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Doug Nolan
February 17 – Bloomberg: “Record new credit in China in January will help the economy maintain momentum while highlighting challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans. Aggregate financing, the broadest measure of credit, was 2.58 trillion yuan ($425bn), the People’s Bank of China said… New local-currency lending was 1.32 trillion yuan, the highest level since 2010. Trust loans, under scrutiny because of default risks, were about half the level of a year earlier. The data add to better-than-forecast trade numbers, suggesting that China can limit the scale of any slowdown from last year’s 7.7% expansion in gross domestic product. At the same time, the figures contrast with a central bank call in mid-January for lenders to control surging loans and highlight diminishing economic returns from credit growth.”
A one-month $425 billion increase in system Credit (“social financing”) is something to mull over. For one, it was an all-time record for a month (in China as well as the solar system), surpassing last January’s record (January is traditionally a big lending month in China). Secondly, China’s January Credit growth was 35% above estimates. It placed year-on-year Credit growth at 17.5%, significantly above slowing GDP expansion. And it was said that January’s record Credit would have been even stronger had the major banks not pulled back from lending during the final week of the month.
Bill Gross has called China “the mystery meat of emerging-markets.” I would tend to view Chinese finance and their policy regime attempting to manage system Credit the proverbial mystery wrapped in an enigma. From Bloomberg: “The jump in loans contrasts with the central bank’s January warning that bank credit was increasing rapidly and also its statement in November that the economy may face long-term deleveraging. Each $1 of credit added the equivalent of 17 cents in GDP in the first quarter of 2013, down from 29 cents the previous year and 83 cents in 2007…”
Rampant Credit expansion is inevitably damaging to the underlying currency. Early in the boom, Credit growth generally supports strong capital investment, favorable economic dynamics, rising asset prices and financial inflows. Trouble mounts as the Credit Cycle ages. At some point, Credit excesses shift from predominantly financing productive investment to various non-productive endeavors. Late-cycle non-productive purposes would certainly include funding speculation, along with lending in support of troubled borrowers struggling to service mounting debt loads. Chinese Credit dynamics do these days bring to mind the great Hyman Minky’s “Ponzi Finance” stage of financial development.
Especially in the emerging markets, the non-productive “terminal phase” will more conspicuously expose Credit inflation’s myriad consequences. These would likely include traditional consumer price inflation, along with problematic Bubbles, inequitable wealth distribution, corruption, and attendant social stress. An increasingly maladjusted economic structure will require ever-increasing amounts of (non-productive) Credit, at great cost to financial and economic stability. Growth will slow even in the face of ongoing Credit excess. Traditionally – and we’ve witnessed this dynamic over the past year in the likes of Brazil, India, Turkey, Russia, Argentina, etc. – the deteriorating macro backdrop will see a problematic reversal of “hot money” flows. A weakening currency will tend to exacerbate inflationary pressures, while fostering ongoing destabilizing excesses within the domestic Credit system.
Let’s return to the Chinese enigma. With ongoing trade surpluses and an incredible $3.8 Trillion international reserves position, the Chinese currency would on the surface appear a juggernaut in comparison to its weak rivals. A strong consensus view holds that the Chinese currency is sound. As I see it, the unprecedented inflation of non-productive Chinese Credit would seem to ensure an eventual currency crisis.
Pegged currency regimes played prominently in ‘97/98 global crises (Thailand to SE Asia to Russia to hedge funds to Wall Street). Currency values tied closely to the dollar were fundamental to huge boom-time speculative “hot money” inflows and leverage that were instrumental in fueling the “Asian Tiger” “miracle” economies. Yet booms never last forever – so be ever suspicious of economic miracles. The reversal of EM “hot money” found the pegged currency regimes unsound and acutely fragile. And the rapid-fire disintegration of currency pegs unleashed contagious deleveraging, financial meltdown and economic collapse.
I’ve for some time viewed China’s currency regime as a virulent “peg on steroids”. Chinese officials have essentially tied the yuan value to the dollar while employing gradual yuan appreciation versus the U.S. currency. If currency pegs invite speculative inflows, then there’s a strong case that China’s newfangled currency controls have over recent years provided the strongest “hot money” magnetic pull in financial history. A powerful “money” magnet in a world awash in cheap “money” provided a most portentous elixir.
February 21 – Bloomberg (Fion Li): “The yuan had its biggest weekly slide since September 2011 in offshore trading after China manufacturing data added to signs of a slowdown in the world’s second-largest economy. The yuan dropped 0.27% today to 6.0847 per dollar…, extending this week’s loss to 0.81%... The offshore yuan is the worst performer in February among 12 Asian exchange rates tracked by Bloomberg. Global yuan trading volume surged to $120 billion a day on average in April 2013, from $34 billion in 2010… Daily average turnover in offshore yuan spot, forwards and options could reach $20 billion in 2014, based on a December estimate by Deutsche Bank AG, the world’s biggest currency trader.”
Early in the week, sanguine analysts were generally viewing China’s January Credit data in positive light. Many saw strong lending as confirmation that the People’s Bank of China (PBOC) had adopted a more accommodative posture. Huge Credit growth was certainly viewed as supportive of 2014 growth – for China as well as globally. And with the PBOC not forcefully responding to declining interbank lending rates, some were even tempted to celebrate the apparent end to Chinese “tightening” measures. Chinese equities enjoyed an almost 3% gain for the week as of Thursday morning, before selling saw stocks end the week little changed.
By Friday analysts were generally scratching their heads. Even as lending surged, January’s preliminary reading on Chinese manufacturing (48.3) surprised on the downside. And from MarketNews International: “The Chinese yuan became the focus of the market this week after it lost 300 pips in four trading days, giving up all of its gains against the U.S. dollar since early December. Traders said the drastic decline of the yuan was a result of the PBOC’s efforts to deter hot money inflows and on expectations of further reform moves by Beijing, such as widening the yuan trading band.”
Maybe Chinese officials haven’t backed away at all from tightening measures. Perhaps it’s just a change of tack; perhaps even an important one. Have the Chinese turned their focus to countering “hot money” speculative inflows? It would make sense. After all, multiyear efforts to tighten domestic Credit conditions (including through interest-rates) have to this point been negated by enormous speculative (“carry trade”) inflows keen to capitalize on widening rate differentials.
http://www.prudentbear.com/2014/02/c...l#.Uwq6Nih8vzI
February 17 – Bloomberg: “Record new credit in China in January will help the economy maintain momentum while highlighting challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans. Aggregate financing, the broadest measure of credit, was 2.58 trillion yuan ($425bn), the People’s Bank of China said… New local-currency lending was 1.32 trillion yuan, the highest level since 2010. Trust loans, under scrutiny because of default risks, were about half the level of a year earlier. The data add to better-than-forecast trade numbers, suggesting that China can limit the scale of any slowdown from last year’s 7.7% expansion in gross domestic product. At the same time, the figures contrast with a central bank call in mid-January for lenders to control surging loans and highlight diminishing economic returns from credit growth.”
A one-month $425 billion increase in system Credit (“social financing”) is something to mull over. For one, it was an all-time record for a month (in China as well as the solar system), surpassing last January’s record (January is traditionally a big lending month in China). Secondly, China’s January Credit growth was 35% above estimates. It placed year-on-year Credit growth at 17.5%, significantly above slowing GDP expansion. And it was said that January’s record Credit would have been even stronger had the major banks not pulled back from lending during the final week of the month.
Bill Gross has called China “the mystery meat of emerging-markets.” I would tend to view Chinese finance and their policy regime attempting to manage system Credit the proverbial mystery wrapped in an enigma. From Bloomberg: “The jump in loans contrasts with the central bank’s January warning that bank credit was increasing rapidly and also its statement in November that the economy may face long-term deleveraging. Each $1 of credit added the equivalent of 17 cents in GDP in the first quarter of 2013, down from 29 cents the previous year and 83 cents in 2007…”
Rampant Credit expansion is inevitably damaging to the underlying currency. Early in the boom, Credit growth generally supports strong capital investment, favorable economic dynamics, rising asset prices and financial inflows. Trouble mounts as the Credit Cycle ages. At some point, Credit excesses shift from predominantly financing productive investment to various non-productive endeavors. Late-cycle non-productive purposes would certainly include funding speculation, along with lending in support of troubled borrowers struggling to service mounting debt loads. Chinese Credit dynamics do these days bring to mind the great Hyman Minky’s “Ponzi Finance” stage of financial development.
Especially in the emerging markets, the non-productive “terminal phase” will more conspicuously expose Credit inflation’s myriad consequences. These would likely include traditional consumer price inflation, along with problematic Bubbles, inequitable wealth distribution, corruption, and attendant social stress. An increasingly maladjusted economic structure will require ever-increasing amounts of (non-productive) Credit, at great cost to financial and economic stability. Growth will slow even in the face of ongoing Credit excess. Traditionally – and we’ve witnessed this dynamic over the past year in the likes of Brazil, India, Turkey, Russia, Argentina, etc. – the deteriorating macro backdrop will see a problematic reversal of “hot money” flows. A weakening currency will tend to exacerbate inflationary pressures, while fostering ongoing destabilizing excesses within the domestic Credit system.
Let’s return to the Chinese enigma. With ongoing trade surpluses and an incredible $3.8 Trillion international reserves position, the Chinese currency would on the surface appear a juggernaut in comparison to its weak rivals. A strong consensus view holds that the Chinese currency is sound. As I see it, the unprecedented inflation of non-productive Chinese Credit would seem to ensure an eventual currency crisis.
Pegged currency regimes played prominently in ‘97/98 global crises (Thailand to SE Asia to Russia to hedge funds to Wall Street). Currency values tied closely to the dollar were fundamental to huge boom-time speculative “hot money” inflows and leverage that were instrumental in fueling the “Asian Tiger” “miracle” economies. Yet booms never last forever – so be ever suspicious of economic miracles. The reversal of EM “hot money” found the pegged currency regimes unsound and acutely fragile. And the rapid-fire disintegration of currency pegs unleashed contagious deleveraging, financial meltdown and economic collapse.
I’ve for some time viewed China’s currency regime as a virulent “peg on steroids”. Chinese officials have essentially tied the yuan value to the dollar while employing gradual yuan appreciation versus the U.S. currency. If currency pegs invite speculative inflows, then there’s a strong case that China’s newfangled currency controls have over recent years provided the strongest “hot money” magnetic pull in financial history. A powerful “money” magnet in a world awash in cheap “money” provided a most portentous elixir.
February 21 – Bloomberg (Fion Li): “The yuan had its biggest weekly slide since September 2011 in offshore trading after China manufacturing data added to signs of a slowdown in the world’s second-largest economy. The yuan dropped 0.27% today to 6.0847 per dollar…, extending this week’s loss to 0.81%... The offshore yuan is the worst performer in February among 12 Asian exchange rates tracked by Bloomberg. Global yuan trading volume surged to $120 billion a day on average in April 2013, from $34 billion in 2010… Daily average turnover in offshore yuan spot, forwards and options could reach $20 billion in 2014, based on a December estimate by Deutsche Bank AG, the world’s biggest currency trader.”
Early in the week, sanguine analysts were generally viewing China’s January Credit data in positive light. Many saw strong lending as confirmation that the People’s Bank of China (PBOC) had adopted a more accommodative posture. Huge Credit growth was certainly viewed as supportive of 2014 growth – for China as well as globally. And with the PBOC not forcefully responding to declining interbank lending rates, some were even tempted to celebrate the apparent end to Chinese “tightening” measures. Chinese equities enjoyed an almost 3% gain for the week as of Thursday morning, before selling saw stocks end the week little changed.
By Friday analysts were generally scratching their heads. Even as lending surged, January’s preliminary reading on Chinese manufacturing (48.3) surprised on the downside. And from MarketNews International: “The Chinese yuan became the focus of the market this week after it lost 300 pips in four trading days, giving up all of its gains against the U.S. dollar since early December. Traders said the drastic decline of the yuan was a result of the PBOC’s efforts to deter hot money inflows and on expectations of further reform moves by Beijing, such as widening the yuan trading band.”
Maybe Chinese officials haven’t backed away at all from tightening measures. Perhaps it’s just a change of tack; perhaps even an important one. Have the Chinese turned their focus to countering “hot money” speculative inflows? It would make sense. After all, multiyear efforts to tighten domestic Credit conditions (including through interest-rates) have to this point been negated by enormous speculative (“carry trade”) inflows keen to capitalize on widening rate differentials.
http://www.prudentbear.com/2014/02/c...l#.Uwq6Nih8vzI
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