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Two Chinese Bond Auctions Fail

Tyler Durden's picture


And while the US is no longer allowed to auction off debt, in China the PBoC appears to be no longer able to auction off debt. As Business China reports, "the central bank scheduled the auction of RMB 20 billion worth of
one-year treasury bonds and RMB 10 billion in six-month bonds on the
country’s interbank bond market for May 13. But banks, faced with tight
liquidity, only purchased RMB 11.71 billion worth of one-year bonds and
RMB 9.63 billion worth of six-month bonds, the report said." In other words, there was a nearly 50% miss on the 3 month auction. The key reason: "The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said." It appears investors don't agree with the central planners that 3% is an appropriate rate to compensate them for surging inflation. That, and also the fact that banks suddenly have no liquidity: "Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying. The central bank also raised banks’ RRRs by 0.5 percentage points on the same day, effective May 18, the fifth consecutive month its has raised RRRs this year." And so the Catch 22 emerges: the more China fights inflation through RRR or rate hikes, the lower the purchasing power of domestic banks to purchase bonds (and yes, the US deficit is just a few hundred billions dollars too wide for it to come to China's rescue). Should the "15 minute" inflationary conundrum continue to express itself, and China be forced to rise rates even longer, very soon the country, just like the US to which it is pegged monetarily, will also be unable to raise any incremental capital.

More from the article:

Analysts had reckoned the restart of three-year bill issuance had satisfied banks’ needs to reinvest in the product as the bills were the major kind of bills to mature in May, the paper said.

Besides, the central bank had been net injecting funds in the past three weeks after it squeezed the volume of the one-year bills to RMB 30 billion in the recent issuance on May 10, and the restart of the issuance of three-year bills was seen as the central bank’s attempt to strengthen its open market operations.

The market generally believed that the influence of the central bank’s open market operations had weakened recently and the diversification in tools used would help drain liquidity.

The restart of three-year bills was considered an appropriate tool in the central bank’s measures to drain liquidity, and the central bank would be more prudent in using RRRs after the resumption of three-year notes as the RRRs had already reached a record level before its fifth hike this month.

After the most recent RRR hike, China’s biggest banks will be required to put aside 21% of their deposits in reserve, based on earlier announcements made by the central bank.

Compounded by the effect of the three-year bills, the consecutive increases in RRRs have brought “real and heavy pressure” on small and medium-sized lenders, the paper said.

“We thought the central bank might want to rely more on open market operations and there would be less chance of an additional hike in RRRs this month after the restart of three-year bills… but the recent RRR hike really surprised the market and completely reversed investors’ earlier optimistic expectations,” an unnamed bank trader was quoted as saying.

And it's about to get worse: those who remember our charts from early this year showing the one week repo rate exploding ti 7%+, well: we are about to have a case of deja vu.

A large commercial lender, which used to be a fund provider, has started borrowing from the interbank market after the RRR hikes, another banker, who was not named, was cited as saying.

“Repurchase rates may surge this week as the latest RRR hike will take effect on May 18, and the stringent market conditions will last for the next two months,” the analyst was quoted as saying.

A recent China International Capital Corp. report estimates that the seven-day repo rate, which reflects money supply in the market, may top 4% at some points and will remain above 3% for a relatively long period.

Bottom line, don't expect a bounce in the SHCOMP any time soon.


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Mon, 05/16/2011 - 11:18 | 1279249 EscapeKey
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I see the Chinese haven't yet managed to copy the US system of Primary Dealers and Open Market Operations.

Mon, 05/16/2011 - 11:27 | 1279299 bonddude
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Rift between Politboro and PBOC ? I smell JASMINE !

Mon, 05/16/2011 - 13:23 | 1279798 TruthInSunshine
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We will all look back to this period and realize, collectively, that even as bad as things are in the house of finance regarding the U.S. and most of Europe, China was tulip central.

My very unpopular view is that many multinational corporations are going to get burned long and hard on their infrastructure investments in China.


Mon, 05/16/2011 - 11:38 | 1279303 bonddude
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Bill Gross must have gotten word that the Chairman was displeased.

Mon, 05/16/2011 - 11:15 | 1279250 FOC 1183
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take notes Tim

Mon, 05/16/2011 - 11:23 | 1279269 Math Man
Math Man's picture

Failed auctions = Real rates will soon be positive = The Chinese will stop buying PMs.

Goodbye gold, Goodbye silver.




Mon, 05/16/2011 - 11:25 | 1279292 SilverRhino
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Congrats on getting it completely backwards you dumb fuck.

Mon, 05/16/2011 - 11:30 | 1279304 EscapeKey
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Making sense is not part of MethMan's agenda. It's all about spreading FUD for his corporate masters.

Hey, MethMan, is that line part of the daily update you were mailed from your "marketing" employer today?

Mon, 05/16/2011 - 12:48 | 1279651 DonutBoy
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Why all the vitriole?  Is it possible he has a point?  All the anger sounds like some pretty defensive PM investors.  There is a region where MathMan is right.  If people believe in inflation but not in currency collapse they seek yield.  That describes my parents.  This is how they're investing their retirement funds. That is the Bernank's target region.  Other investors, like me, believe he'll overshoot. 

It is important to be asking why your investment thesis may be wrong.  I'm glad you're here MathMan.  I want to  see what you have to say.


Tue, 05/17/2011 - 00:34 | 1281955 h3m1ngw4y
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he is right. but real interest rates will not become positive in an inflationary environment

Mon, 05/16/2011 - 11:46 | 1279358 Math Man
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The only ones who have it wrong are you guys...

The Chinese and the Indians are the largest buyers of PMs - BECAUSE THEY HAVE AN INFLATION PROBLEM.

Real rates are negative - they have no choice but to buy hard assets.

Failed auctions mean investors are demanding higher rates...and that real rates will soon be postive.

Positive real rates will DESTROY precious metal demand from India and China.

And thus the price.   Not to mention the impending collapse of the commodities market that will squash US inflation expectations. 

Mon, 05/16/2011 - 11:47 | 1279376 EscapeKey
EscapeKey's picture

From the 'bible' on hyperinflations:


Mon, 05/16/2011 - 11:54 | 1279393 Bay of Pigs
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Where do come up with this shit? Do you read anything posted here on ZH?

I don't think you do. In fact, I'm sure of it.

Mon, 05/16/2011 - 11:56 | 1279399 trav7777
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then real rates will never be permitted to be positive, because failure to grow = implosion.

Tue, 05/17/2011 - 01:23 | 1282050 TruthInSunshine
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"It only takes 32.5 renminbi to dig an ounce of silver out of the ground."

Mon, 05/16/2011 - 14:14 | 1279994 strannick
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Mathman gored by SilverRhino.

Mon, 05/16/2011 - 11:28 | 1279293 SheepDog-One
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Meaningless drivel, as if PM values are only relevant to whether or not China is buying them? Hold whatever paper you want.

Mon, 05/16/2011 - 11:29 | 1279311 KlausK
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Meth much?

Mon, 05/16/2011 - 11:30 | 1279313 Tortfeasor
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Remind me again, what happens when people lose faith in currency?  The stop buying ______ and start buying ______?

Mon, 05/16/2011 - 11:42 | 1279344 TheTmfreak
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They stop buying popsicles and start buying bubble gum.


Mon, 05/16/2011 - 11:45 | 1279364 tmosley
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I'm all out of bubble gum.

Mon, 05/16/2011 - 11:52 | 1279384 TheTmfreak
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Although now that I think about it I shouldn't be surprised but... I was surprised that came from a movie rather than Duke Nukem....

Your face. Your ass. What's the difference?

Mon, 05/16/2011 - 12:25 | 1279527 tmosley
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"They Live" is EXCELLENT.  One of the greatest fight scenes in western cinema.

Mon, 05/16/2011 - 11:44 | 1279348 Urban Redneck
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Time for Chinese banks to dump reserves yielding a negative real rate to make room for Central Committee mandated purchases.

Mon, 05/16/2011 - 11:42 | 1279350 tmosley
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Real rates are negative, therefore they will soon be positive?


Mon, 05/16/2011 - 11:21 | 1279273 oogs66
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China might have to sell some treasuries so they can buy their own paper? 

Mon, 05/16/2011 - 11:23 | 1279284 DK Delta
DK Delta's picture

We are drowning in debt. People are looking for a sandy beach.

Mon, 05/16/2011 - 11:27 | 1279289 Deep
Deep's picture

Hey Tyler, Bill Gross just "spoke" about you over on CNBC

Said some blogger, misconception




Mon, 05/16/2011 - 15:10 | 1280194 speconomist
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Hehe, just watched the video from CNBC posted here, didn't realize he was talking about the Tylers!!!

Mon, 05/16/2011 - 11:27 | 1279291 Cognitive Dissonance
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It just means the Chinese don't have enough leverage over their primary dealers.........or who or whatever serves the function of drinking all the debt served with the noodles.

Mon, 05/16/2011 - 11:30 | 1279298 Azannoth
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It's called Blow Back, bitchezzz

Or look up Newton's 3 law of physics

Mon, 05/16/2011 - 11:29 | 1279302 TorchFire
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They will fully monetize their debt...just like the Bernank.  Ultimaely this will be very good for PMs as the intellectually sleepy of the world come to realize the pervasive fraud of central banks.

Mon, 05/16/2011 - 12:26 | 1279535 stewie
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FYI:  China is not the US.  They can't "fully monetize their debt" while maintaining the peg.  The problem they are having right now is one of liquidity caused by the raising of banks' reserve requirements.  

Amen on the eveilness of CB however.





Mon, 05/16/2011 - 11:30 | 1279306 SheepDog-One
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They cant auction off 1 year debt? Wow amazing. I guess theyll dump the remainder of their worthless UST's now.

Mon, 05/16/2011 - 11:31 | 1279317 Out9922
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Mon, 05/16/2011 - 11:42 | 1279342 topcallingtroll
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Not a chance!

They only survive complete economic ruin if they maintain a suppressed currency.

They know the endgame is a rising yuan. They are trying to keep the rise as slow as possible.

Mon, 05/16/2011 - 12:38 | 1279586 stewie
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Yes absolutely.  Ben's playing Currency Chicken, trying to get the Yuan's rise to accelerate in order to rein in US current account deficit.  He knows this will cause pain to China by way of inflation.  Right now the Chinese are trying to suppress inflation through traditional means (rising RR & intersts rates), but nothing can be done with the cost pull inflation caused by the falling USD-Peg.  China is clinging to the US tooth & nail, and Ben has jumped in the water with an air tank.  It's only a matter of time when China has to let go to get some air, or drown.

Check the Yuan's peg.  This will signal an end to PM's raise, unless this chicken game ends in a head-on crash.  In that case, holding physical will might you. 


Mon, 05/16/2011 - 11:39 | 1279330 topcallingtroll
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America haters like to ignore that we have the advantage in this game and china is weak and about to implode the greatest malinvestment bubble in history.

America haters may try to ignore the truth, but the chinese government is well aware of their disadvantaged position.

Mon, 05/16/2011 - 11:51 | 1279381 tmosley
tmosley's picture

The Treasury Bubble?

Or the Dollar bubble?

Mon, 05/16/2011 - 11:38 | 1279333 Oh regional Indian
Oh regional Indian's picture

As an aside (southward) India has been raising rates to fight the inflation monster (same situation here, essentials are way too expensive, junk is cheap and can be bought on credit, classic bi-flation via hyperinflation and super-deflation in tango).

To walk about in an Indian market is to see the essence of social engineering displaying it's finest victory. The 300 million, newly minted Great Indian Middle Class. Soon to be taken to the cleaners, but right now, who needs food when you get a Maybach? Eh???

Weird world.


Mon, 05/16/2011 - 11:42 | 1279340 dracos_ghost
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Chinese hard landing anyone?

Mon, 05/16/2011 - 11:49 | 1279385 trav7777
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Bbbbut....I thought the yuan was the new reserve currency!??!!

Mon, 05/16/2011 - 11:55 | 1279390 eaglefalcon
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As far as monetization of debt is concerned, the Bernank and the Jeetner has a scam going on:

1.  Geetner prints treasuries and sells them to primary dealers

2.  Bernank prints federal reserve notes and buys from primary dealer

Those two have a stealth, incestous relationship.


The problem for the Chinese is that their Ministry of Finance doesn't issue bonds, the the central bank (PBOC) does.  So if they want to monetize, this is what they need to do:


1. Zhou xiaochuan prints bonds and sells them to commercial banks

2. Zhou xiaochuan then prints RMB yuan and buys from commercial banks


That wouldn't be stealthy incest at all.  It's more like masturbation in public 

Mon, 05/16/2011 - 12:06 | 1279463 instinctiveDrift
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+1000 For the coffee I just spit all over my monitor. Great analogy, thanks for the laugh!

Mon, 05/16/2011 - 12:11 | 1279489 EscapeKey
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I agree. More links are required for opaque accounting fraud.

Mon, 05/16/2011 - 12:18 | 1279512 KlausK
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Touch of genius. We get the picture ... Urrgghh

Mon, 05/16/2011 - 12:51 | 1279673 Calculated_Risk
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I can't decide if I need a cigarette or a shower after that...

Mon, 05/16/2011 - 11:57 | 1279417 PulauHantu29
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"Very Bullish for the markets," says Wall Street.Should be worth at least 0.5 GDP Boost.


Mon, 05/16/2011 - 11:58 | 1279424 Atomizer
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Man who fishes in other man's well often catches crabs

Mon, 05/16/2011 - 12:25 | 1279541 carbonmutant
carbonmutant's picture

The 2012 we get is not the one this administration is talking about...

Mon, 05/16/2011 - 13:40 | 1279845 TooBearish
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These auctions didn't fail - the PBOC choose not to sell as much.

Mon, 05/16/2011 - 14:19 | 1279997 thefedisscam
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The ONLY post worth while reading.  +1000

Mon, 05/16/2011 - 17:06 | 1280677 AldoHux_IV
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This is why central banking + fiat + flawed policymakers = worthless system that needs to be replaced.

Do NOT follow this link or you will be banned from the site!