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China Conducts Emergency Reverse Repos To Calm Money Market Liquidity, Fails, As 2 Week SHIBOR Hits Record 8.6%

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Mon, 06/20/2011 - 23:33 | 1387754 HungrySeagull
HungrySeagull's picture

I don't understand this. China is supposed to be what? 6 Trillion Surplus as a Nation this year? Where is the money?

Mon, 06/20/2011 - 23:44 | 1387774 holdbuysell
holdbuysell's picture

As has been discussed here before, it appears that the country is loaded to the gills with debt.

This may be an early warning sign.

Mon, 06/20/2011 - 23:55 | 1387797 Fedophile
Fedophile's picture

An inverted yield curve is a strong indicator of a future recession.

See the FRBNY publication 'The Yield Curve as a Predictor of U.S. Recessions' by Arturo Estrella and Frederic S. Mishkin

Tue, 06/21/2011 - 00:15 | 1387833 Re-Discovery
Re-Discovery's picture

Fred Mishkin . . . uhhh . . . yeah.  Except he seems to have missed the biggest recession of his lifetime.  Completely AWOL in 2008.  Mishkin 'Seal of Approval" for the Icelandic banking system.

Tue, 06/21/2011 - 00:21 | 1387850 Fedophile
Fedophile's picture

Had he read his own paper in 2007 he would have seen an inverted US yield curve.

His subsequent stupidity only proves his own delusion and not his prior work invalid.

Tue, 06/21/2011 - 07:52 | 1388349 HistorySquared
HistorySquared's picture

The yield curve is an excellent long term indicator that historically has forecasted  recessions and currency prices (note : Indian and Brazillian yield curves recently inverted)

The 1 week - 1 month forward curve inverstion has predicted Currency Crashes

"Predictable Changes in Yields and Forward Rates"

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.
The indicator looks for a downward sloping yield curve using a 7 day vs 30 day interbank interest rate.


  • “To sum up, our indicator is able to identify both speculative pressures that were successfully combated by the central bank in the pre-crisis period, and starts signaling the impending crisis six days before the official announcement of the devaluation.”


  • 1997 Czech Republic crisis
    • Tight peg against DM and USD with bands of +0.5% to 7.5% until crises in May 1997
    • Trade Balance turned negative in 1996
    • Economic growth slowed
    • Upward Trend in currency from 1992-1997
    • Heavy central bank intervention in week before crises kept it within the band
    • Indicator was positive since early January 1997, accelerating in the week before the crises
    • Simple rate of change performed well to determine the threshold
    • Performed ok 5 days out for the Czech Republic but not for DM
Of course, nothing works 100% of the time. 


Tue, 06/21/2011 - 00:01 | 1387808 Debt Rolling
Debt Rolling's picture

1) There is a big difference between liquid cash and assets.

2) The banks' problems are usually their business (until it becomes too grave and the government is forced to the rescue).

Tue, 06/21/2011 - 00:20 | 1387849 quintago
quintago's picture

in real estate there is a saying...land rich, cash poor.

in China there is a similar saying... oh shit

Tue, 06/21/2011 - 00:56 | 1387929 ZerOhead
ZerOhead's picture

Looks like the SHIBOR is about to hit the fan!

Mon, 06/20/2011 - 23:35 | 1387756 tmosley
tmosley's picture

Of course it's going to fail.  They are trying to stop the flood by unplugging the drain and turning off the faucet while the storm of the century rages outside, and they don't have a roof!

The reverse repos might drain some liquidity, but there is no way it will be enough to make up for the flood of yuan entering the system via their dollar peg (where they print yuan for every dollar that comes into China, then sits on the dollar).  The storm, of course, is our little printing escapade we are on right now.  The faucet is the interest rate, which they are turning off by raising.

Tue, 06/21/2011 - 00:00 | 1387804 cougar_w
cougar_w's picture

ty for the explanation, that helped explain some things.

Tue, 06/21/2011 - 00:05 | 1387811 Charles Wilson
Charles Wilson's picture

Please write more on this.  If true, it is one more piece of the puzzle.  I have stated often  enough that we are at war with someone economically.  Bernanke may still be certifiably insane but in this game of "Chicken" Bernanke still has the pedal to the metal in his '57 Buick.

He is wagering Western Civilization against the East and he will not blink.  Bernanke is no Reagan but the methods may yet correlate:

"If you do not revalue the Chinese currency, we will unleash a catastrophe that you cannot  comprehend.  The Soviets foundered because they could not keep up.  You can't either.  Revalue or face the consequences."

I'm not too thrilled at the analysis, if true, but it may be one of only one or two rational reasons to do what the Fed is doing.



Tue, 06/21/2011 - 00:36 | 1387897 CrazyCooter
CrazyCooter's picture

I am not prepared to expand further on this thought, but somewhere along the way it occured to me that the US bankrupted the soviets because we had the petro-dollar. How might that have turned out different if the world ran on petro-rubles?

I really can't say I understand what the elite are doing, but it is obvious dollars are not what you want to denominate your savings in ... I prefer something that isn't readily debaseable ...



Tue, 06/21/2011 - 01:41 | 1388007 Urban Redneck
Urban Redneck's picture

I don't think currency revaluationmeans what Bernanke thinks it means.

Currency revaluation hurts American consumers by raising the price of everything we import from China, since margins are razor-thin now, prices would have to rise immediately.

On a slightly longer timeline, China's input import costs for energy and raw materials would decrease, the benefit most likely accruing to Chinese producer margins, and not US consumer prices.

I think USDCNY is more a game of M.A.D. - either side could wreak havoc on the other.  However, the US is the debtor, one of increasingly many to China, and the Chinese have more options due to the large inventory of F/X and commodity reserves and manufacturing capacity.

I think Bernanke is just trying to keep all of his member banks afloat as long possible.

Tue, 06/21/2011 - 06:19 | 1388258 Bringin It
Bringin It's picture

Good answer. 

Tue, 06/21/2011 - 08:16 | 1388420 Charles Wilson
Charles Wilson's picture

Yes, good answers and thank you for all the input, even the Junkers.

Cooter: You state: "it is obvious dollars are not what you want to denominate your savings in".

Exactly, and it is here that Bernanke's Keynesian megalomania shows. "Savings" <=> "Hoarding" and this is unacceptable - "Spend it all NOW".  A similar vein is found in his view of Monetarism.  Many trash Monetarism but Bernanke AGREED that Friedman and Schwartz were correct about their analysis of Great Depression 1 and indeed he based his "corrections" to the Banking Collapse of 1988 by providing immediate cash reserves to banks in trouble as Schwartz and Friedman advocated.

However, the curious part of this Chapter in the History of Monetarist thought is that, while eveyone ackowleges that Monetarism "works" in great expansions and contractions of the money supply, Friedman always advocated small, measured growth year over year.  "You could manage it with a computer", Friedman always said.  You cannot "micromanage" the money supply and, again, Bernanke's Keynesian predominance shows - "We know better and can manage much better than the peasants 'cause we're so much better than they are..."  Here is where the criticism of Monetarism usually comes.  The results: Huge swings in Money Supply measures and resulting economic uncertainty that DID NOT HAVE TO OCCUR.

Urban Redneck: Friedman also chuckled everytime someone would bring up "Trade Imbalances" and currency manipulation shenanigans. "We get the goods and services they produce for the price of paper and ink", he said on 'Wall Street Week' a long time ago.  "Where do they put their dollars...Under mattresses?"

Finally, I agree that the massive devaluation is destructive to the U.S. and World Trade but if you believe your job is micromanage and make economic decisions that would be made by the free individual otherwise, you will do so.  This is Bernanke at his worst and most dangerous.  Especially if your Second Mandate is to bring down a President who was obviously incapable and incompetant.  Dangerous, even.  But that's a conversation for another day.


Thanks again all,



Tue, 06/21/2011 - 00:07 | 1387822 qussl3
qussl3's picture

SHIBOR spike indicate liquidity crunch.

Banks are doing the repo, PBOC is giving them liquidity ie cash.

The PBOC isnt draining its pumping.

This isnt about inflation its about banks having short term funding issues.

Those that know better please correct me if wrong thanks.

Tue, 06/21/2011 - 05:31 | 1388235 S-hai High
S-hai High's picture

exactly this.

New hike in RRR came into effect yesterday; and squeezed short-term funding a little too hard - hence the spike in shibor.

PBoC performed repo to ease liquidity conditions.. although, of course - the overall point the other poster made is true regarding a runaway inflation problem in the country.

Tue, 06/21/2011 - 07:57 | 1388364 tmosley
tmosley's picture

Thanks for the correction.  I don't speak crazy very well when I am tired.

I think we can safely say "buh-bye" to China at this point.  The only thing that can save them at this point is dumping treasuries, which doesn't seem to be in the cards for unknown reasons.

Tue, 06/21/2011 - 08:19 | 1388430 qussl3
qussl3's picture

Pressing sell = nuke up ass.

Tue, 06/21/2011 - 00:24 | 1387848 FischerBlack
FischerBlack's picture

Not sure what you're getting at. Tyler reports a *reverse* repo by the central bank. So there's nothing liquidity draining about it. It's a liquidity injection. The bank sells some fixed income asset to the central bank while agreeing to buy it back at some future date. Spikes in interbank overnight rates tend to indicate lack of liquidity rather than excess.

Or maybe you had some other point I'm missing.

Tue, 06/21/2011 - 07:50 | 1388358 tmosley
tmosley's picture

You are correct, it was late, and I misread it, apparently.  Trying too hard to think with some amount of logic, I guess.

So they are instead adding to the flood by turning up the faucet.

lol, this won't end well.

Tue, 06/21/2011 - 08:00 | 1388372 EB
EB's picture

If A conducts a repo with B, B can be said to have conducted a reverse repo with A.  It's simply a matter of perspective.  The Federal Reserve reports all transactions based on the other party's perspective, so a Fed repo is always liquidity adding and a Fed reverse repo is always liquidity draining.  This convention is not necessarily used by other CBs. 

Wed, 06/22/2011 - 11:28 | 1391881 davepowers
davepowers's picture

indeed, it's maddening trying to figure out which way the money is flowing in these deals when they all use 'reverse repo' and 'repo' interchangeably.

Sort of like trying to figure out which kind of inflation Mish is talking about when he refers to 'inflation' to cover either credit, price, and monetary inflation.

Mon, 06/20/2011 - 23:40 | 1387759 scratch_and_sniff
scratch_and_sniff's picture

umm, thats up there, time for the heavy gear. No one mentioned it yesterday though, it might get a mention today somewhere.

Mon, 06/20/2011 - 23:36 | 1387761 hound dog vigilante
hound dog vigilante's picture

Yet another tell. The system continues to unravel.

Mon, 06/20/2011 - 23:46 | 1387778 Bazooka
Bazooka's picture

Hi Tyler,

Do you ever sleep? I do very much  appreciate your site! Or do you have a 2nd and 3rd shift staff?

Mon, 06/20/2011 - 23:46 | 1387787 qussl3
qussl3's picture

Oz is so fucked lol.

Mon, 06/20/2011 - 23:50 | 1387788 JimRogers
JimRogers's picture

Best title in zerohedge history! 

KUTGW Teeds.

Tue, 06/21/2011 - 00:45 | 1387915 The Fonz
The Fonz's picture

WTG on the IOTTMCO Acronyms!

Mon, 06/20/2011 - 23:47 | 1387790 BORT
BORT's picture

The Liquidity is in the trees of the Sino-Forest, Bitchez

Tue, 06/21/2011 - 00:02 | 1387802 qussl3
qussl3's picture

Ta ma de, ou mei cha bu duo wan le, hai kan zhe li ga mah.


Mon, 06/20/2011 - 23:58 | 1387803 disabledvet
disabledvet's picture

actually, just for being wrong on rally Monday i give you this instead:


Tue, 06/21/2011 - 00:07 | 1387823 johngaltfla
johngaltfla's picture

Better call the Primary Dealers. They are the experts on "fixing" er, "manipulating" er, creating good looking rates despite market forces.

Just ask LIBOR and EURIBOR...

Tue, 06/21/2011 - 00:11 | 1387830 qussl3
qussl3's picture

Wouldnt it be epic if as China is being billed to be bailing out the EU banks, they have a bank run of their own?

Tue, 06/21/2011 - 00:11 | 1387831 Mitch Comestein
Mitch Comestein's picture

Tyler:  So for a comparison.  What was the SHIBOR high print in 08/09?  I tried looking myself with no success.

Tue, 06/21/2011 - 00:17 | 1387839 Tyler Durden
Tyler Durden's picture

Tue, 06/21/2011 - 00:23 | 1387844 qussl3
qussl3's picture

Cue *crickets*

Tue, 06/21/2011 - 01:04 | 1387944 slow_roast
slow_roast's picture

WOW, fucking WOW!

Tue, 06/21/2011 - 01:10 | 1387962 MacGruber
MacGruber's picture

Is that a Shibor in your pants or are you just happy to see me? To the moon Alice!

Tue, 06/21/2011 - 09:12 | 1388582 snowball777
snowball777's picture

They say as the tsunami approaches shore, the wavelength shortens and the amplitude rises much higher than that of the initial wave...

Tue, 06/21/2011 - 00:15 | 1387832 Caviar Emptor
Caviar Emptor's picture

Even dollar liquidity parameters not totally calm since last week.

Tue, 06/21/2011 - 00:16 | 1387836 The Fonz
The Fonz's picture

Uh, wait a second am I reading this right? The Yuan gained 5% of its value overnight? If that is so why are all the asian stock indexs running green? Shouldn't they be running red?

Tue, 06/21/2011 - 00:18 | 1387842 qussl3
qussl3's picture

I think you missed a decimal.

Tue, 06/21/2011 - 00:24 | 1387868 The Fonz
The Fonz's picture

appologies and thank you :)

Tue, 06/21/2011 - 00:22 | 1387840 twinshot
twinshot's picture

What has gone unmentioned here is the State Administration of Foreign Exchange (SAFE). They have recently implemented very strict controls on all foreign currency coming into China. You now need need to pony up copies of all invoices or contracts for all foreign cash coming in depending on which SAFE city jurusidiction you are in. It is making business nigh on impossible in some cities as the banks will not release your overseas earnings until you give them every copy of every USD 100 invoice. For some cities it is only for incoming funds over USD 500K so they have a cack-handed approach to it as they each interpret the rule differently. Essentially though, this is strangling incoming liquidity all in the name of preventing "hot money" flowing in - naturally it is the legitimate businesses that are suffering. At least a part of this liquidity squeeze is their own darn fault.

Tue, 06/21/2011 - 09:16 | 1388599 snowball777
snowball777's picture

Interesting boots on the ground info, t-shot. This is exactly the kind of idiot maneuver one can expect from a truly centrally-planned economy and exactly the kind of protectionism that really kicked off the great depression in the 30s. Let's hope they get a clue before it's too late.

...cack?! aussie? ;)

Tue, 06/21/2011 - 11:01 | 1388970 twinshot
twinshot's picture

Antipodean yes. Honestly having dealt with many of these various government agencies I am constantly surprised the Chinese can coordinate anything. There is "central planning" but this is dominated by local corruption and chaos.

Tue, 06/21/2011 - 00:27 | 1387857 trainrobbery
trainrobbery's picture

What the hell happened in Jan 2011? 

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