China interbank market freezes - record high overnight repo rate

[ProdigyofZen]

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.

No Japan wouldnt have done this. IMO it seems there were historical reasons for why Japan did not reflate immediately using the expansion of the BoJ's balance sheet and that is their hyperinflationary event following their loss in WWII.

[ProdigyofZen]

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

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.”

Update from Marketfield Asset Management on China Money Markets:

China Money Market Update
We continue to monitor the turmoil in Chinese money markets and it is starting to become increasingly clear that in large part the sudden tightening of funding markets is a result of a deliberate attempt by the monetary authorities to send a blunt message to the shadow banking industry that it is time to sharply constrain their activities.
This has been made apparent by the very targeted manner in which the PBOC has chosen to inject liquidity into gridlocked financing markets and the lack of official comment in spite of several media requests for information. In response to this limited intervention, there was at least some improvement in some of the more egregious rates, with the 1 month REPO rate declining from its record 17.0% to 12.0%. 1 month SHIBOR (which was fixed before the injection of funds) rose 30 bp to 9.70, a new record (see charts).
Looking ahead, we are less worried about the short-term effects than the long-term consequences of this episode. The PBOC, under instructions from the new administration, seems intent on sending a very blunt message to the financial system that rampant credit creation needs to be rapidly constrained. We assume that they will try to ensure sufficient liquidity to avoid an immediate collapse of a significant entity but that they will make it much more difficult for shadow banking sources to provide capital going forwards.
This, and the collapse of the IPO market for corporate credit, means that going forwards, Total Social Financing will be substantially lower than recent months and will once more be dominated by bank loans. Although this will give the PBOC much more control over the process, the shutting off of certain areas of liquidity is very reminiscent of what took place in the US in early 2007 when the sub-prime market blew up, removing a large number of borrowers from the housing market, and the simultaneous collapse of a number of SIVs destroyed demand for commercial paper (see chart).
Although most commentators followed Henry Paulson's view that the damage was "contained", within a matter of months it became apparent that losing the key funding sources of the housing bubble had created a massive destabilizing of the entire financial system. This is the danger which the PBOC now faces should it decide (or be forced by political masters) to forcibly shut down large portions of the shadow banking system.

[Polish_Silver]

chinese brand names

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.

As an example of that, how many "chinese brand names" can you think of. Hardly any. Most of thier stuff is done "off label" and some for major brands, which try to hide the fact it is made in china. Contrast that with Japan, Korea, Germany, US, France, they all have
brands which are emblematic.
I don't think Chinese people are incapable of that. But the system they are in is not conducive to it. And I am skeptical that they can get there without radical change. I don't think a "5 year plan" will do it.

[Polish_Silver]

Re: Can China do it?

No Japan wouldnt have done this. IMO it seems there were historical reasons for why Japan did not reflate immediately using the expansion of the BoJ's balance sheet and that is their hyperinflationary event following their loss in WWII.

If they had aggressively reflated, they would have created a different sort of problem. I am with EJ, once you have blown a bubble, you are screwed. It's just what kind of suffering you want.

[c1ue]

Re: Can China do it?

As an example of that, how many "chinese brand names" can you think of. Hardly any. Most of thier stuff is done "off label" and some for major brands, which try to hide the fact it is made in china.

Name me some quality Japanese brands in the US in 1970, or even 1980.

Contrast that with Japan, Korea, Germany, US, France, they all have brands which are emblematic.

Oh, you mean like GM?

[Polish_Silver]

Re: Can China do it?

Name me some quality Japanese brands in the US in 1970, or even 1980.



Oh, you mean like GM?

MK,
I said emblematic, not problematic. I was thinking along the lines of Intel, Boeing, Apple,
Caterpillar. Japan and Korea both transitioned from low end stuff to high end. The question is whether China can do it. I can think of arguments both ways. To some extent China is already doing it, with electronic test equipment and li-ion batteries.

[Milton Kuo]

Re: Can China do it?

Polish_Silver, not me, wrote the stuff you quoted....

Name me some quality Japanese brands in the US in 1970, or even 1980.



Oh, you mean like GM?

By the 1970s, Sony had already made a name for itself and by the 1980s, most of the consumer electronics sold in the U.S. were Japanese-made and were of very good quality. I have an uncle who has a Sony Trinitron television from the early 1970s that still works although it badly needs a de-Gaussing. Panasonic was also a relatively well-regarded name in the 1970s. In 1970 itself, the Japanese stuff wasn't top-tier but it wasn't utter garbage either.

I seem to also recall that by 1980, Honda and Toyota were acknowledged as being good quality cars albeit not as big or exciting as some American cars. The Japanese automobile manufacturers were given a huge boost by the Big Three in Detroit churning out utter garbage. In fact, the Lemon Laws came about in the 1970s in response to crappy American cars. To the best of my knowledge, the Japanese cars from Toyota and Honda were unaffected by the Lemon Laws.

As for top-quality American goods, I've been of the opinion that when the U.S. actually tries, it creates products that very few in the world can beat and when we don't try ... we get crap like the cars from Detroit made in the 1970s and 1980s. Just off the top of my head, here are a few American institutions that make high-value products that are pretty doggone good:

• Boeing
• Intel
• New Balance
• Apple (Yes, I know they outsource manufacturing to Foxconn but the software and product design is done in Cupertino)
• Microsoft
• Google
• Blizzard Entertainment
• A good deal of the U.S. war machinery
• Leatherman
• Snap-tite
• Steinway
• Fluke
• Caterpillar
• Coins from the U.S. Mint
• Books printed and bound in the U.S.A., where the quality difference between same from China is obvious.
• Tesla (you knew I had to put this here )

[verdo]

Re: Can China do it?

Not sure about you guys, but I'm just really thankful for market guru's like Bill Murphy, James Turk, Ted Butler, and exceptional traders like Peter Schiff. Without them I would honestly have no idea what's going on right now

[metalman]

Re: Can China do it?

Not sure about you guys, but I'm just really thankful for market guru's like Bill Murphy, James Turk, Ted Butler, and exceptional traders like Peter Schiff. Without them I would honestly have no idea what's going on right now

murphy... turk... butler...schiffty...

[GRG55]

Re: Can China do it?

Name me some quality Japanese brands in the US in 1970, or even 1980.


...

Without even trying to hard: Seiko and Sony. The Seiko digital watch I got as a graduation gift in the 1970s kept better time than the Rolex I replaced it with 21 years later.

[c1ue]

Re: Can China do it?

Polish_Silver, not me, wrote the stuff you quoted....

Sorry, fixed.

I said emblematic, not problematic. I was thinking along the lines of Intel, Boeing, Apple, Caterpillar. Japan and Korea both transitioned from low end stuff to high end. The question is whether China can do it. I can think of arguments both ways. To some extent China is already doing it, with electronic test equipment and li-ion batteries.

As I've noted before - nothing is certain but there are companies in China which have the long term viewpoint and technical capability to become a global brand via global products. Huawei is one of them in my book.

Without even trying to hard: Seiko and Sony. The Seiko digital watch I got as a graduation gift in the 1970s kept better time than the Rolex I replaced it with 21 years later.

Seiko makes good stuff - but were they a quality brand? Did people rush out to buy Seikos every time the latest model came out?

From what I recall, they were good but primarily for value to a discerning few.

Sony in the 1970s was known purely for the Walkman - a toy, albeit a useful one - and one which they were unable to build on until the advent of the compact disc (1982) and Playstation (1994). In between, they had such notable value brands like betamax, mini-disc, Memory Stick (tm), and so forth. Fortunately, despite not having exclusive development rights over CDs (Philips was there too), CDs alone were enough to boost Sony into megacorporation status.

In the 1980s - Sony was a brand. 1970s - not so clear to me.

[GRG55]

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

...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.

Lot's of speculation about how this transition is going to be executed. Some are suggesting that this administration may be trying to make an economic shift as transformative as the late 1970s under Deng Xiaoping.

It would seem to be a delicate process as the State Owned Enterprises are far larger, more influential and entrenched, complete with all the high Party officials vested interests and corruption that invariably benefits from maintaining the existing structures. Slogans and praises for competition, market economies and private investment are the easy part.

Exposing the debt riddled SOEs and local governments to sudden banking sector credit reforms would seem to risk both the largest contributors to "growth" and the financial sector at the same time...while new growth engines - whatever those might be - are in the embryonic stages. No matter how anyone wants to rationalize it there has been a breathtaking amount of mis-allocated borrowed capital and that can't now be wished away, any more than tracts of debt-financed McMansions in California, Vegas, Phoenix and Florida in 2006.

And finding new growth opportunities will be much more of a challenge than the 1980s and 1990s, with Europe, the USA and developing countries like Brazil, Mexico, and other SE Asian nations all vying for the same markets and far more attuned to Chinese competition in what looks to be a secular slow growth world for some years to come.

In a parallel with the Arab world which is struggling to resolve the conflict between Islam and modernity, China would seem to be caught between the conflicts of the essential "stability" needed to maintain the one party system, through sprinkling patronage and rigid internal controls, and exerting capital discipline while "liberalizing" parts of the economy for private sector participation.

[lektrode]

Re: Can China do it?

Sony in the 1970s was known purely for the Walkman - a toy, albeit a useful one - and one which they were unable to build on until the advent of the compact disc (1982) and Playstation (1994). In between, they had such notable value brands like betamax, mini-disc, Memory Stick (tm), and so forth. Fortunately, despite not having exclusive development rights over CDs (Philips was there too), CDs alone were enough to boost Sony into megacorporation status.

In the 1980s - Sony was a brand. 1970s - not so clear to me.

oh!!! the walkman - when they came out with ver2 (the smaller one) that was when i became a fervent fan - there was NOTHING quite like blasting down thru a field (ski trail) of fresh fluff with something like AC/DC pounding into my brain....



but, as with most good things that come to an end (not the least of which was my skibum daze)
IMHO, sony lost it when they bought into the hollywierd scene/cbs records - seemed like the 'lectronics declined right about that time, eh?

having owned a couple trinitrons, boomboxes etc and altho this latest gadget covers most all the bases, methinks their stuff is a bit overpriced for the level of functionality/quality

[Milton Kuo]

Re: Can China do it?

Without even trying to hard: Seiko and Sony. The Seiko digital watch I got as a graduation gift in the 1970s kept better time than the Rolex I replaced it with 21 years later.

Seiko makes good stuff - but were they a quality brand? Did people rush out to buy Seikos every time the latest model came out?

From what I recall, they were good but primarily for value to a discerning few.

The Swiss watch industry was brought to its knees by the Japanese watchmakers. It was widely acknowledged that Japanese watches were of exceptional quality and far less expensive than Swiss watches. And Seiko in the U.S. was considered a brand that made high-quality wristwatches.

Something that I've entirely forgotten about are Japanese cameras. Japanese cameras were widely acknowledged as excellent products and I believe this occurred in the 1960s or maybe even earlier. The quality of Japanese cameras were mentioned in 1964's "Dr. Strangelove," whose screenplay was co-written by Stanley Kubrick, a master photographer himself:

Lionel Mandrake: I was tortured by the Japanese, Jack, if you must know; not a pretty story.... It was just their way of having a bit of fun, the swines. Strange thing is they make such bloody good cameras.

[GRG55]

Re: Can China do it?

...Seiko makes good stuff - but were they a quality brand? Did people rush out to buy Seikos every time the latest model came out?

From what I recall, they were good but primarily for value to a discerning few.

Sony in the 1970s was known purely for the Walkman - a toy, albeit a useful one - and one which they were unable to build on until the advent of the compact disc (1982) and Playstation (1994). In between, they had such notable value brands like betamax, mini-disc, Memory Stick (tm), and so forth. Fortunately, despite not having exclusive development rights over CDs (Philips was there too), CDs alone were enough to boost Sony into megacorporation status.

In the 1980s - Sony was a brand. 1970s - not so clear to me.

Sorry but your memory is seriously flawed. Seiko had the high end digital watch market all to itself by 1980...they had already driven Texas Instruments, their only real competitor, out of the market by then. The Seiko quartz that I got on graduation was a beautifully finished stainless steel piece, the type of craftmanship the USA had forgotten how to do by then. I still have a 25 year old Seiko watch with dual time zones and an E6B time/speed/distance/fuel calculator on the bezel that I use when flying.

Calling the Walkman a toy is a bit rich C1ue. Like lektrode, all of us in my crowd bought them for when we went skiiing. Sony created and owned the personal recorded music player market until the iPod came along. By the late 70s Sony was the top of the heap of the Japanese consumer electronics companies, able to charge a premium (like Apple does today) over their competitors for their stereo gear and well on their way to wiping out the top audiophile American brands like SAE and Harmon Kardon by the mid-1980s.

By the way, it was the Japanese brand car makers that almost put Chrysler out of business until the first government bailout of that company in 1979.