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On The Stealthy Doubling In Chinese 7-Day Repo Rates
Even as most investors are focusing on Europe, Libor, Euribor, Ted Spreads, the ECB, etc, many have noticed that over the past 10 days China's seven-day interbank rates have doubled from 1.8% to 3.2%. Is this latest episode of liquidity turmoil indicative that the PBoC is becoming less successful at communicating an "all clear" to the domestic (and international) markets? Or are there more troubling undercurrents in the sea of (previously) excess Chinese liquidity?
The primary driving force behind the BRIC (re)growth story of the past year has been the mirroring by China of the US excess liquidity policy, coupled with an extremely loose fiscal policy. Which is why every minor blip in any of the liquidity metrics in China tends to be analyzed under a microscope, due to huge implications on the commodity (and thus every other) trade. As the chart below highlights, in the last week, there has been a very disturbing move in the Chinese seven-day repo rate.
What may be the reasons for this surprising move? Bank of America's Ting Lu ventures one explanation:
Recent anomalies in China’s money market bewildered most investors who are trying to detect any small change in policy direction amid the European debt crisis. Markets became nervous about a possible credit seizure as China’s seven-day interbank rates doubled from 1.8% to 3.2% in 10 days. While some took the net injection of RMB224bn in May as a sign of policy easing, others cite the latest rise of the one-year PBoC bill’s yield at issuance as a sign of imminent rate hikes in June. However, we believe the ongoing mess in short-term rates tells us much more about the PBoC’s technical problems than its policy intentions.
The most immediate reason for the spike according to Lu, are imminent IPO and Convertible Bond issuances by the BoC:
To smooth short-term interbank rates, the PBoC has to forecast the demand and supply of funds. Though it might be hard to know the exact scale of hot money inflow or outflow (or conversion between USD and RMB by domestic residents), it should be relatively easy to know of IPOs and seasoned offerings in advance. The latest “unexpected” spike was largely driven by Bank of China’s RMB40bn offering in CBs, which could freeze RMB1.0tn during issuance.
The reason for the RMB40 billion Convertible Bond issuance, as BusinessWorld explains, is the desire by the BoC to shore up liquidity against "bad debt." Since this is something China has a lot of, we anticipate many more such liquidity lock-ups.
The problem, however, facing the PBoC is that such confidence restoring measures go directly against the ongoing desire to reliquify the market. As BofA further explains:
The PBoC intends to cap new loans at RMB7.5tn this year, but it got involved in a competition with CBRC on monitoring banks’ daily loan making. For the PBoC, RRR hikes and bill issuance this year became tools for both regulating bank loan making and smoothing short-term rates. But this multi-tasking flattened (or inverted) China’s yield curves to a degree that the PBoC is not comfortable with.
Indeed, as the chart below shows, the US is not the only country experiencing curve flattening, a bearish signal.
Further demonstrating the quandary facing the the PBoC is the increasingly erratic direction of recent liquidity injections and withdrawals: in this volatile environment, it is amazing 7 day repo rates have moved to only 3.2%.
Another very troubling trend is the drop in excess reserves held by banks: the commercial bank excess reserve ratio has dropped from 3.13% at the end of 2009 to 1.96% by end of Q1, 2010.
And the last factor leading to liquidity distrubances in Shanghai, completely independent of what may be happening in Europe, is the increasing volatility in RMB-USD forwards, courtesy of the groupthink moving from one near revaluation certainty, having hit a multi-year tight in late April, pushing back to January 2010 level as shortly as a month later.
With so much endogenous liquidity volatility occuring in China, it is no wonder Shanghai is at 52 week lows. It is only a matter of time before the broader market puts two and two together and links up the suddenly volatile liquidity environment in China to what is happening in the entire world. And as these things tend to be self-sustaining in feedback loops, keep an eye on the Chinese 7 day interbank rate, together with the European Commercial Paper and repo market, which, if history is any guide, is where the next liquidity shock will strike.
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Nervous/loose central banks and nervous/tight commercial banks always make strange bedfellows.
Is there not a Mandarin phrase about Mama-San offering a prudish banker a one-eyed dragon special? Probably a Cantonese saying, now that I think about it.
+10 lol! I have heard such phrases in bars in Kuala where ethnic Chinese relax and talk about such things.
Sudden jerks in property values may also be flashing red signals re hot money. Down 18% per square meter in a month is no mole hill. I think the reverberations could be big. Looking back the peak was reached in March. First domino.
This surely sets up a new set of analyses.
Whoa!!!
Yeah, I want to move to Ordos, Mongolia...........I hear there is lots of empty space!
bring your own yurt, and some goats. But be prepared to move according to the seasons.
Wow, time to buy a bunker and load up on beans and bullets. It is rather obvious that China had to tighten Money given the huge speculative bubble blowing in Beijing residential RE. Some of my friends are telling me that prices have increased 20-30% in 6 months. Restricting liquidity may be necessary but it will hurt...
And rice. Beans and rice.
Yeah this doesnt look good at all, the Chinese Banking system is under huge pressure at the moment. Have a look at the SHIBOR (shaghai inter bank offered rate) its gone through the roof! Commentators here in Oz describing it as PBC succesfully reducing liquidity in the domestic lending system but it doesnt look orderly to me.
What is your opinion on the Australian property market bubble an possible pressure on Australian banks? See this:
http://www.debtdeflation.com/blogs/2010/05/21/excellent-presentation-on-...
and this
http://www.smh.com.au/business/why-our-foreign-debt-is-a-taboo-topic-201...
its a bubble for sure but not as bad as US. we never really had a reccession here yet but aggresive interest rate cuts, grants and stimulus during GFC inflated it even further. banks have been tightening home lending for the past few months and RBA has been rapidly increasing rates in an attemp to pop it and i think they are about to succeed. there is a housing shortage here though so not expecting US / Euro style collapse.
property not the problem for ozzie banks though, wholesale funding is. we are big importers of money here and the banks cant get the funding they need at the moment with whats going on in global credit markets.
That graph of Australian house prices certainly looks like Al Gore's hockey stick. Certainly an "An Inconvenient Truth" :(
Isn't it true that "there is a housing shortage" justification preceded most property price collapses?
Absolutely. To be honest, the Aussie housing shortage line is mainly one pushed by the MSM and housing and real estate industries. It's accepted as fact by most, but digging a bit deeper suggests the possibility that it is not exactly true. Additionally, any "housing shortage" that exists is artificial in that it is largely state governments not releasing land and developers hoarding land that stops greater housing construction.
A housing shortage in a country as massive as Australia with a measly 23 mil. population is laughable. Oz housing is headed for a huge fall, just a matter of the planets aligning. We have been lucky until now as the recession has largely passed us over with minimal damage. Still, people are starting to struggle out there as the personal debt loads here are enormous.
Us Aussies should start exporting our food. I miss it so much. Dim Sims, Potato cakes, Chicko rolls and the new wave of gourmet burger outlets springing up all over the place. Damn good stuff.
When all the worlds about to end what's an investor to do?
"Life is to short to conquer the whole world" Ghengis Khan on his deathbed.
It is about to get uglier than I can imagine very soon now. The gravity of the situation is starting to sink in on me finally. Going to get real bad. Seeing well composed people such as nic lenoir getting shook up is a real, honest wake up call.
Long grains guns and the fear of God.
Edit: will the 2 year note go negative? LOL!
Is there such a thing as too much of a good thing?
Obviously yes. India has a strange mixture of no currency controls (for the classes, enough loopholes) and tight currency controls (for the masses).
And so, as one can see from the gyrations of the Indian Stock market (BSE) over the past few years, hot money can yank chains to the point of great pain. We also have a similar, ridiculous property bubble in big cities.
As I had written in my rather pre-scient jottings on my web-site back in early may 2008, Chindia were both going to take it on the Chin.
China is the enemy and India is currently a recent and convenient Geo Political ally, so I guess we'll see some "Stability" (hah) for a bit before it's our turn for the take down.
There is an answer, for all of "us", I have it, but it seems people want pretty pictures and slick presentations.
Sad but true.
We love the very things we say we hate.
I often find myself feeling elated by the terrible news. A smug " I told you so!" type of feeling. How stupid am I sometimes!
Foxconn is raising wages in order to address the rash of suicides. This signals quite a turning point in China as their major comparative advantage is essentially their reliance upon near slave labor wages.
Oh great so exhausted workers with pointless lives now get bigger numbers to make it all worthwhile. The old the slavery has a light at the end of the tunnel trick.
Freaking $60 dollar foxconn motherboards. That's rediculous and stupidly low.
Making enough phones for everyone on the planet so that 20 percent of them can constantly buy new ones and throw out the old models or break them every 6 months.
Yep.
Unfortunately, cheap is like a cocaine fix for most, too hard to let go of.
I was guilty (Price Club member for a while in the US). Bought so much worthless shit.
Also important to remember that we only see mostly sanitized pictures out of China (and India).
The reality of a true industrial sweat-shop here (see things like ship-breaking, which governments consider a growth industry worth fighting for) is beyond awful.
Ugh.
The news about Foxconn raising wages is great! We are all better off when competition takes place on grounds other than low wages or environmental devastation.
While factory work isn't necessarily great, proper wage levels go a long way to making life a lot better...Just ask American workers in industrial unions who happened to live in the Great Compression.
They aren't going to raise wages till October. Then china will be back in trouble and they'll say they can't afford it.
From : http://www.squareandc.net/Design%20Vision%20may08.html
May 19th 08
And I quote...
" China is staggering under its own curious set of circumstances of a large population set “herded” into rapid “development” mode, much like India. Most of the “gains” are hype. Credit, cheap and plenty until recently (private equity had moved it into the right hands in preceding years), being the sole driver (flogger?) of growth."
Juan, no shame in being right, especially about times and things such as these.
Pre-science is not rocket-science, it's more like pre-signs.
If you can read tracks, you already know half the story. And the rest of your conjecture will be well-informed.
Updated DOW charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
april 16th, china equites, are now all optionable, hmmmmmmmmmmmmm
u can do more with less
"Punishment by the market will be swift and merciless now that the open secret that governments outright lie about their economic data on a routine basis is out."
I don't know if we're about to head into the Asian Flu season again, but someone just sneezed. An almost textbook setup for a full-blown emerging/developing country default, I guess we'll know when the wolves start showing up on the scene and circle the prey. Looks like Soros is going to have his chance to add another sovereign to his belt, and this time there's a nice purse of gold waiting for him.
Its a race to the bottom in the developed world. Who has the biggest stomach for electoral discontent and sagging approval ratings ? Not Obama, clearly. Lets see how young Cameron gets on, he's already warming the population up for tough measures. As Rockhound says in Armageddon, 'embrace the horror, we've got front row tickets to the end of the world'...
China was always going to tighten this year, has been well flagged for months. Less production of useless plastic rubbish for the West can only be a good thing medium term as a result. The world does not need to squander more resources on superfluous crap.
I realize old school math is just that; 1.8% doubled isn't 3.2%. A 78% rate increase is significant, but it's only money.