On The Next Chinese Craze: "Money Lending", Or Has The PBoC Lost Control Of Money?

Tyler Durden's picture

Over the past few months many have wondered how it is possible that with the great amount of tightening current undertaken by the PBoC has China not seen any decline in its inflationary pressures over the past 6 months. Finally, courtesy of Sean Corrigan who first identified the so called reverse Cash-n-carry trade in China over two years ago, we have our answer on the "next Chinese investment craze" - money lending. In a nutshell, as the Economic Observer points out, the Chinese central bank has now outsourced nearly a fifth of all its capital lending to private sources. And as Corrigan explains: "…so, I guess what is happening here specifically is that Chinese cos buy metal abroad on USD credit (cheap, depreciating) - - possibly for extended term, then sell/buy the metal domestically for Yuan on the spot/futures market (reverse cash-n-carry), then lend out the Yuan on the curb market at double digit rates to bank loan-deprived customers in an appreciating currency into the bargain - - - - -    ‘implied demand’, my foot!" Just as importantly, with everyone lending, the proceeds continue to funnel into precious metals now that the local stock and real estate market bubbles have popped. The only question is how long will this recycled source of capital last?

From EEO:

~
Despite ample liquidity in the market, funds have been retreating from
some of the areas where money had previously flowed, stocks are not
pushing new highs, property is being hit by government policy to rein in
soaring prices, recent falls in the price of vegetables have led to
speculation in agricultural products to drop off and the outlook for the
art market is no longer clear, in the face of all this, where is all
that money going?
~ It seems that many companies are turning to the
business of "making money out of money," by entering into the field of
lending money traditionally controlled by banks and other financial
institutions.
~ A non-ferrous metal company from Suzhou offers an
example, the company has set up a small loan company that is able to
earn annual returns of between 15 to 17% on average.
~ Our newspaper
has learned that real estate companies are now sourcing over 20 percent
of their funding needs from trust companies.
~ An official engaged in
currency policy at China's central bank said he was confused about the
phenomenon, "Which industries and companies are making such large
profits of providing credit? If everyone is lending money, then what
final use is the money actually being put to?"
Original article: [Chinese]

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trav7777's picture

Ponzi, bitchez

hedgeless_horseman's picture

Microintermediation, bitchez!

King Durian's picture

You mean, HumancentiPad Ponzi.

topcallingtroll's picture

Later dude

No more tops to call for now. I shall return again at the low, but for now i will let the younger trolls get some practice.

Cash_is_Trash's picture

Like Texas Gunslinger.

That punk wrote the bible on trolling.

King Durian's picture

Seriously though, the companies lending this money out, (probably to capital-starved small businesses and individuals) are getting a nice return that will shield them from the effects of the renminbi appreciating, while at the same time, the people have a source of financing. While not cheap to Westerners, it is important to understand that the average Chinese is happy they have a source of finance that they can qualify for. Credit doesn't grow on trees for the average Chinese consumer/small business owner like it does in America. Some needed perspective when you think about this. So these businesses act as the gateway for these otherwise locked out of the market participants to receive loans. And 15% interest can be a deal in China. A lot of private businesses charge 30-50% for loans to the individual/small business owner w/o collateral.

Urban Redneck's picture

Didn't take them long to create a shadow banking system once the regulated FIs became less accommodative.

Math Man's picture

PM Ponzi, bitchez.

 

Have fun when silver is back below $20.

King Durian's picture

Only the brave hold silver. Get ready for a rollercoaster ride, it will not be made easy psychologically to take profits with silver.

tmosley's picture

After all, $34 was the top, and YOU called it.  I'm sure you'll be just as correct about this.

Math Man's picture

Have fun w/ your 95% long allocation.

Silver will be back below $20 very soon.

It only costs 5 bucks to dig it out of the ground.

 

willien1derland's picture

Wonder how long it will take Goldman Sachs to purchase these loans & 'securitize' and or 'privately place' these investments - I am certain EVERY underwater pension plan in the U.S. will LUNGE at the chance to participate in the latest/greatest ponzi -

LowProfile's picture

20% of the PBoC's business is now outsourced into a highly leveraged carry trade based on current trends that are likely to violently reverse (for a period of time).

What the hell, why not make it 50%?

slewie the pi-rat's picture

~ An official engaged in currency policy at China's central bank said he was confused about the phenomenon, "Which industries and companies are making such large profits of providing credit? If everyone is lending money, then what final use is the money actually being put to?"

this is funny, to me:  a chinese central bankster trying to figure out what the hell is going on, here?  i mean, here we have credit expansion on the private side (something the US can only dream about, right now) and this guy can't figure out wtf is going on.

(hint:  think possible inflation...)

beastie's picture

Thank you. Great intel and more useful information than the pages of speculation that has been written about Silver in the last 24 hours.

King Durian's picture

I beg to differ with you on this Stewie. In most economies, yes, I would agree that this sort of behavior would cause inflation and a negative effect on people's lives. But in an environment in which people have not had access to credit, and therefore have not having a way to create value. This credit that is being loaned out by these businesses will not primarily be used to spend, which would cause inflation. This capital would be used to create a business which would create something of value. If that still caused inflation, then I would argue in such a credit starved economy such as China (only the upper classes have credit access really), it would be a form of good inflation, a price the Chinese peasant has to pay in order to create a vehicle for generating wealth, instead of the current status quo of having no vehicle and just toiling away with little to no return.

The key here is that this money being lent out will be used to create structures that can create real value, instead of just using the funds on consumption, which would cause a form of inflation that would not benefit the peasant. The money that the peasant received was only used to purchase something that in turn caused higher inflation to eat up future earnings.. and the peasant at this point still has no vehicle to create wealth! That's why I say in the Chinese system there is good inflation and bad inflation. It is good inflation if its the gateway price that needs to be paid for the average Chinese to develop a business in which wealth and value can be generated, instead of being one of the many who are exploited who simply turn the cog in the system and ensure the money gets sloshed around, creating minimal value, besides the value that a worker can generate.

 

However, there is a danger in this. Too much capital and credit available would flood the average Chinese population with credit. The bad thing about this is the direction would go: in opening up bland, generic retail shops, which is what most Chinese would do if given credit. This in turn would squeeze the margins of already strained Chinese independent retailers which would overall damage the independent retail/wholesaler industry in China. Basically, the danger is that everyone stops working for someone and just engages in retail/wholesale/reselling, with not the demand needed to buy all of the goods being recycled. So this is one of the dangers of too much credit being available in China, as its other industries for employment are not quite developed, leaving the reselling/retailing/wholesaling usually one of the only options for a Chinese who wants to go into business for himself.

 

slewie the pi-rat's picture

1) slewie, not stewie

2) the inflation is being exported to them by the FED.

i'm not talking about your fantasies, any more than the article that tyler wrote & put up there was,  you fuking little shitheaded asswipe.

Non Passaran's picture

They obviously don't mind the inflation, otherwise they could allow the yuan to appreciate.

D1eeeeeNAHHHHH's picture

This is the next short term money that will prop up the market in China.  It won't last for years, but maybe up to 18 months and the money will dry up as prices fall further in RE.

fcamargoe's picture

It may be a low USD liability now however lets not forget the experience with the Asian Tigers and their USD denominated debt. Back then the USD was also the most hate currency and any scenarios of a USD bounce were dismissed as close to impossible. China's 'official' CPI is too high. It is a well known fact that Chinese economic statistics are fudged and actual inflation is much higher. Therefore this ponzi might prove much more riskier than what these Chinese companies believe it to be.

steve from virginia's picture

Coming from Sean Corrigan the idea is completely credible.

The metal bit is unrealistic; Chinese exporters are the source of US dollars, they have a choice between swapping them @ the PBOC or selling them to loan sharks @ a better rate.

The Chinese are competing with themselves to buy dollars, which is one reason for hyperinflation in China, this is the good ol' two currency conundrum. Chinese can choose which currency to get a 'good deal' in.

Yuan appreciate in the official exchange market, do something else on the streets of China. The central bank cannot afford to really tighten and have the dollar trade escape it completely. One reason for this is its obsession with dollar 'value' which it cannot capture. The dollar carry trade also works against China as it bids up in dollars what it seeks to buy with them.

High oil and other rising commodity prices are not the gift of Bernanke but of China mercantilism. This is why the end of QE2 will have no effect on the 'price' of dollars. The largest dollar hoard on the planet is China's and they are stranded with- and by it.

If China simply holds dollars it obviously cannot gain anything in return for them. If it sells dollars it depreciates them (and is doing so right now). If it buys Treasuries it encourages more money creation in the US and elsewhere diluting its currency hoard value. If the central bank doesn't buy dollars, Chinese loan sharks buy them. Businesses in China are screwed regardless. They have to sell the dollars to somebody!

They can hedge currency risk in the F/X swap markets (chortle...)

China the cheap thief has been outmaneuvered by history and American cynicism, tricked into 'renting' cheap US jobs with the accompanying false promise of 'USA- style prosperity'. Instead they have increasingly expensive jobs which are unable to add value to the American dollars that accompanied the jobs!

The biggest problem China faces today outside of its own resource waste is its dollar surplus. This is bankrupting the country and doing so at an accelerating pace.

... and right now it appears there is nothing China is willing to do about it.

Vampyroteuthis infernalis's picture

As long as the Communist party remains in power, they care less what happens to rest of the populous. Average Chinaman suffers, not the leaders.

synonym's picture

Thanks Steve from Virginia

An intelligent, though-provoking and helpful comment, well worth reading. Shame that can't be said for more of the coments made on ZH.