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Roubini On The Chinese Liquidity Hangover
Following China's Christmas day hike, Roubini Global Economics has put together a brief (and not so brief for clients) summary on the firm's views of what the Chinese post-liquidity stimulus hangover will look like. Here is how Nouriel's firm summarizes its near-term views on China: "Three interest rate increases after the hike on December 25
will leave real deposit rates negative for most of 2011, which will
require additional macroprudential measures to prevent a further
increase in property prices. A modest slowdown in growth, as we forecast
in our recently published 2011 Outlook,
is a likely side effect. Some of the interest rate hikes in 2011
probably will be asymmetrical to increase the role of price signals in
credit decisions. This will be a gradual process, however, since moving
too fast to remove the subsidized net-interest margin of the state-owned
banking sector would put it at risk of insolvency." In the meantime, as China does everything to prevent an unpegging of the CNY from the USD which means an increasing tightening across all other verticals (especially with higher rates attracting excess global capital), virtually anything the US does to reliquify stocks will have a diminishing effect on risk asset values, and much more of a price shock on commodity input costs, as the specs move away from China and attack the US, that last bastion of infinite liquidity, full bore. Which is why we believe that WTI of $100+ is just a matter of weeks.
Policy Cures for China’s Post-Stimulus Hangover, RGE December 29, 2010 Morning Note
The chef on the Titanic is said to have survived the icy waters by thinning his blood with booze as the band played on. China’s approach to the global financial crisis followed a similar strategy.
In the fall of 2008—with Lehman Brothers’ collapse curtailing China’s access to trade finance, capital flowing out of the economy and final demand for Chinese goods in advanced economies plummeting—policy makers popped the cork. The People’s Bank of China (PBoC) got the party started by cutting interest rates by 216 bps from August 2008 through the end of the year. Quick to don its own party hat, the Politburo in November 2008 directed the government to launch a RMB4 trillion fiscal stimulus. When policy makers gathered for the Central Economic Work Conference in December 2008, they joined the party by imposing a minimum for new loans instead of the usual limits on bank lending. Some local governments may have overestimated their tolerance: Borrowing through urban investment and development corporations (UDICs) jumped 70% to RMB7.4 trillion in 2009. Just as several stiff drinks may have saved the Titanic’s chef, China’s economy survived the global financial crisis thanks to a liquidity chug. The current economic hangover—slower growth, higher inflation, bubbly asset markets, a weakened banking sector and a bloated industrial sector—may be a small price to pay.
With the output gap closed and monetary conditions hardly tighter, consumers are beginning to feel the post-party pain. In the second half of 2010, just as the PBoC was shouting last call, the Fed decided to buy at least one more round of liquidity for the U.S. economy—and in so doing opened the floodgates for hot money inflows to China.
With consumer prices rising rapidly, China’s policy makers have begun to seek remedies. In “The Hangover: China Considers Policy Pills,” available exclusively to clients, we survey China’s medicine cabinet for hangover cures, judge their effectiveness, consider potential side effects and sketch out our baseline forecast for China’s monetary policy in 2011. Hiking the required reserve ratio (RRR) for banks has been the easiest pill to swallow, so in the fourth quarter the PBoC took three doses in five weeks, along with hiking interest rates twice. Needing more sugar to get currency appreciation to go down, the Politburo so far has used this sparingly. It also has tried other remedies—from price controls to tighter capital account restrictions—in small doses. Some policy makers are calling for a hair-of-the-dog response: The rumored lending cap for the banking sector has steadily increased from RMB5 trillion a few months ago to a minimum of RMB7 trillion today.
We expect China to employ a mix of remedies in 2011, with limited effect at easing consumer prices. Three interest rate increases after the hike on December 25 will leave real deposit rates negative for most of 2011, which will require additional macroprudential measures to prevent a further increase in property prices. A modest slowdown in growth, as we forecast in our recently published 2011 Outlook, is a likely side effect. Some of the interest rate hikes in 2011 probably will be asymmetrical to increase the role of price signals in credit decisions. This will be a gradual process, however, since moving too fast to remove the subsidized net-interest margin of the state-owned banking sector would put it at risk of insolvency.
The PBoC will allow the RMB to appreciate modestly, creating a need for additional RRR hikes and stricter enforcement of capital controls to deal with increased hot money inflows. As RRRs reach their limit, the PBoC will have to return to open-market operations, which will require higher yields on the bonds it issues. This, in turn, will limit RMB appreciation, as it will raise the funding costs for the PBoC’s sterilization efforts. The RMB will also see more internationalization, though not enough to cause lending quotas to lose their bite.
Finally, the government will not exhibit much of a fiscal impulse in 2011, but it will not consolidate its balance sheet much either, for fear of drifting from its longer-term target of rebalancing the economy toward domestic consumption.
Though Chinese policy makers will spend most of 2011 cleaning up after the party, all the while they will be laying the foundation for financial reforms that will lead to increased use of price controls in lending decisions, further internationalization of the RMB and eventually the opening of the capital account.
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re Roubini
dissapointing
A lot of repetition, lack of coherence, statement using mysterious "Fed talk" of the GreenSpan sort....seems to me
Through the fog, i think i see a 'meaning' that China will have a hard time of it 2011, with negative real interest rates on deposits (hence withdrawals), and a number of other unintended effects - such as 'hot money' carry trade chasing a too low priced yuan, etc..
All i got clear-signal was that West Texas Intermediate bench mark oil would go over $100 due to China's reaction to USA QE2....that, too, a 'strange statement' since it has been almost two years that WTI really mattered on the World Market of Actually delivered/customer refinery oil...
Don't them squinty eyed commies even know to just buy the fucking dips?!?!?
Oil not pegged in USD is quickly game over. Sheeple confusion, unrest, panic -- hello, Bancor
Move sovereign gold now from FRBNY to West Point and never exchange it for Bancors in lieu of USD
compelling stuff and profound - liquidity = higher commodity costs - who'd have guessed.
But what enquiring minds want to know is if larry will reinstate his ownership stake and management role in Roubini Economics now that he has left the administration?
No mention of Falling exports from China to the US and Europe as consumers buy less Chinese made Crapp. BDI confirms this.
You can almost hear those Chinese factories humming.. listen closley. It's going to be a hard landing for them with the excess and now overcapacity they have.
With Chinese induced High Commodity costs , the Communist Mother of margin collapse. Welcome to the 21st century mfers!..
I hear something ... sounds more like whistling ... what's that tune? Ah yes, whistling Dixie ...
Welcome to the global economy Chairman Mao.
++
This post was immediately junked yesterday.
Only a few saw it....Hong Kong was up big last night.
...............................................
Possible nipple bottom on FXI.
Who knows? Might be worth grabbing for a trade.
Sentiment on China is terrible right now.
Nipple bottom? Wow.
Agreed. If the front runners jamming PMs higher are any indicator, China bounces.
FXI has moved 4 (count 'em ... using 252 trading days per year) standard deviations down versus the SPY over the last 30 trading days, (month and a half). The algos will be forced to go long ...
4 STD = 99.993666% probability, or 6 days in 99,994 trading days -- or once every 400 years.
If China was in a bubble, Hong Kong is the top puss filled oozing center.
in all honesty, Roubini has been wrong about everything. extremist views are the new mainstream.
Totally unrelated headline:
Beijing city to raise minimum wage 21%; Second move in 6 months amid
inflation concerns.
[At least in Keynesian-think, "liquidity" has nothing to do with the general level of wages and prices.]
In China, we often call it 'structual pressure'...demographic issues
Also, some argues too much money has caused living costs in big cities to rise too rapidly, and that has caused labor cost to rise.
Actually, the PBOC has used its quantitative methods (issuing PBOC bills+RRR hikes+'window guiding' of new loans) to such an extreme that money market rates recently have almost reached its peak in Oct 2007 (bill discounting rate has reached 7% a few days ago). Besides topping money market rates, the effect was still mixed. New loans this year on 24th December is said to have reached 7.99 trillion RMB, much more than most have expected. The unexpected part is said to come from non-banking financial institutions (financial companies+trust companies+credit unions) and foreign banks. The PBOC has good control of the Chinese banks at the end of the year, and it has tried to use these banks as its liquidity-absorbing tools. In 2011, the PBOC will of course try to curb inflation with further/continuing pressures. But it has identified another important task for itself next year--it will push forward the process of interest rate liberalization. One step would be the introduction of a new money market tool and the other would be to 'encourage' banks to raise its own rates.