With the ongoing obsession over whether the Fed will or won’t taper, most forget that this is largely pointless, if usefully distracting from real issues, conversation. Best case: Fed tapers by $20 billion in September, market tanks as bond yield surge crushing interest-rate sensitive stocks (dividend payers, REITs, builders) and killing what little is left of the non-institutional bid in housing (Exhibit A: mortgage applications). In the meantime, “the grand scheme of tapering things” looks like this.
So while the Taper, if and when it happens, will have only one actual result: to unleash the UNtaper, this is little comfort for one country that has to live with the $160 billion per month hot money flow impact of both the US QE and now that of Japan: China.
As explained previously, China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place.
In a nutshell, the country’s economy is rapidly slowing down as shown by a variety of external metrics such as the plunge in Caterpillar Asia sales, and the lowest electricity consumption since 2009. This is further compounded by the fact as of late, record endogenous credit injections, which currently stands at a level of 240% of GDP…
… have had little residual positive impact on China’s GDP as shown here:
The above is the topic of a recent Albert Edwards paper looking at China’s “Minsky moment” which can be found here. Of course China could overcome this macoreconomic slowdown by injecting even more credit, however, it is here that the Fed and the BOJ come in, because the Chinese economy is already flooded with exogenous, Bernanke and Kuroda-created hot money on the margin, and inflation is far higher than the government would like to admit. One needs to only look at house prices which increased for the 12th consecutive month despite ongoing failed efforts by the government to cool down the housing market using decree after decree.
So thanks to the G-0 central planners, the PBOC’s hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.
Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the “China Liquidity Squeeze Risks Companies’ Debt Rollover” leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling. To wit:
- A lack of liquidity in China’s banking system may threaten some companies’ ability to roll over debt, deteriorating banks’ non-performing loans and increasing risks of hard-landing in economy, Bloomberg economist Michael McDonough writes in note to clients.
- PBOC may be forced to inject liquidity via open market operations to offset surging money-market rates.
- China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in market overnight: MNI cites three unidentified people in interbank market
- China’s 1-day repo rate surges 240 bps today to 8.5506%, highest since Jan. 2012; 7-day repo up 151 bps to 6.8317%, highest since Feb. 2012; Nomura attributes liquidity squeeze to pre-holiday cash demand and policies to curb shadow banking and capital inflows
Problem is the PBOC can’t simply “inject liquidity” as it will flare up what is already an unstable “inflation monster” (the cousin of Abe’s deflationary nemesis).
But if China is indeed the latest to see its liquidity transmission mechanism fail, then surely its economy will follow immediately? Well, yes. Only problem is that all macroeconomic data out of China is made up.
Recall from “China’s Data Manipulation In One Chart, And Why The Real Data Implies Weakest GDP Growth In Over 20 Years” which we posted a month ago after China reported the latest set of blistering trade data, when we said that “breaking down the true numbers behind China’s economy, who using real export and import data ex-manipulation and fudging, that China’s reported 7.7% GDP would translate into a 5.5% Q1 GDP growth, the lowest rate of growth in 20 years!” In other words, if one takes away China’s ability to manipulate data, the recent trade surplus, will not only be unwound but likely result in accelerate GDP contraction.
Recall also from “The Bronze Swan Arrives: Is The End Of Copper Financing China’s “Lehman Event” that China’s SAFE has done just that when it passed new regulations on May 5 to end China’s Copper Financing Deals, whose function was to not only serve as a source of collateral rehypothecation, but led to the surge in Hong Kong trade discrepancy, where copper (and its current account boosting trade with HK) was being arbed to profit from the domestic (CNY) to foreign (USD) interest rate differential.
All of the above would imply trade data for May would be atrocious. And, sure enough, as reported last night it was.
- China May Exports Rise 1.0%; Est. 7.4% Rise (range 3% fall to 17.1% gain, 38 economists).
- Imports dropped 0.3% vs est. 6.6% rise (range 2.8% fall to 16% gain, 38 economists)
Slowly but surely, the real Chinese economy is starting to peek through. What’s worse is that since trade data is a key component of the GDP equation, suddenly China’s entire growth picture will be repriced by the market, far lower.
Yet despite this ongoing slowdown, the PBOC continues to be limited in what it can do from a liquidity injection standpoint.
So China, thanks to the PBOC’s own failed policies and thanks to the other central banks, suddenly has no way out. Naturally, this has lead to an immedate outpouring of warnings from “very serious people” overnight who have finally come to the same conclusion as we did months, if not years ago. Some snippets:
- Global investors will be “shocked” at China’s decelerating trade growth and it’s unlikely the government will loosen monetary policy to boost economic growth gievn the outlook for inflation, according to Gavin Parry, the managing director of Hong Kong-based brokerage Parry International Trading Ltd.
- China’s trade data will hurt the stock market though losses won’t be massive given that expectations of economic weakness have already been reflected in the nation’s equities, according to Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million.
- Investors should avoid buying Chinese stocks as the nation’s trade data show economic growth is slowing and liquidity conditions are tightening, according to Hao Hong, chief China strategist at Bank of Communications Co. “The reverse of export growth was expected, but not the magnitude,” Hong says in an e-mailed response to questions today. “The concurrent fall in import growth confirms earlier allegations on suspicious trades.”
All precisely as we have warned.
The good news is that according to the US’ own propaganda machine, the US economy and its consumer is strong enough to be the world growth dynamo and pick up the baton from a China whose dreams of 7% (and declining) GDP have been maybe permanently dashed. Of course if it isn’t, and in the PBOC does indeed have no choice but to step in and prevent its economy from going into a tailspin and its banking system house of cards to tumble down, and does what all other central banks are doing by unleashing another epic stimulus round, then make sure all your hard commodities are nailed down. Because the explosion in demand for hard assets will be unlike anything seen yet.