Shanghai Stocks Drop Following Failed 3 Month Bill Auction

Tyler Durden's picture

As the rest of the world celebrates Christmas, blissfully pretending all is good, and the Fed can manipulate markets to infinity without at least one of the numerous violated laws of physics being reasserted in the process, things in China are once again reminding those who care that just as liquidity giveth, so does liquidity taketh away. We pointed out a week ago that the 7 day Repo rate in China recently hit a post-Lehman high, as banks are increasingly concerned that following 3 RRR hikes, the PBOC has no choice but to resort to some tightening measure that actually works. As a result excess liquidity has suddenly become rares than hen's teeth. Today we get a first hand lesson of why this was material: Dow Jones reports that the Chinese MoF has failed to attract sufficient interest in its 3 Month 20 billion CNY auction. The result: SHCOMP is now down 1.2%. Bottom line: as the world is sleeping, China just had a failed bond auction. If news mattered, this would be a very disturbing event. Luckily for Ben, it doesn't. For the time being. It will soon. Then Montier's mean reversion meme may just strike with great deferred vengeance and furious accrued anger.

From Dow Jones:

China shares extend their falls following news the Ministry of Finance fails to attract enough bids to sell all of its planned CNY20 billion 3-month bills in an auction. The Shanghai Composite Index is now down 1.2% at 2819.72 and analysts peg support at 2800. The MOF's unsuccessful bill auction is fresh evidence of tight liquidity conditions in the market, due to China's three RRR hikes since November and rising cash demand near the year-end. "Institutions are inclined to expedite pocketing in some profit," says China Post Securities, adding "the situation will increase the likelihood of a bearish market in the short term." Banks continue to fall on various news reports that China is likely to use new measures, such as special RRR hikes, to rein in credit expansion next year.

Incidentally, the last time China had a failed bond auction was in mid April, just as the stock market hit its then 2010 highs, only to be followed by a drop to the year's lows.

h/t London Dude Trader

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Calvin Jones and the 13th Apostle's picture

Freakin' YouTube.  I can't believe the Don Meredith version isn't on there, so this will have to suffice:


I think it is appropriate.

dlmaniac's picture

Well since Fed already assured us rate dropping / flatening / rising are all sign of economy recovery, we really have nothing to worry about so keep partying. Greenshoots to infinity.

SheepDog-One's picture

Right excellent point, up, down, or sideways, its all good and definite signs of recovery. $25 trillion debt by 2012? Nevermind all that, stocks are what americans need to be buying, on a credit card, and media says to sell your gold and silver because kids are somehow harmed in African mines which is somehow my problem and Im responsible for it since I bought PM's. But stocks are 'good and wholesome' of course. Max out those credit cards for Christmas, american sheeple. All youre good for is debt slavery anyway.

malikai's picture

Just curiosity here. What good is a debt slave that cannot service their debt?

Clycntct's picture

It's a make works program.

Give a bailouter a job

jeff montanye's picture

excellent question mali.  

on that thread hangs much: are the debt slaves recapitalized by their own default or by hyperinflation or by a slow, earned debt paydown or by debt forgiveness?  the last seems too revolutionary for the bankers and the politicians (except for themselves of course) so looks like more of the first three, which tend to turn the debt slaves more revolutionary.  

isn't it ironic?


Ken P's picture

Debt slavery is even better than real slavery because the slaves don't even realize they are slaves.  The whole point of slavery is not to own people for the sake of ownership.  It's to force people to work for you at minimal cost to you.  Slavery allows the slave owner to maximize what he receives from the slave's labors with minimal benefit to the slave.  That's what happens with debt slavery.  Once someone reaches a certain level of indebtedness their labor is mostly devoted to paying off debt with little benefit to himself.  Now imagine that you are the Federal Reserve.  Every dollar that they create is a unit of debt to them.  They create money and lend it to banks at interest and lately they are creating money and buying government debt.  The creation of dollars costs the Fed nothing, but every dollar they create means more debt slavery for them.  We have now reached the point where individuals are maxed out on debt and state, local, and federal governments are maxed out on debt.  We can never repay all the debts that have accrued, but to the Fed that is of no consequence.  To a certain extent we are all debt slaves to the Fed because so much of whatever we produce will go to paying off interest and the beauty of it is that the Fed paid nothing to create the money but has a country full of slaves.

4xaddict's picture

......strike with great deferred vengeance and furious accrued anger



Oh regional Indian's picture

Funny this, Reserve Bank of India had a weak auction of medium term paper earlier thsi week also.

Chindia, going to take it on the chin, together it seems.

Real Estate is the bell-weather though. When the leak begins out of that bubble, watch out below.

All of this other stuff is distraction.



Landrew's picture

Bubbles don't leak, they pop!

Oh regional Indian's picture

Trew Landrew, but it seems that the master's of finance have managed to make many bubbles leak an awful long time without popping eh?

Maybe leaking bubbles is a part of the new normal?


jeff montanye's picture

ben's blowing as hard as he can into the inflator hole (his cheeks are turning purple) but the leaks show little sign of slowing.  the betting in the casino on the remaining life of the balloon is furious.  imo the bears may have most of the happy new year.  

wretch's picture

If a market falls (fails) in the forest...

wintermute's picture

The Ministry of Finance does not need money for itself as China is running a monumental trade surplus and has mountainous reserves.

So the auction is purely to drain CNY internally to fight inflation which is evident in ramping retail prices. There is enough CNY sloshing about - just that the interest rate offered by MoF on their bills is too low.

So we know for certain that the CNY is artifically low. China has to increase interest rates , and their exchange rate, or their economy gets a slow roast in the fires of inflation.

AUD's picture

Ain't these 3 month bills marketable securities though? If so they would be 'money good'. Don't quite see how this drains any 'liquidity'. Unless it's all just a ruse, which is what I'm thinking.

Divided States of America's picture

Perfect timing on the Chinese part...this news will be swept underneath a rug and in the US, it will be swept underneath a mountain of presents containing useless unnecessary goods that were made in China.

SheepDog-One's picture

Yea, well that rug everything is getting swept under now looks like a postage stamp on an elephants back.

jeff montanye's picture

aud: yes the bills are marketable and money good (in yuan).  

however, as i understand it, this is traditional monetary policy: offer something of longer maturity than checking account deposits to reduce available cash balances that could be spent on goods and services.  

the bills could be sold and the money spent but the tendency is for it not to be, else why buy them? and, at the margin, it also raises short term rates (as we see here), also liquidity draining, as some, previously indifferent, now buy the more attractively priced bills, further reducing checking account balances.

this ignores external currency flows which tend to counter the contractionary effects of this monetary policy.  

TheJudge2012's picture

Peter Schiff said if China raises interest rates it makes Chinese deposits more attractive than dollar deposits, borrow in dollars and buy RNB and earn that spread, causing more hot money to flow into China. Then they would have to print even more RNB to keep the dollar afloat which means inflation goes up even higher. The only thing that will work is to let the RNB go up.

Depeg which means lights out over here.

scatterbrains's picture

and I thought if they depeg the dollar drops with a reflex spike higher in stocks. How does the "lights out" scenerio unfold if you don't mind?

TheJudge2012's picture

If China depegs, the RMB goes up, our interest rates and consumer prices will be forced higher. He doesn't talk about the stock market in that clip but you can call during the show.

archive for 11/19/2010 about 10 minutes into show. What happens during a default at about 77 minutes.
edit previous post to

"Then they would have to print even more RNB to keep the dollar afloat which means their inflation goes up even higher."

wintermute's picture

If China de-pegs then this should make their exports more expensive for US consumers, encouraging US domestic production to make up the slack. This is good for the US economy in the medium/long-term. However, the blow-fly in this ointment is that other low-cost manufacturers (Bangladesh, Indonesia etc) will fill the cheap goods void and the boost for US domestic manufacturers will become a mirage.

TheJudge2012's picture

There's gotta be something in it for Bangladesh and Indonesia to do that. May be that the only reason China had for supporting the US with its dollar peg was it didn't think the RMB would be taken seriously to trade without it, but why it didn't abandon it a long time ago is the question.

If China depegs, US interest rates and consumer prices go up crushing the phony economy and if the Fed stays on the same trajectory we will have hyperinflation.

"...the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process."

jeff montanye's picture

c-4 soaked in nitroglycerin bitchez.

Mr Lennon Hendrix's picture

Asia would rather buy gold.

Mr Lennon Hendrix's picture

Daily (rather nightly) flash crash in platinum almost complete. 

Mr Lennon Hendrix's picture

There there now platinum, it's ok, soon the big bad will no longer manipulate you.

Trimmed Hedge's picture

I just came back from China.

They are kicking our asses over there!

Id fight Gandhi's picture

Why? Do tell. Love hearing China stories.

Cursive's picture

I just came back from China.

They are kicking our asses over there!

They're better at central planning, manipulated markets and widespread fraud than we are?  Good for them.

SheepDog-One's picture

The Chinese have been doing communism longer than the US, thats all.

jeff montanye's picture

don't you mean crony capitalism?

sbenard's picture

We need a good correction! A cold shower and a dose of reality are long overdue!

froghat's picture

Eventually the shi* has to hit the fan. I wish they would just get it over already! You can't spend your way out of a depression. The world has completely gone insane!

Id fight Gandhi's picture

I believe people are borrowing and spending without regard. A collective fuck you is what creditors will get when Americans havent the money to pay.

centerline's picture

Yeah - I think there are a couple of major segments in the middle class here.  Some are getting out of harm's way fast (very few though).  Then, there are those who are doing what you suggest.  And another segment who just can't do math...  and simply do not accept (err..refuse to accept) reality.  Most have lived entirely in a fiat fantasy land on the "fun" part of the parabolic curve.  They do not see how future earnings are pulled forward, creating a massive hole.  They are cutting back - but nearly enough to get out of trouble.  They are underestimating the severity of the situation and how dramatically things have changed.  They will continue to bleed off cash, literally until the moment it siezes up.  Then, and only then, will they suddenly panic and do something.  So many people are now simply one major capital expense (replacement car, new roof on house, etc.) away from that moment.  And I am not even talking about stuff like major medical.  I am talking about stuff that does in fact happen.  The same goes for too many small businesses as well.  All in the same boat.

Got a feeling we are seeing what is in effect a major consumer dead cat bounce - as savings, 401k's and investment accounts are stripped to keep the party going just a little while longer.  Not to mention it's all good news about the economy!  Right?  Things will be right back on track come January!  Right?

Anyhow, Xmas is likely the apex of that dead cat curve and the trajectory is soon to be terminal.  Margin compression as a result of soaring input costs will just be fuel on the fire.  Very deflationary... and into a muni clusterfuck.  The only option will be QE3 or some acronym program of monitization to kick the can a little further.

Either way though, I think the collective "fuck you" is coming - not by choice, but by circumstance.  With lots of pain to go around.  Especially for those who drop early.  For those of us with limited resources, I think the trick will be last long enough for a good portion of system to crumble first.  Kind of like getting away from an angry bear... don't need to be fast enough to outrun it... just fast enough to outrun the next guy!  LOL.

Itsalie's picture

"The MOF's unsuccessful bill auction is fresh evidence of tight liquidity conditions in the market, due to China's three RRR hikes since November and rising cash demand near the year-end. "

Hey hey, DOw Jones have not heard the loan shark market has increased the shadow market rate lately? Anyway all this silly RRR and MoF auctions are the same as the Fed's money printing - unlike the indians, the chinese do not have the backbone to take away the punch bowl, or maybe they have learnt some can-kicking kungfu from the Chairman (no, not Mao, I mean Ben). They are digging their own graves, but they are probably 2 to 3 years away from their minsky moment. So yes Chanos and Hugh endry are correct to short china but they need to hold the trade for a while more.

hangemhigh's picture

TO:  RobotTrader
on Fri, 12/24/2010 - 00:42


This looks just  like the MSFT chart of early 2000.....a piece of swiss cheese full of hot money gaps...............

lewy14's picture

Dude. Those gaps aren't "hot money"... those gaps are lunch.

Id fight Gandhi's picture

Us markets having the best december in 20 years. I wonder how much will be shaved off as the robots power down and the fund managers screw hookers over the holiday week.

Id fight Gandhi's picture

China just put a serious limit to licenses it will issue to cars. This won't be pretty for ford and gm especially when their growth is china based and big gas guzzler trucks are top sellers here. Gas jumping will slap sales down.

mberry8870's picture

This would be important if it mattered.

williambanzai7's picture

I knew something was up. The line at Gucci HK just doubled. 

Julia's picture

I'll never forget one time I was in HK and went shopping in Kowloon. There was a knock-off T-Shirt of Calvin Klein that read Caivln Kieln. Seems their I's and L's were mixed up. They insisted I didn't want those but I insisted that indeed I did. They only had 7 and I bought every one of them... 

squexx's picture

Lots of funny (but usually innocent) translation errors at