China interbank market freezes - record high overnight repo rate

[BadJuju]

Re: China interbank market freezes - record high overnight repo rate

For all China's problems, I think they'll do much better than the USA in the future.

[ProdigyofZen]

Re: China interbank market freezes - record high overnight repo rate

The Chinese government wants to restructure the banking system to re-orient it around productive versus non-productive projects so that more credit is extended to firms that intend to build next generation factories to meet demand for higher value-add manufactured goods and less to firms engaged in wasteful property projects.

The intention is to force most banks, and particularly banks that lend to property builders, into needing recapitalization by the government. By recapitalizing only those that the government wants to see survive they can achieve the desired banking system restructuring in one fell swoop. The crisis that the PBoC has induced and is now escalating is in its early stages. I imagine they can achieve the desired level of crisis in weeks or months at most, but who knows. They absolutely have the means to halt the crisis and reflate at any time.

This could never be done in a western democracy. Restructuring a banking system by fiat one of the benefits of a centralized economic system.

EJ, you don't seem too concerned that this "China internal private debt restructuring overseen by the PBOC" is going to cause major disruptions to the weak global recovery outside of markets directly influenced by commodity sales to China?

[icm63]

Re: China interbank market freezes - record high overnight repo rate

EJ, how do you know this? It it speculation, or is there a white paper, research paper?? Do you have links??

[EJ]

Re: China interbank market freezes - record high overnight repo rate

EJ, how do you know this? It it speculation, or is there a white paper, research paper?? Do you have links??

Call it informed speculation.

The channel of communication that led to my concept of Economic MAD working its way into policy channels in China then back into the U.S. policy "discussion" also produced a half dozen contacts that have given me a window into a completely different way of thinking about economic and monetary policy and tools than we are accustomed to. There is none of the tension there we have in the U.S. and Europe between principles of free markets and degrees of government and central bank influence or interference, whichever term applies depending on your ideological bearing. At least in principle in the U.S. and Europe the government is there for the people. In China's it's the other way around. The people are a means to an end, by which the government achieves aims on behalf of the elites who run the government. Fiscal policy and monetary policy are not tools to use to manage the business cycle and recessions that occurs as a natural outgrowth of free markets. That is a western Keynesian concept. There has been not a single recession in China in over 34 years because there is no business cycle in China because there is no market in the sense of markets as we conceive of them in the west, that occasionally punish the careless and reward prudent. In China markets are perpetually managed in real time. Fiscal and monetary policy are not tools used to modulate the extremes of the market but to determine specific market outcomes. If you used the phrase "the central bank is interfering with the market" in policy circles in China they'd find it as confusing as the phrase "the steering wheel of a car interferes with the car's direction." They'd ask, But isn't steering what the steering wheel is for just as the purpose monetary and fiscal policy is to steer markets and the economy in the desired direction?

In the U.S. we might have a public policy debate about winding down the FIRE Economy and winding up the TECI economy. Within the constraints of our political system it'd be tough going as FIRE interests control everything from campaign finance to the framework of debate in the media. In China if the ruling party decides that TECI is a good idea they'd develop one or more five year plans to implement it and then it would be done. I use TECI only as an example. As I've noted I think China lacks the cultural and institutional framework to build a TECI economy, at least today.

China has new leadership and the new leader has decided to reboot the banking system to re-orient it toward new economic policy objectives.

The main point is that the credit bubble failure mode of an economy so run is completely different than anything we have ever seen. The two most outstanding failure modes of credit bubbles were The Great Depression and Japan's 20 plus year drift in and out of recession while stuck in a liquidity trap and output gap. Both occurred due to too little too late reflation responses to credit crisis. I don't think China will repeat that error. The failure mode for The Great Wall of Money is as yet to be determined, but is not imminent.

[GRG55]

Re: China interbank market freezes - record high overnight repo rate

June 21, 2013 6:00 am
The Financial Times Limited

China steps back from severe cash crunch

China pulled back from the brink of a severe cash crunch on Friday, with money rates falling after reports that the People’s Bank of China, the central bank, had acted to alleviate market stresses.

Nevertheless, interbank conditions remained tight and analysts said the PBoC would continue its hard line of recent days to compel financial institutions to pare back their leverage.

Local media reported that the central bank had provided targeted cash injections to the country’s biggest banks after the interbank market almost froze on Thursday, though there was no official announcement of any special provisions.

One bond trader told the Financial Times that the PBoC had given verbal instructions to major banks to resume lending to each other, in order to get the interbank market working again.

The seven-day bond repurchase rate, a key measure of liquidity, fell 227 basis points to 8.5 per cent, indicating that the threat of an acute financial crisis had significantly receded.

But short-term lending rates remained roughly double their normal level – high enough to cause serious pain for over-leveraged financial institutions. The central bank has steadfastly refused to conduct any large-scale, system-wide cash injections over the past week despite calls for help from lenders.

The Shanghai Composite index, the country’s main stock index, fell nearly 1 per cent in the morning trading session, adding to its 7 per cent tumble over the past two weeks.

“We maintain our view that the monetary policy stance will remain tight, at least until the second-quarter GDP release on July 15,” said Zhang Zhiwei, an economist with Nomura Securities.

“We believe that recent action by the PBoC reflects the government’s determination to take aggressive action to contain financial risks,” he added.
Overall credit has grown by about 22-23 per cent in China this year, from 20 per cent in 2012, after a surge in “shadow” lending by trust companies and banks through off-balance-sheet vehicles.

That has added to an already-rapid accumulation of leverage in the economy. The overall credit-to-gross domestic product ratio has jumped from roughly 120 per cent five years ago to closer to 200 per cent today.

“We believe that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth,” analysts with Barclays said in a note.

“Though we believe that the PBoC is likely to stabilise the interbank market in the near term, short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions.”

[Chris Coles]

Re: China interbank market freezes - record high overnight repo rate

EJ, is there any reason to believe that the US might see an advantage in destabilising the Chinese economy; and if so, how would that occur?

[GRG55]

Re: China interbank market freezes - record high overnight repo rate

EJ, is there any reason to believe that the US might see an advantage in destabilising the Chinese economy; and if so, how would that occur?

Haven't the Chinese done a good enough job of that by themselves?

[Polish_Silver]

Can China do it?

. . . Fiscal policy and monetary policy are not tools to use to manage the business cycle and recessions that occurs as a natural outgrowth of free markets. That is a western Keynesian concept. . . .
The main point is that the credit bubble failure mode of an economy so run is completely different than anything we have ever seen. The two most outstanding failure modes of credit bubbles were The Great Depression and Japan's 20 plus year drift in and out of recession while stuck in a liquidity trap and output gap. Both occurred due to too little too late reflation responses to credit crisis. I don't think China will repeat that error. The failure mode for The Great Wall of Money is as yet to be determined, but is not imminent.

Isn't the error always that the people in charge think they understand what is going on, but underestimate the problems they face? I don't see how China is immune to that.

As for the "great wall of money", if china is as opaque and corrupt as people claim, how can anyone know how robust the wall is?

Can China create higher value products? I think it's a question of whether the government will permit significant economic and power centers to develop which it cannot control.

[Southernguy]

Re: Can China do it?

Isn't the error always that the people in charge think they understand what is going on, but underestimate the problems they face? I don't see how China is immune to that.

As for the "great wall of money", if china is as opaque and corrupt as people claim, how can anyone know how robust the wall is?

Can China create higher value products? I think it's a question of whether the government will permit significant economic and power centers to develop which it cannot control.

34 years without a recession are proof that "Chinese flavored capitalism" is up to something.
When some people compare Chinese ability to create vanguard technological products with, for example, USA´s, they should remember that in 1900 USA was already a first class industrial powerhouse. In 1949 China Communist Party arrived in power. The USA was, almost, the master of the universe.
China was an agricultural underdeveloped nation. There on they developed a heavy industrial base (including mastering nuclear military technology). They continued to be, however, a basically agricultural nation.
On 1978 Deng Xiao Ping begun with "reforms" leading to that strange form of capitalism.
You can´t go to a shopping center anywhere in the planet not full of products "made in China". They have millions of engineers, working on development of technology. And they have developed an up to date infrastructure in a couple decades. Hundreds of millions are now out of poverty. In this respect China is very different from India which although it attained some success in advanced technology holds more than 25% of hungry people in the world.
Please, I am in no way talking about "should be" matters. Just cold acceptance of publicly known facts.
In think EJ is absolutely correct in his unemotional analysis of Chinese reality.
The limits to this huge country development shall come from availability of key resources they must import, say: iron ore, other metals, agricultural commodities and, of course, energy.
As for monetary and credit matters, there is nothing a money printing machine controlled by a savvy state cannot handle. Remember, a state not controlled by corrupt election minded politicians but by (maybe as or even more corrupt) non election minded engineers.

[EJ]

Re: China interbank market freezes - record high overnight repo rate

June 21, 2013 6:00 am
The Financial Times Limited

China steps back from severe cash crunch

China pulled back from the brink of a severe cash crunch on Friday, with money rates falling after reports that the People’s Bank of China, the central bank, had acted to alleviate market stresses.

Nevertheless, interbank conditions remained tight and analysts said the PBoC would continue its hard line of recent days to compel financial institutions to pare back their leverage.

Local media reported that the central bank had provided targeted cash injections to the country’s biggest banks after the interbank market almost froze on Thursday, though there was no official announcement of any special provisions.

One bond trader told the Financial Times that the PBoC had given verbal instructions to major banks to resume lending to each other, in order to get the interbank market working again.

The seven-day bond repurchase rate, a key measure of liquidity, fell 227 basis points to 8.5 per cent, indicating that the threat of an acute financial crisis had significantly receded.

But short-term lending rates remained roughly double their normal level – high enough to cause serious pain for over-leveraged financial institutions. The central bank has steadfastly refused to conduct any large-scale, system-wide cash injections over the past week despite calls for help from lenders.

The Shanghai Composite index, the country’s main stock index, fell nearly 1 per cent in the morning trading session, adding to its 7 per cent tumble over the past two weeks.

“We maintain our view that the monetary policy stance will remain tight, at least until the second-quarter GDP release on July 15,” said Zhang Zhiwei, an economist with Nomura Securities.

“We believe that recent action by the PBoC reflects the government’s determination to take aggressive action to contain financial risks,” he added.
Overall credit has grown by about 22-23 per cent in China this year, from 20 per cent in 2012, after a surge in “shadow” lending by trust companies and banks through off-balance-sheet vehicles.

That has added to an already-rapid accumulation of leverage in the economy. The overall credit-to-gross domestic product ratio has jumped from roughly 120 per cent five years ago to closer to 200 per cent today.

“We believe that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth,” analysts with Barclays said in a note.

“Though we believe that the PBoC is likely to stabilise the interbank market in the near term, short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions.”

FT did a decent job of analyzing the situation in this article. Thank you for finding it. A few minor changes and amplifications:

China steps back from severe cash crunch

China pulled back from the brink of a severe cash crunch on Friday, with money rates falling after reports that the People’s Bank of China, the central bank, had acted to alleviate market stresses.

Nevertheless, interbank conditions remained tight and analysts said the PBoC would continue its hard line of recent days to compel financial institutions to pare back their leverage.

Local media reported that the central bank had provided targeted cash injections to the country’s biggest banks that meet banking system restructuring policy criteria after the interbank market almost froze on Thursday, though there was no official announcement of any special provisions.

One bond trader told the Financial Times that the PBoC had given verbal instructions to major banks to resume lending to each other, in order to get the interbank market working again.

The seven-day bond repurchase rate, a key measure of liquidity, fell 227 basis points to 8.5 per cent, indicating that the threat of an acute financial crisis had significantly receded.

But short-term lending rates remained roughly double their normal level – high enough to cause serious pain for over-leveraged financial institutions. The central bank has steadfastly refused to conduct any large-scale, system-wide cash injections over the past week despite calls for help from lenders.

The Shanghai Composite index, the country’s main stock index, fell nearly 1 per cent in the morning trading session, adding to its 7 per cent tumble over the past two weeks.

“We maintain our view that the monetary policy stance will remain tight, at least until the second-quarter GDP release on July 15,” said Zhang Zhiwei, an economist with Nomura Securities.

“We believe that recent action by the PBoC reflects the government’s determination to take aggressive action to contain financial risksimplement a restructuring of the banking system in line with broad economic policy changes under the new administration,” he added.
Overall credit has grown by about 22-23 per cent in China this year, from 20 per cent in 2012, after a surge in “shadow” lending by trust companies and banks through off-balance-sheet vehicles.

That has added to an already-rapid accumulation of leverage in the economy. The overall credit-to-gross domestic product ratio has jumped from roughly 120 per cent five years ago to closer to 200 per cent today.

“We believe that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth,” analysts with Barclays said in a note.

“Though we believe that the PBoC is likely to stabilise the interbank market in the near term, short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions.”

[Milton Kuo]

Re: Can China do it?

Can China create higher value products? I think it's a question of whether the government will permit significant economic and power centers to develop which it cannot control.

My opinion is that China cannot create higher-value products without a substantial cultural change which will take decades. Higher-value products always have an intellectual property component to them be it proprietary technology, brand reputation, or fineness of quality. I don't see that in anything coming out of China today and, through my limited lens into what's going on in China, don't see any cultural norms being established that will allow such a thing to occur in the near future.

[jpatter666]

Re: Can China do it?

My opinion is that China cannot create higher-value products without a substantial cultural change which will take decades. Higher-value products always have an intellectual property component to them be it proprietary technology, brand reputation, or fineness of quality. I don't see that in anything coming out of China today and, through my limited lens into what's going on in China, don't see any cultural norms being established that will allow such a thing to occur in the near future.

Speaking of those cultural norms.....

"What should have been a hushed scene of 800 Chinese students diligently sitting their university entrance exams erupted into siege warfare after invigilators tried to stop them from cheating."

http://www.telegraph.co.uk/news/worl...-cheating.html

[metalman]

Re: Can China do it?

Speaking of those cultural norms.....

"What should have been a hushed scene of 800 Chinese students diligently sitting their university entrance exams erupted into siege warfare after invigilators tried to stop them from cheating."

http://www.telegraph.co.uk/news/worl...-cheating.html

teachers/students collude to inflate grades... everyone wins!

china... where students go to school to learn how to be corrupt...

China rulers struggle with corruption culture

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights.

China’s lunar new year holiday is the busiest time of year for the Zhengzhou East long-distance bus station. But officials in Shuyuanjie village, the district that owns it, complain that every bus rolling out of the station is a reminder of the revenue lost through corruption.

Fan Jianhui, the local Communist party secretary, has seized control of the station to run as his private business and despite street protests and complaints by local officials, there has been no investigation into his activities.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights.

The case illustrates the struggles of China’s ruling party to ensure basic standards of governance even as its new leaders pledge to root out corruption.

Xi Jinping, the new party chief, said last month that the party must fight “tigers and flies at the same time”, adding that no exception would be made in probing graft no matter who was involved.

http://www.ft.com/cms/s/0/764ae9a8-7...#ixzz2WsKUG5WB

[vt]

Re: China interbank market freezes - record high overnight repo rate

The Chinese government wants to restructure the banking system to re-orient it around productive versus non-productive projects so that more credit is extended to firms that intend to build next generation factories to meet demand for higher value-add manufactured goods and less to firms engaged in wasteful property projects.

The intention is to force most banks, and particularly banks that lend to property builders, into needing recapitalization by the government. By recapitalizing only those that the government wants to see survive they can achieve the desired banking system restructuring in one fell swoop. The crisis that the PBoC has induced and is now escalating is in its early stages. I imagine they can achieve the desired level of crisis in weeks or months at most, but who knows. They absolutely have the means to halt the crisis and reflate at any time.

This could never be done in a western democracy. Restructuring a banking system by fiat one of the benefits of a centralized economic system.

Eric,

The American Financial Crisis of 2008 was caused partially by such lunacy as 125% mortgages, and banks/Wall Street with 30-1 leverage. You state western democracies can't restructure a banking system by fiat, but how did we let regulation fail so much as to let us get to the above cited lack of any control?

[Polish_Silver]

Re: Can China do it?

I agree that China's export strength is very impressive. It is also true that any sort of "debt default" can be wiped clean with a printing press. But there are consequences.

Japan had a powerful export economy that started to have troubles around 1990. If printing money were enough to solve the problem, Japan would have done that.