Epic history is in the making.
The Chinese yuan fell by another 1.1% this week to hit an eight year low.
Reports from mainstream media have constantly been implying that the yuan’s decline has been “designed”, “tolerated”, “controlled” or “premeditated” by Chinese government’s central bank, the PBoC.
However, evidences hardly seem to reinforce such claims.
Instead, the PBOC appears to be implementing interventions in its monetary-banking system which has resulted to what can be characterized as a whack-a-mole impact!
As the perspicacious ‘eurodollar’ analyst Jeffrey Snider at Alhambra Partners has repeatedly pointed out—where the PBOC attempted to fix the yuan, signs of stress erupted at China’s (or/and Hong Kong’s) interbank rates. And when the PBOC tried to restrain interbank rates, the yuan plunged. Hence, the whack a mole dynamic.
The chart above reveals of the progression of PBoC’s whack-a-mole effects from the PBoC’s actions.
Lately, the PBoC appears to have given up with controlling the yuan and or the SHIBOR.
So the pressures appear to be escalating in BOTH the yuan and the SHIBOR
And turmoil in the SHIBOR has not been limited to the very short term, but has spread throughout SHIBOR curve.
And similar stress can be seen in the above charts of the offshore yuan via Hong Kong’s HIBOR.
And all these have been occurring while the Chinese government’s treasury holdings of US Treasury have plunged…
Chart from Zero Hedge
From Bloomberg (November 17)
China’s holdings of U.S. Treasuries declined to the lowest level in four years, as the world’s second-largest economy runs down its reserves to support the yuan.
The biggest foreign holder of U.S. government debt had $1.16 trillion in bonds, notes and bills in September, down $28.1 billion from the prior month, according to U.S. Treasury Department data released Wednesday in Washington and previous figures compiled by Bloomberg. That’s the lowest level since September 2012.
And as the Chinese government continues to liquidate on its US Treasury holdings in order to shore up its domestic “dollar” requirements, such liquidations have only been manifested through plummeting foreign reserves.
Chinese foreign reserves tumbled by $45.7 billion to $3.12 trillion in October (Bloomberg November 7)
Yet underneath the intensifying pressures on the monetary and banking system has been the Chinese government’s addiction to credit…
…or runaway credit comes in the face of declining economic activities!
Even mainstream media and experts have come to be cognizant of its grave perils.
From Bloomberg: (November 16)
A nine-year credit expansion meant to protect economic growth has prompted numerous warnings of impending financial trouble. China’s debt-to-gross domestic ratio reached 247 percent after expanding at the fastest pace among Group of 20 nations, according to economists Tom Orlik and Fielding Chen at Bloomberg Intelligence; such sharp increases have been known to trigger crises in other countries, they say.
The Bank for International Settlements in September used data comparing credit and GDP to warn of looming risks in China.
“Targeting economic growth and continued heavy reliance on credit to support growth means that economic leverage is unlikely to abate soon,” said Cornish. “This will increase the risks for the financial sector.”
Of course, credit money (over $2 trillion annual) has to go or be spent somewhere.
If they haven’t flowed to the general economy, then just where have they been directed at?
Well, the short answer is that it has only been fueling one bubble after another.
It began with a colossal real estate bubble….
Charts from USFunds.com and Bloomberg’s GADFLY
But spread to the stock market…
Then back to real estate today when the stock market bubble imploded in 2015.
And as these asset bubbles alternately billowed, a gargantuan bond bubble (Barrons August 26 2016) has likewise been inflated
China’s bond market has been on such an epic tear in recent weeks that the central bank is scrambling to curb speculation. The first sign came Wednesday, when the PBOC injected pricier 14-day repurchase agreements into the financial system for the first time since February. It also clamped down on unruly peer-to-peer lending. The steps are aimed at mopping up excess credit - especially the cheap, short-term kind - to refocus punters on longer-term investments. It’s a tacit confirmation that China has joined U.S. Treasuries, German debt and Japanese government bonds in bubble territory.
Dynamics in China could be the most troubling of all. At first, China’s debt boom seemed a piece of a global trend, one that picked up pace in January when the Bank of Japan joined the European Central Bank in engineering negative rates. Yet a rising number of mainland defaults should be driving credit spreads in the opposite direction. The same goes for regulatory crackdowns on credit and wealth-management products, moves that suggest growing alarm over threats to the national balance sheet.
Increasingly, though, banks have been plowing short-term borrowings normally used for daily cash needs into markets and offering it to investors. Much of it has flowed into bonds amid concerns about shaky stock values. The upshot has been a ramping up of leverage in the $8.5 trillion bond arena, as evidenced by 10-year yields in the neighborhood of 2.6%.
The bond bubble is another reminder of how painfully slow President Xi Jinping has been to recalibrate growth engines. While moves to swap debt for equity and securitizing bad loans garnered banner headlines, in practice they’ve just enabled politically-connected highly-indebted companies and local governments with bailouts. That also helps keep corporate yields down. Moral hazard risks, in other words, have only increased this year.
Also since stocks and bonds were not enough, the tidal wave of credit induced the Chinese to also indulge in manic speculations on commodities
From the Financial Times (April 27)
In the past month near mania has gripped China’s commodity futures markets with day traders and yield-hungry wealth managers pouring into a lightly regulated sector, often with astonishing results.
Daily trading volumes in some commodity futures contracts such as iron ore have been so large that sometimes they have exceeded China’s annual imports. Turnover in Shanghai steel futures one day last week eclipsed all of the shares traded on China’s equity markets.
Alarmed by the surge in trading, which has parallels with the lead-up to last year’s equity market meltdown, Chinese exchanges have moved quickly to increase transaction fees and margin requirements on future contracts to cool some of the speculative ardour.
While this has removed some of the froth from prices, it is not clear whether it will deter the new band of investors that turned away from equity markets after draconian rules were imposed last year. At the same time, Beijing wants to place China at the centre of global commodity markets with prices determined and settled in renminbi.
All of this could have far-reaching consequences for the way raw materials are priced and risks driving up the cost of commodities that are the building blocks of the global economy.
Here is the titanic speculative ramp on commodities as shown in the updated chart provided by the Zero Hedge
Massive credit creation already implies of a weaker yuan. Add to these significant numbers of people who would want to move capital out of China. Such capital flight may be due to political conflicts or economic difficulties or concerns over the economic repercussions from asset bubbles or a combination thereof.
More importantly, economic predicaments translate to the deepening of financial system’s balance sheet ordeals, which have only magnified pressures from excessive (but still ballooning) indebtedness, particularly for US dollar liability exposures. Leverage based on wholesale finance adapted by the financial system has further compounded or aggravated on the system’s US dollar woes.
So all these have been expressive of mounting financial (bubbles) and monetary strains as the real economy struggles (or artificially inflated by trillions or a tsunami of credit)
Strains, incidentally, which seems to be compounding on China’s (as well as the world’s) “dollar shorts” conundrum.
And progressing strains has now been ventilated in the escalating plunge of the yuan and the coincidental-correlational spikes in interbank rates.
And it would appear that the PBoC has been left out in the cold.
As Mr. Snider warned
The PBOC no longer holds SHIBOR steady, but the results are the same. China found itself with only growing unrest to the point of chaos in its RMB markets due to the “dollar” and that disorder spread out in waves to other places around the globe. The processes and symptoms are all the same; a consistency you just won’t find in mainstream commentary. Again, as noted earlier, the “rising dollar” is a euphemism for a more acute “dollar” shortage, one that ebbs and flows. This looks more and more like another global “flow” – “dollar”, not Trump.
Once again, the seeming transmission process from the present periphery (China and emerging markets’ currency, bonds and precious metals) to the eventual core (developed economies).
Epic history is in the making.
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