If
I’m not mistaken China’s economy has now entered a very perilous
stage.
It
could be in very big big big big big big big trouble.
More
than this, the ongoing liquidity crunch has now spread to the long
end of the curve.
From
Bloomberg: (December
16): China’s sovereign bonds posted the
biggest weekly decline in two years, reeling
from the fallout of hawkish Federal Reserve comments, yuan
depreciation pressures and waning liquidity. The 10-year sovereign
yield surged 25 basis points this week, the most since December 2014,
to 3.35 percent on Friday. The one-year yield jumped 50 basis points,
while the five-year rose 27 basis points. The yuan, which fell to an
eight-year low, is heading for the biggest weekly decline in a month.
And
Thursday’s crash actually prompted for trading halt…TWICE!
From
CNBC (December
16): Trade
in futures for the five-year and 10-year bonds were reportedly
halted twice on Thursday
– once in the morning session and again in the afternoon – after
they fell far enough to breach the 2 percent trading limit.
The
PBoC intervened on Friday. While the injections lowered yields, it
remained substantially elevated. From Wall
Street Journal : China’s
central bank extended hundreds of billions of yuan in emergency loans
to financial firms on Friday and ordered some of the country’s
biggest lenders to extend credit
as well, as it moved to ease a liquidity crunch and continuing debt
selloff. The moves marked a second day in which the People’s Bank
of China pumped money into the financial system and markets, after
the U.S. Federal Reserve signaled it might quicken the pace of its
rate increases. That in turn spooked Chinese investors who were
already worried about government attempts to let the air out of a
highly leveraged and overheated bond market by tightening credit. On
Friday, the yield on China’s 10-year government bond jumped about
0.1 percentage point to 3.33%, while yields on the interest-rate
sensitive two-year government bond and the 30-year bond, which
responds to inflation expectations, rose even more. That followed a
Thursday plunge in the price of some bond futures contracts that led
authorities to temporarily halt trading. Yields rise as prices fall.
Investors and analysts said that the PBOC’s moves—which ended up
pumping around 600 billion yuan ($86.3 billion) into the markets and
financial system in two days—have helped calm some of the jitters.
Last
week’s bond auction even failed to meet its target
From
Bloomberg (December
17): The Chinese government failed
to meet a debt sale target for the first time in almost 18 months,
with some bids falling short of minimum requirements, according to
traders required to bid at the auction.
The Ministry of Finance sold only 9.57 billion yuan ($1.38 billion)
of 182-day bills in a planned 10 billion yuan sale Friday, and 10.85
billion yuan of 91-day notes in a planned 12 billion yuan sale,
according to a statement from the bond clearing house. The sale
amount includes additional sales of bonds after the auction.
Remember
I wrote that the imposition of capital controls signified acts of
desperation*
The
capital controls have been indications that the PBOC’s toolbox has
effectively been depleted, thus the PBOC seem as losing control.
*China’s
Mises Moment? December
4, 2016
Well,
I’m right, as the yuan plunged to a fresh
eight year low.
Just remember, capital controls signifies an implicit form of
protectionism.
So
even before Donald Trump’s formal assumption, China has already
erected capital and implied trade walls against the world!
And
dollar liquidity pressures can be seen from the substantial drop in US
Treasury holdings by the Chinese government last October….
From
Bloomberg (December
16):
China’s
holdings of U.S. Treasuries declined
to the lowest in more than six years
as the world’s second-largest economy uses its currency reserves to
support the yuan. Japan overtook China as America’s top foreign
creditor, as its holdings edged down at a slower pace. A monthly
Treasury Department report showed China held $1.12 trillion in U.S.
government bonds, notes and bills in October, down $41.3 billion from
the prior month and the lowest investment since July 2010. The
portfolio of Japan decreased for third month, falling by $4.5 billion
to $1.13 trillion, according to the data. Collectively, the two
nations account for about 37 percent of America’s foreign debt
holdings.
And
the drop in US Treasury holding has been consonant with the sustained
decline in foreign currency reserves last November.
From
Bloomberg: (December
7): China’s foreign currency
reserves, the world’s largest, fell the most since January
after the yuan declined to an eight-year low… Reserves
decreased $69.1 billion to $3.05 trillion in November,
the People’s Bank of China said in a statement Wednesday That
compares with the median forecast of $3.06 trillion in a Bloomberg
survey of economists Decline was biggest since reserves tumbled $99.5
billion in January
So
with reserves down in November this means Chinese selling of US
treasury last November has been sustained.
The
liquidity crunch has even percolated to stocks. The Shanghai
Composite cratered 3.4% this week.
There
has been a lot of attribution for this week’s actions to the US
Fed.
But
the FED has only been an aggravating factor. And so with capital
controls.
Yet
both should be addressed by PBoC injections. But this hasn’t worked
out.
The
key problem has most likely been accelerating balance sheet strains.
And they are most likely strains from US dollar denominated debt.
The funding problems have now been spreading and intensifying.
A
year back, this was the reason for the global meltdown. Today at even
worst conditions, China liquidity predicament has largely been
ignored by the world.
If
things in China worsens or becomes totally unhinge, prepare for a
shock
The
coming weeks should be very interesting.
