future. Should China sell its bonds they will be quickly snapped up by Japan. China holds about 8% of the total US public debt. It's hardly in a position to do major damage to the United States.
The US dollar assets held by the Chinese are basically a present to the USA. It's the greatest con in the world and it keeps America afloat.
The Chinese, like the Japanese before them. buy US dollars when they are trying to keep the Yuan lower than it should be on the currency markets. This helps their export business but leaves with a whole pile of US Dollars it can do nothing with - if it sells them their currency will rocket and their export business is destroyed. As a result they end up buying anything that is valued in Dollars. The yanks are very happy to push the interest they pay to nothing and then watch as inflation, even when low, reduces the value of the Chinese holdings to nothing. The Japanese got caught the same way in the Seventies.
The Chinese are desperate to buy in their own currency, the yuan, but they cannot until it is free floating and has sufficient liquidity.
So Russia, with only 6% debt, growing living standards and huge energy resources is the best placed of the lot, despite all the hate thrown its way by Western leaders for not doing as it is told.
The Financial Times said propaganda authorities have ordered China’s journalists to stop writing gloomy articles about the cash crunch, a sign that events may be slipping out of state control.
The central bank has a trump card if efforts to deflate the credit boom gently spin out of control. “They can cut the reserve requirement ratio (RRR) at any time,” says Daokui Li from Tsinghua University.
Lenders have parked $3 trillion with the authorities to meet the RRR rule of 20pc. Yet J Capital Research in Beijing says this is “deceptive”, failing to capture the scale of shadow banking. The real rate may already be down to 15pc, while the loan-to-deposit ratio may in reality be 90pc rather than 75pc as claimed. If so, China’s safety buffer is less than supposed.
While credit levels in China are not high compared to rich OECD states, they are very high for a mid-income country without deep capital markets.
Growth in lending has been 20pc to 30pc a year since the Lehman crisis, when China ramped up credit to cushion the global trade shock. Rating agencies says this is far above the safe speed limit.
The drama is no longer a local Chinese issue. Credit has grown from $9 trillion to $24 trillion in five years. It is now equal to the entire banking systems of the US and Japan combined. Any misjudgment will have global ramifications.
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