On a related note, the FT reported China has ordered its news outlets to stop talking about the country’s cash crunch. Last month saw the Shanghai inter-bank offering rate (Shibor) unexpectedly spike as the People’s Bank of China sought to impose discipline on its financial sector by starving it of cash.
China Tells Media To Stop Talking About The Cash Crunch, And To Say That Everything Is Just Fine
This oughta do the trick.
Nothing instills confidence in the financial system like the government issuing a directive to media telling outlets to report that everything is just fine.
Alas, that’s exactly what China has done.
In a directive written last week and transmitted over the past few days to newspapers and television stations, local propaganda departments of the Communist party instructed reporters to stop “hyping the so-called cash crunch” and to spread the message that the country’s markets are well stocked with money.
The Chinese Central Bank Freaked Out Over A Bank Lending Spike Unlike Anything It Had Ever Seen Before In History
But at the same time, in China, there was a spike in SHIBOR (which is China’s equivalent of LIBOR) which screamed cash crunch for China’s banks.
That too freaked markets out, and now thanks to Lingling Wei and Bob Davis at WSJ we have a better idea of why SHIBOR (which has since calmed down) spiked so hard.
Basically (and this was suspected at the time) the People’s Bank of China let the rates spike as a tough measure to induce a level of tightening and discipline in the banking system.
What caused the PBOC to do this?
According to a previously undisclosed summary of a PBOC internal meeting on June 19, the central bank was especially concerned that in the first 10 days of June, Chinese banks increased lending by 1 trillion yuan ($163 billion)—an amount the central bank said “had never been seen in history.” And about 70% of that amount consisted of short-term notes that mostly don’t show up on banks’ balance sheets—making it easier for the banks to get around regulatory lending restrictions-—rather than lending the money to promising companies or projects.
The PBOC evidently took that lending spike to be a sign of an expectation of further easy policy, and so the response was to do the hard opposite, let interest rates spike, and basically give the banks the back of the hand, letting them know that their risky behavior would not be rewarded.
China No Longer Making Up Numbers, Now Simply Deleting Them
For many years, the Chinese politburo (not to be confused with the US Department of Labor) had a simple solution to accusations that central planning doesn’t work: just make up the economic numbers. However, a few months ago China found itself in hot water when it became impossible to pretend its manipulated numbers were even remotely credible, driven by a massive discrepancybetween China exports to Hong Kong and HK imports from China.
The immediate result by China, and the PBOC, as it attempted to regain some credibility was an drastic and epic move to force capital reallocation, in the process nearly wiping out its banking sector when interbank lending rates exploded to over 25%. For now, China appears to have regained some control even if the ensuing CNY1 trillion deleveraging that is imminent is sure to lead to unprecedented pain for the country that is more addicted to credit creation than any other.
But in the meantime, China has once again fallen bank to doing what it does best: manipulating economic data, in this case the recently announced PMI. Only this time there is a twist: instead of goalseeking reported data to comply with some artificial reality that Beijing approves of, now China is simply flat out refusing to report numbers, period!
Barclays Sees An “Increasingly Likely Scenario” Of A 3% Growth “Hard Landing” In China
Japan may have its Abenomics, which is about reversing deflation and restarting growth using a shock and awe approach of qualitative and quantitative easing, simplified as a doubling its monetary base in a few short years, but that is old news. The latest –nomics is that of China and, as Barclays calls it, Li Keqiang’s Likonomics which is about “about deceleration, deleveraging and improving growth quality.”
Of course, since the deleveraging involved in credit-starved China will be measured in the trillions of yuan, we wish them all the best. Because as Barclays also adds, “The fate of both policies, however, will be determined by the success of structural reforms in each country.”
Alas, if there is one thing the modern world has shown is that while implementing aggressive monetary policy is simple, following through with sustainable, fiscal and structural reforms has proven impossible (see Europe and the US). Maybe what failed everywhere else will work in Japan and China. But if it doesn’t, things for China are about to get very ugly. So ugly that the hard landing scenarios of yesterday will seem like a walk in the park. From Barclays: “China could experience a temporary ‘hard landing’ (quarterly growth dropping to 3%) in the next three years.” If that happens, all global growth (and stability bets) are off.
China’s alarming credit crunch
As investors digest the sharp spike in China’s interbank rates last week, the action of the central bank is now in the spotlight.
Was this a considered policy to purge speculative excess from the financial system, or is the People’s Bank of China seeking to disguise a bigger problem?
On the face of it, slamming the brakes on credit appears a questionable policy when economic growth is already slowing and inflation is seemingly stable. What’s more, would the central bank really engineer a cash-crunch that sent overnight interbank rates to 13% and effectively froze the interbank market?
China June official PMI slips to 50.1, adds to growth worries
4 Reasons The World Is Still Vulnerable To Another Huge Crisis
The same conditions that resulted in the last crisis are all still with us.
I liked this piece by Philippe Bacchetta and Eric van Wincoop at VOX regarding the causes of the global great recession. In it, they discuss the factors that led to the crisis and why it was so globally widespread. This section, in particular, jumped out at me:
“There were also several factors that made the global economy more sensitive to a global panic:
- First, credit was tighter due to the financial crisis, making firms more vulnerable when hit with lower demand and lower profits.
- Second, there was limited scope for monetary policy as interest rates were already approaching the zero lower bound.
- Third, there were constraints on countercyclical fiscal policy due to increasing debt levels and new fiscal rules.
- Fourth, economic integration, although incomplete, had substantially increased in previous decades.
The first three factors generate vulnerability to a self-fulfilling panic in general, while the last one generates particular vulnerability to a panic that is global in nature.”