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China Conducts Emergency Reverse Repos To Calm Money Market Liquidity, Fails, As 2 Week SHIBOR Hits Record 8.6%
Yesterday, when we pointed out the surge in the overnight SHIBOR, many were quick to dismiss this dramatic contraction in liquidity, because it happened to be a replica of a comparable such move before the Lunar New Year which did not end result in an end of the world type event. And while many ignored this very disturbing interbank lending lock up sign, there was someone who did not: the PBoC. According to Market News, "The People's Bank of China has conducted reserve bond repurchase agreements with at least one bank in a bid to ease liquidity conditions, local media reports said Tuesday. The National Business Daily cited an interbank market trader as
saying the central bank injected at least CNY50 billion into the China
Construction Bank on Monday via a 14-day reverse repo at 7.5%." Which incidentally is how it should be done: want to get emergency funding from your central bank? Sure. But it will cost you a whopping 7.5%. Now the question of whether CNY50 billion is enough (and in related news, the USDCNY parity just dropped to a fresh all time record low of 6.4690) is a different matter altogether: we expect to get today's updated SHIBOR fixing any second, and have a feeling more reverse repos will have to be injected before this is over.
More:
The official China Securities Journal also reported on reverse repos of CNY50 billion but said that two banks were involved. It did not identify the participating lenders.
Monday's reserve requirement hike -- the sixth of the year -- has sent money market rates surging to levels not seen since the pre-Chinese New Year holiday scramble for funds in late January.
Let's hope that like last time, and every time there is a liquidity crunch, the central bank cartel can step in and save the day. After all, all it takes for the global ponzi to get the See No Forest treatment is just one failure.
Overnight SHIBOR yesterday...
1 Week SHIBOR yesterday:
But more important is the terming out of the liquidity freeze, with the biggest overnight move affecting the 2 week SHIBOR which just an all time record:
And a longer view - note the record
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I don't understand this. China is supposed to be what? 6 Trillion Surplus as a Nation this year? Where is the money?
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.
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
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.
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.
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.
Conclusion:
- 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.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).
in real estate there is a saying...land rich, cash poor.
in China there is a similar saying... oh shit
Looks like the SHIBOR is about to hit the fan!
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.
ty for the explanation, that helped explain some things.
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.
CW
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 ...
Regards,
Cooter
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.
Good answer.
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,
CW
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.
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.
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.
Pressing sell = nuke up ass.
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.
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.
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.
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.
umm, thats up there, time for the heavy gear. No one mentioned it yesterday though, it might get a mention today somewhere.
Yet another tell. The system continues to unravel.
Hi Tyler,
Do you ever sleep? I do very much appreciate your site! Or do you have a 2nd and 3rd shift staff?
Oz is so fucked lol.
Best title in zerohedge history!
KUTGW Teeds.
WTG on the IOTTMCO Acronyms!
The Liquidity is in the trees of the Sino-Forest, Bitchez
http://www.youtube.com/watch?v=MoAfwObkNPM&feature=player_detailpage
Ta ma de, ou mei cha bu duo wan le, hai kan zhe li ga mah.
actually, just for being wrong on rally Monday i give you this instead:
http://www.youtube.com/watch?v=qqG7iDCxgqc&feature=player_detailpage
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...
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?
Tyler: So for a comparison. What was the SHIBOR high print in 08/09? I tried looking myself with no success.
Cue *crickets*
WOW, fucking WOW!
Is that a Shibor in your pants or are you just happy to see me? To the moon Alice!
They say as the tsunami approaches shore, the wavelength shortens and the amplitude rises much higher than that of the initial wave...
Even dollar liquidity parameters not totally calm since last week.
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?
I think you missed a decimal.
appologies and thank you :)
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.
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? ;)
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.
What the hell happened in Jan 2011?
Chinese New Year.
before or after people started lighting themselves on fire?
Serial implosions, beetchez
Isn't this analogous to a top that is running out of rotational energy? It begins to lurch and wobble seemingly at random as it unwinds its spinning state. Singular events are likely to keep occuring sporadically, but I know my ability to forecast anything but a bad fall, still lacks the necessary element of of TIMELINESS!!! When a centipede goes to bed, how many shoes drop?
What is it with people speaking in tongues on this site? They should call this place metaphor hedge. When a centipede goes to bed? WTF?
How many shoes keep dropping?
OK as the Chinese building ponzi unwinds, there will be sporadic, dangerous appearing events that appear to be a near crash. Because, like all economic systems it is very chaotic, with nearly infinite inputs, the Chinese system will lurch and and stumble a number of times and probably avoid collapse for an unknown length of time.
Just as a spinning top keels over, eventually as its energy is depleted, China drops. When and how far??? Really wish I could foretall that part, protection might be possible.
Good pre-curser to global liquidity crunch. If EZ banks start pulling money out of the EU...also there is Japan repaitration talk too going on via TEPCO.
"We have a liquidity problem not a solvency issue"
Now where have i heard that before lol.
Hence, the solvency issue will come as a result of the liquidity problem.
This event could be the first inkling of a Chinese financial crisis or a mere blip which means nothing in a planned economy, or anything in between. I swear I don't know shit anymore.
Yes. The IDKS club includes me too.
If it can't be grown, it has to be mined. Why the disconect between economy and oil production? Where does all the usury come from? Debt, debt everywhere, and not a drop of liquidity. All the compount interest, my friends, is being pumped out of the ground. So what if China says it has trillions in dollar reserves? It's just a fantasy. When crude production falters, (as it already has), the big implosion begins.
Huge reserves means the Chinese could destroy a market. $15 wheat, $20 soy, etc etc. Surprised they haven't tried to corner any food commodities yet, vegetable oil,...pork bellies,... In a famine, 2trillion bucks would let them clean the cupboards in the USA!
What happens when half of us are out of work and on food stamps but there isn't any food!!! We won't even be able to starve with dignity because the Chinese will be laughing so loudly. Squirrel stew and wild hickory nuts anyone?
They have to buy, you dont have to sell.
They prefer commodities that don't stink up the joint after a lost decade.
When you run a global Ponzi like what we have now, every piece of it has to be running well or everything gets dragged down.
Bankrupt economies trading with other bankrupt economies proffering IOUs as payment is a setup for liquidity panics.
just the timing coincidences make me think: chinese banks extend giant middle finger @ idea of financing europe.
on one hand we have china positive about avoiding any damned domino thingy and the EU expanding its bailout bond fund, big time.
on the other hand: all of a sudden, yes, we have no bananas.
Ice 9-8.6?
No bananas? Try no pork
Pork price hits record high in China: State mediaBEIJING - THE price of pork, a staple of the Chinese diet, hit a new high in China this month due to rising costs and short supply, state media said on Tuesday, amid persistent concerns about soaring inflation.
Pork cost 27.67 yuan (S$5.29) a kg last week, surpassing the previous peak of 26 yuan set in 2008, the China Daily reported, citing Feng Yonghui, an analyst with Soozhu.com, an online pig market monitoring service.
The cost of live pigs also surged to 18.57 yuan a kg at the end of last week, beating the previous record high of 17.20 yuan reached in April 2008, he said. 'The price will keep rising till the end of the year,' Zhu Baoliang, an economist with the State Information Centre, a government think-tank, was quoted by the newspaper as saying.
The price of corn, which accounts for around 60 per cent of pig feed, hit a record high in March, sending pig and pork prices skyrocketing in the following months, according to Feng.
He warned that price increases in pork, which accounted for 65 per cent of China's meat consumption, risked sending the costs of grains and vegetables up as consumers seek alternatives to meat, the report said. The government could try to curb pork price rises by freeing up supply reserves, Mr Zhu said.
However, the effects could be limited given a general supply shortage after pig farmers slaughtered breeding stock last year due to low prices and diseases, he said. -- AFP
Sure appreciate this site. Sure a lot of crap I never wanted to learn....but once you go down the rabbit hole it is hard to turn back.
+1
And once you've been in the hole for a little while you realize it's a whole lot of idealism, and the bankers have a lot more control over the situation than ZH would like to admit.
But yes, extremely valuable information to process, and it gives a wonderful perspective on how corrupt our beloved system truly is.
Lots of talk tonight about firewalls, ring fences...around Euro countries that have "been given the benefit of the doubt."
Gee, with subpoenas flying all around the criminal syndicate banking cartel, and money printing machines near meltdown world wide, I wonder if giving the benefit of the doubt is a good idea. Hmmmm.
I'm no TA expert Cdad, but it sure looks likes gold and silver want to BREAK OUT...
For 11 years...up, up ,up....
agree
The joys of central planning. Liquidity crunch coming to a country near you...again...and soon.
Come on folks, this Dr. Jekyll and Mr. Hyde business is making my neck sore.
I thought reverse repos were PRECISELY intended to do the opposite and PULL LIQUIDITY!
(I don't have time right now to post those contradictory posts, but if you press yourselves, you can easily google a half dozen on ZH.)
As stated yesterday, this spike in SHIBOR is due to the PBoC's latest increase in reserve requirements coming into force (effective June 20th), an increase from 21% to 21.5%.
The surge in SHIBOR may indicate that there are insufficient surplus reserves in the system, or that those reserves are concentrated and are being withheld. If that's the case, then the PBoC will either back down on reserve requirements, or will extend emergency reserves via their version of the discount window.
Any 'crisis' will (like last time) most likely be short-lived. Over time, reduction in new horizontal transactions or the passing on of more stringent interest servicing will allow banks to build reserves as required, easing pressure on interbank rates. This only becomes a serious crisis if borrowers start to default in large numbers.
That *might* happen, but we're not there yet. In other words, move your hand to hover position over the big red button, but don't press it just yet.
In other words Chinese consumers have to just suck it up and swallow that inflation cos its got nothing to do with the liquidity in the system, but rather their rising wages and sheer number.
The wage price spiral, China edition.
Except, wages aren't matching inflation by any stretch of the imagination.
- food shortages through droughts and now by floods have caused certain staple food to increase by 10%+ in a single month!
- Secondly, USD-denominated commodities imported add to inflation (as the dollar gets crushed)
Wages have increased somewhat, but not in step with price increases - hence why you're starting to see unrest in certain parts of the country... but i agree on the fact that its not to do with liquidity in the system
A panic is unfolding.
"6 Trillion Surplus as a Nation this year?"
Fractional reserve banking is like a game musical chairs except that the guys still standing when the music stops gets killed.
SHIBOR on Bloomberg:
1 week:
http://www.bloomberg.com/apps/quote?ticker=SHIF1W:IND
2 week:
http://www.bloomberg.com/apps/quote?ticker=SHIF2W:IND
1 month:
http://www.bloomberg.com/apps/quote?ticker=SHIF1M:IND
those charts need to be run into smaller time frames, and upgraded! NOW!
Your traders will miss the trade when N.Y. opens!
Holy SHIBOR!!
Euribor for 3 months is up to 1.52%, highest since early 2009 when the ECB rate was over 2%.