China’s Massive RECORD January Credit Inflation Shows Why The World Remains on Lifeline Support

Amidst the record highs or immensely levitating stock markets, mostly predicated reflation chatter, lost in the mainstream conversation has been the elephant in the room: global economies have operated under lifeline support. 

There is no bigger proof than present developments in China

From Bloomberg:

China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree.

Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion) in January, exceeding the median estimate of 3 trillion yuan in a Bloomberg survey

New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate

The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system. The PBOC recently moved to tighten monetary policy by raising the interest rates it charges in open-market operations and on funds lent via its Standing Lending Facility.

In the last 12 months, total social financing totaled USD $2.7 trillion that was partly backed by USD $1.8 trillion of bank credit. (charts from Yardeni Blog)

And this hardly includes a comprehensive take on shadow banking activities.

Yet the Bloomberg notes: “The main categories of shadow finance all increased significantly. Bankers acceptances -- a bank-backed guarantee for future payment -- soared to 613.1 billion yuan from 158.9 billion yuan the prior month.”

All those previous talks about tightening have really not transpired.

Being hooked or extremely dependent on credit, the Chinese economy can hardly afford to take the pains of withdrawal.

This reveals to us the dangers of policy-induced credit expansions. Like drugs, once applied it can hardly be controlled. Political path dependency on credit expansion becomes the main channel for transmission mechanism to the economy.

The PBOC has been again reported to “tighten”. But unless there should be a meaningful turnaround, such measures are likely superficial.

Of course, credit inflation does not exist in a vacuum. It has effects. YYYUUGGEE effects.

The staggering record credit inflation, despite the overcapacity, has boosted not only China’s PPI and CPI but also filtered into stocks and commodities.

This shows that money has to flow somewhere. As been stated here, China’s bubbles have only been in a rotation, it has recently shifted from real estate back to commodities.

In general, asset bubbles have spread to cover a much bigger or wider scale of her economy

Previous sizzling hot Chinese property prices have supposedly weakened due to the crackdown by the national government

From Shanghai Daily (February 15)

CHINA’S property sales have fallen since the government began tightening, and analysts expect more to be done in 2017 to deflate the bubble.

The China Index Academy, a real estate research institute, said property sales in China dropped 36.7 percent month on month in January, in terms of floor space.

On a yearly basis, sales fell by 27.3 percent in January, with Beijing and Shenzhen declining by nearly 50 percent, according to the China Index Academy.

From January 1, banks in Beijing raised mortgage rates for first-time home buyers. On January 19, Shenzhen tied new home prices to the average price of houses on sale in the neighborhood. On February 6, Chongqing also tightened its policy.

And this comes at a time when housing price statistics seem as being controlled.

From Business Insider (January 20)

At least two major Chinese private providers of home price data have stopped publishing the figures, at a time when economists are split whether the red-hot property market will remain a driver of the economy in 2017.

The China Index Academy, a unit of U.S.-listed Fang Holdings , has stopped distributing monthly housing price index data for 100 cities that it usually issued at the start of the month.

The academy told Reuters on Friday it had suspended distribution indefinitely, without giving a reason for the suspension.

"I don't know who exactly is making the order, and it's not mandatory," said a source with knowledge of the matter, who declined to be identified as the topic is a sensitive one.

Home price data from private providers tends to show sharper increases than official data from the National Bureau of Statistics (NBS), which publishes monthly and annual percentage changes in 70 major cities.

And this whopping credit inflation triggered rally in commodities has now been rationalized as the Trump reflation.

Further, think of how these should impact the yuan

At the end of the day, whatever one sees in the market today, such hasn’t been about organic growth but about the seemingly endless life support system provided by central bankers to sustain and keep the world from a massive debt debacle. 

Yet the other side of this has been to worsen the underlying conditions. Record stocks is a symptom of the pathology of redistribution.

All these will hit a wall…sometime soon.

And of course what happens in China won’t stay in China.

China’s Credit Crunch Has Been Spreading and Intensifying!

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.

The turmoil in short term funding rates for both SHIBOR and HIBOR curves have only been worsening!

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.