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China Begins Liquidity Tightening, As Bubble Threat Looms
While the domestic money printing syndicate refuses to accept the glaring reality that endless money printing causes unavoidable hyperinflation (the only question being when), China has decided it is time to start closing the spigot. Bloomberg reports that, "China’s central bank began to roll
back its monetary stimulus for an economy poised to become the
world’s second-biggest this year, seeking to reduce the danger
of asset-price inflation after a record surge in credit. The People’s Bank of China yesterday sold three-month bills
at a higher interest rate for the first time in 19 weeks." Ah the benefits of a planned economy: controlling the supply and the demand at the same time. And further, being pegged to the dollar, China receives all the secondary benefits of the Chairman's endless dollar printing. Ain't life grand in Beijing...
“It’s a signal toward the commercial banks, because the
commercial banks allocate their lending at the start of the year
-- it’s a signal not to overindulge,” said Alaistair Chan, an
economist with Moody’s Economy.com in Sydney. “They’re going to
tighten in various ways,” including using the benchmark rate and
required capital reserve ratio for banks, he said.
After in 2009 the Chinese Central Bank was on route to lend over 10 trillion yuan, this year the institution is expecting to tighten credit by 25% to 7.5 trillion yuan.
The PBOC offered 60 billion yuan of three-month bills at a
yield of 1.3684 percent, 4 basis points higher than at last
week’s sale, it said in a statement yesterday. The central bank
is set to withdraw 137 billion yuan from the financial market
this week, the most since the week ended on Oct. 23, according
to data compiled by Bloomberg News.
“The move is best seen as an early stage of interest-rate
increases,” Barclays Capital economists Peng Wensheng and Jian
Chang wrote in a note to clients today. Higher bill rates will
influence the cost of credit between banks, and “help to prevent
a rebound in bank lending, expected in the first few months of
2010, from becoming ‘excessive,’” they wrote.
The PBOC move will likely not be welcomed by equities, as a trend toward tightening always, without exception, ends up in a substantial pullback in equity prices courtesy of an increase in the cost of capital, a brilliantly simple concept which somehow the Fed Chairman in all his excessive studies never managed to quite grasp.
PBOC moves to tighten policy “are likely to cause transient
profit-taking pressures on markets occasionally as investors
have become hooked on easy and cheap money,” RBC Capital Markets
emerging-market analysts, headed by Nick Chamie in Toronto,
wrote in a report. “However, given it’s a confirmation of an
improving growth outlook, any pullback should be within the
context of a typical early cycle policy adjustment phase.”
Amusingly, all this is occurring in the context of a heated debate between domestic pundits about the fate of China, with just today Mark Mobius and Jim Chanos taking on two diametrically opposite views.
On one hand, Templeton's permabullish Mobius had this this to say:
“The Chinese will act rationally and they’re not going to
kill the market,” Mobius, who oversees $34 billion of
developing-nation assets at Templeton Asset Management Ltd.,
said in an interview in Singapore. “There’s still a lot of
savings in China. Prices are high but I don’t see a crash.”
Being permabullsh, as noted, prevents him somewhat from having a truly objective opinion.
Mobius said he plans to increase holdings in Chinese stocks
by purchasing shares that benefit from consumer demand,
including developers and raw-material suppliers. Shanghai’s
index of property stocks has lost 28 percent in the year through
Jan. 7 after reaching a one-year high in July.
On the other hand, the world's most famous short seller and Enron slayer, Jim Chanos, couldn't disagree more.
“Bubbles are best identified by credit excesses, not valuation
excesses,” he said in a recent appearance on CNBC. “And there’s no
bigger credit excess than in China.” He is planning a speech later this
month at the University of Oxford to drive home his point.
Yet Chanos faces an uphill battle, as ever more of the procyclical long-onlies come out of hiding, forgetting that all the world market is one great big ponzi that came close to fair value a mere year ago.
“I find it interesting that people who couldn’t spell China 10 years
ago are now experts on China,” said Jim Rogers, who co-founded the
Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
Nonetheless, Chanos is firmly convinced the next bubble will start in Beijing:
“The Chinese,” he warned in an interview in November with
Politico.com, “are in danger of producing huge quantities of goods and
products that they will be unable to sell.”In December, he
appeared on CNBC to discuss how he had already begun taking short
positions, hoping to profit from a China collapse.
So at the end of the day who is right: the mutual fund-based, index hugging pension funds of the world who are always last in and last out, and actually rely on Goldman and JPM, and even S&P research for their investing decisions, or the Chanoses and, yes even the the PBOC, who seem to have a far more worried approach to the Chinese bubble? Time will tell, and with the world yet to experience a massive central-planning based bubble implosion, the timing of the Chinese bubble collapse could be very quick or painfully prolonged. Our only hope is that Bernanke will actually heed his Chinese colleagues call for monetary prudence and begin raising rates in the US shortly. Of course, with $1.2 trillion in excess reserves sloshing around, we are keenly aware that our hopes are at best pipe dreams.
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Keynesian liquidity trap.
Keynesian liquidity trap?
????????(k?i ?n s? liú dòng xìng xiàn j?ng).
Does not translate to Chinese so well. Let's just go with
????????(jià gé guò g?o méi y?u lè qù).
Prices too high so no more "good" times.
...unexpectedly...
All your Keynesian belong to us!
" One toke over the line sweet Jesus "
Translation preeze ?
Pop...
http://www.youtube.com/watch?v=JDewDnVsNUY
Somehow, I think this will become comical...if the misgivings didn't hurt so much.
So, which country to invest in? The US? No thanks.
I'm no expert on China, I keep up with the news, but China is very opaque.
We buy lots more bearings (for our overseas company) from Korea and Japan than we do from China. Or from the USA.
I would be careful if you are bullish on China.
Chile boss. The chilean economy is goin' on. They have a capitalist friendly tax code and a liberal(small 'L') constitution which allows a lot of freedom and trade.
This from Mish:
The records only go as far as Dec. 19, but combined unemployment claims numbers just broke out to a new record!
http://globaleconomicanalysis.blogspot.com/2010/01/massive-jump-in-emerg...
If they have the will-power to tighten, they will resume their descent into Japanification.
Any clear indications if this is just stern posturing, or a consistent withdrawal of liquidity?
China does the two step all the time:
-We are serious, we are tightening
-Kidding!
Give it until Tuesday, there will be "soothing words for speculators", I meant investors for the long term.
cause that is what I mean, till i don't.........
Very true. They've been doing it all year. Every time some apparatchick says they are going to tighten and their market drops they panic and come back out a few days later and reverse course.
A true, short story. Somewhere in a little town in a commie country there was a factory which was manufacturing clothes for a French and also a German company. Factory workers were making decent money and also were stealing clothes from the factory like there was no tomorrow. In just a few short years this little town became one of the wealthiest town in the country with the most expensive real estate. But one day for some reason the factory was closed down. Guess what happend with that little town. It became poorer than it had been before.
love jim rogers but what a smug and meaningless rebuke to the bubble argument
Jim Rogers is a buffoon. I'd put my money on Chanos any day of the week.
Feel free to go down with that ship. Tell Captain Chanos to enjoy his precious FRNs courtesy of Ben.
Tyler,
Didn't Bill Gross just say the US gov/Fed was "Ah the benefits of a planned economy: controlling the supply and the demand at the same time."
Aren't we(US)doing the exact same thing as China?
"Prices too high so no more "good" times."
Is that some sort of economic haiku?
Prices are too high
so there are no more "good" times
It sucks to be US
(us...US...?)
"Prices too high so no more "good" times."
Is that some sort of economic haiku?
Interesting contemporaneous annoucement with Fed's bank interest rate warning. Who's the sock puppet?
The "Bluff" you posted over there is very credible. Could be as easy as trying to scare gold down.
If 2010 is the year of rate rises, the scares will work...however, gold will recover. Can't see how finance/RE/insurance ever will. The Chinese have announced quite a few times their long-term plans for gold, and if it's a question of whether I believe them or the bankrupt OECD paperbugs that trade GLD and the like - I believe the Chinese. You don't tell 1.5 billion worried peasants to put 5% of their wealth in bullion, or steadily build up your gold holdings and industry from 2003 to become the no. 1 gold producer in the world, without a serious long-term plan. :-)
I do think gold is in for a volatile year. The US/UK PTB are desperately trying to suppress and fake out whoever still believes in them (their populations?). The Chinese seem to be allowing them to have their days - when needed before unemployment reports, State of the Union addresses, and such.
Me and my friends are 'turning Chinese', resolving to use every dip and plummet thru 2010 as a buying opp.
That said, I do think the gold price will see a lot of 'dips' (plummets?) this year. But beyond the short term I just don't see how they can raise rates high enough to compensate for the risk (the 0% probability) of the UK or what is laughingly called the 'American empire' ever paying those debts and entitlements. Paper promises have been around a few decades now and they aren't going to go quietly into that good night I guess. The Chinese said a slow, gradual price rise and that's overall how it's been, not like the wild ups and downs we tend to look for.
Looking forward to selling my gold and silver into a brand-new global (tripartite?) currency...maybe! :-D Or I might just keep it in a big ol' pile and rub it sensuously from time to time.
I think everyone who matters is accumulating metal right now, but not sure how public they want that knowledge at the moment. There are still a lot of rapidly deteriorating USD holdings out there, which if devalued too fast will create a rather lamentable pickle.
PS: There are new platinum and palladium ETFs just opened. Interesting year for it.
I'm kinda new (over a year) with the PMs, but I'll white knuckle the dips. Been at it long enough (plus researched it) to see the big picture (which is what I care about, the golden hedge against time and the economy).
I do not have platinum or palladium. When Platinum was the same price as gold, I thought I should buy, but then got worried that catalytic converters were going out, along with cars in general, so I choked. Had the thought again at 1300. Woulda, coulda, shoulda. If I see it again, I'll do it. I'm worried I'll die and my inheritors will think the stuff is silver... :-)
Kynikos, Greek for "Cynic", an adherentof the school of philosophy that viewed personal virtue and independence the only good. (the original "beat-niks")
Of Diogenes the Cynic it is said:
Alexander stood opposite him and asked, "Are you not afraid of me?" "Why, what are you, " said Diogenes, "a good thing or a bad?" Alexander replied, "A good thing" whereupon Diogenes said, "Who, then, is afraid of the good?"
At another time Diogenes was sunning himself when Alexander stood over him and said, "Ask of me any boon you like." To which he replied, "Stand out of my light."
Alexander is reported to have said, "Had I not been Alexander, I should have liked to be Diogenes."
If Chanos is a true Cynic, and I suspect he has at least something of it, his view is to be respected. It will cut like a knife through the pretensions of the presumptuous and carnal.
I am less concerned with how much China looks like a bubble than how much the U.S. is beginning to look like China
excellent piece. Chanos is, yet again, on point.
about that $SSEC credit bubble:
Bloomberg ~ China CSRC Confirms It Has Approved Margin Trading
"Ah the benefits of a planned economy: controlling the supply and the demand at the same time."
Like our government isn't doing the same???
"a brilliantly simple concept which somehow the Fed Chairman in all his excessive studies never managed to quite grasp.
I think this is the only concept that BB and AG has grasped in their studies. "lower interest means higher stock market"which benefit their friends underwriting and peddling paper for money. After all,bubbles are bad only for retirees and the general public,and there is always the tax payers to share the pain that comes after...
Some one explain to me how we are going to have hyperinflation. Real businesses are still suffering from margin compression and people are still getting laid off. Maybe the dollar weakens and makes imports more expensive but that is far from hyperinflationary. As far as the money printing, it's going from the Treasury to the Fed and the excess liquidity is locked up in excess reserves and not leaving the system (except for an elite few who suck the tit of the government and get a few zeros added to their bank account).
Inflation is more of a psychological phenomenon than a monetary one. Prices go up by 3% because everyone is used to getting a 3% raise at the end of the year. Merchants take advantage of this and raise prices. If everyone is doing really well then prices go up further (an example is women's shoes and purses over the last few years). Printing money caused inflation when we actually used printed money, I don't know how or want to speak out of turn but I believe that electronic money has changed the equation for velocity a bit.
Money has become imaginary and what is to stop the Fed from saying that they will give debt relief to the Treasury and just make their Treasury Bond and Note purchases disappear? So you say, ok but then the dollar is worthless, but I say, so is every other currency. It all comes down to where do you want to have monopoly money to play with? The US or Poland or China? I'll still take the US.
The real danger is not money printing but that the current government is making things so bad here with their policies that those who can would rather have their monopoly money elsewhere. And unless that place is our biggest exporter, it would not cause inflation.
We now live in a world of micro-inflation (bubbles) caused not by the amount of money but by easy credit. The housing inflation we had was caused because for $2000 a month you could afford a $150,000 condo, then $250,000 townhouse and the a $500,000 house. It had nothing to do with money printing. This can only be caused by excess and reckless lending.
First, forget about people being laid off. You don't need wage inflation to have hyperinflation; this has been proven time and time again through history.
Second, money is getting into the economy. Why do you think the Fed is buying all the mortgages? How about cash for clunkers? Reopening Chrysler auto plants? Money isn't being loaned to consumers by banks, but it is being loaned and given to them by the .gov.
Give me a modern example of hyperinflation with huge deflationary pressures (and I'm not trying to be facetious, I'm actually very curious on this topic and is probably going to be a research area for me).
Also, I would say that the money such as cash for clunkers has been going to companies with huge deficits so it has gone to keep entities from collapsing but not thriving (as opposed to someone in the opposite camp like Goldman Sachs). So I would still say that none of this money has hit the real economy other than keeping people subsisting not thriving.
What do you think happens to the money once it goes to 'companies with huge deficits'? Think they just dig a hole in their yard and bury it?
Unless those huge deflationary pressures are a permanent part of the 'new normal' inflation is a foregone conclusion. Unless of course the Gov is able to magically suck all these extra $$ out of the economy at exactly the right time... Do you really have faith in their ability to do that?
No they pay down their debt to financial institutions who keep the money in excess reserves or pour it into risky trades. So all the inflation that everyone is talking about is already taking place in paper asset markets.
I dont know about you but I run a portfolio several businesses which range across the sector board and other than military contracting, everything is getting slowly worse with margin compression as the same amount of companies are chasing fewer deals or customers. I really don't see inflation being a problem unless the economy truly improves (which it isnt, no matter what the media says) and all the excess reserves find their way into pockets. The only way that will happen is through lending or equity purchases and that aint happening any time soon. Why lend to a business when you can sell dollar and buy yuan or reais?
Right, that's not far off what I said. Unless the deflationary pressures are permanent (ie the economy never improves) we're going to get inflation.
Which translates to either we're screwed because the economy stays completely in the toilet, or we're screwed because it comes out and we get our asses rocked with inflation.
Inflation *right now* isn't what I'm worried about, it's inflation in the not too distant future.
Yes, I can agree with that and the fact that either way we are fucked.
Prices go up by 3% because everyone is used to getting a 3% raise at the end of the year.
If only this were true. Wages for most people haven't gone up at the same rate of real inflation, resulting in the lifestyles of the middle class quietly eroding. The desired mild inflation rate is a stealth tax. Those that can stay above inflation win, and those who fall behind lose, thus the rich get richer and the poor get poorer.
Hyperinflation, as I understand it, occurs when everyone frantically tries to convert perishable, rotting dollars into something real before they become next to worthless. Basically a lack of trust in the currency brought about by excessive and wreckless printing. There is a psychological tipping point from deflation to hyper-inflation.
I agree, I was just using that as an example. A lot of the inflation we had was because of easy credit and all the classical signs for inflation were there. Inflation was especially rampant in housing and the psychological aspect for bidding things up where there.
You point is exactly what I mean, hyper-inflation is a psychological phenomenon not a monetary one (regular inflation is a combination of both monetary phenomenon - also wonder if the stagnation in wage rate rise will be sticky and keep prices at bay for a while also). Looking at a portfolio of businesses, I just don't see the makings of hyper-inflation. I am not buying more materials because I think the dollar is devaluing. I can't afford to because I have less sales and those sales are becoming ever more unpredictable.
I just picked up "A History of Inflation" for some weekend reading. Hopefully history will shed some answers for me, it's a topic that fascinates me and should be treated by the behavioral finance camp more than regular economics (which is completely detached from the real world).
Thank you all for your comments, nice to have an intelligent conversation on the internet.
Bingo. Hyperinflation will come to the US not due to any of the traditional market mechanism that people continue to argue about, as if the premise of "normal" market operations still holds up these days. It will come when the rest of the world finally acknowledges the worthlessness of our currency.
When confidence in the currency is abandoned, all of the other concepts that would normally mitigate the deflationary/inflationary balance go out the window.
Right, I would agree with you that it could only come, not from internal money printing as everyone thinks, but from a debasing of the currency vs. others. But one could argue that most countries are in the shit pile together. Eurozone is not in better shape, the Chinese will implode once their goods are priced out of the market. Maybe they'll have the funds to keep on bidding up resources like they are now but I don't know. Seems like we are all sinking together. It seems that currency trading for the most part has become a game of relative value where in the end all fiat money is make believe and different countries have different levels of believability, but in the end, they are all crappy.
I ask you this, you have $1b in cash, where do you put it to feel safe that you will still have extreme purchasing power. Maybe a combo of dollar/euro and reais but in this interlinked world, we all sink together for the most part.
The scary part is that when I read "The Ascent of Money" or any of the other financial history books like "Madness of crowds", what we are doing now with the money printing, deficits, it's just a repeat of history. It is very very frightening the turn this country and the rest of the capitalistic world has taken. Things are really broken and we are not doing anything to fix things. We left the gold standard and now we are leaving the sanity standard where those with governments and guns get to make up money. Why not I guess? especially in a relative value world where there is no regard for intrinsics since no one has intrinsic value anymore.
I don't think it's a large bubble. Bubbles are mania-fed. Vacant high rise buildings, and dwellings are nothing new in China. Been going on for years. Like I said before, the question is liquidity. Whether credit expansion is leading into speculatory manias where housing becomes get rich quick scheme. Manias usually throw risk out the window with immense over-leveraging since many want to join the party as quickly as possible. Sure tightening credit is going to going to burn some, but it's not a systemic problem like what the US had, and what Dubai had.
China where some (not all clearly) of the credit expenditure has a chance of raising productivity and long term returns in a market where incomes are rising and labour force (non ag) is still increasing and intra regional trade is rapidly displacing the East West shuffle.
or
The US where untramelled credit expansion stops on the balance sheets of bummed out banks never to be seen on main street and the state is avidly buying housing assets at par + 15-20% at least. where 401ks are blown to smithereens, the boomers are hitting retirement at exactly the wrong time and the givernment (who hold ALL of the purse strings) wouldn't know a productive use of capital if one stepped up and smacked them in the face.
I'll still take long China thanks.
When someone gives you a choice between an ass burger and a shit sandwich, it's ok to choose neither.
Ex-act-ly.