"China is reversing course on a major effort to tackle its hefty local government debt problem, marking a setback for a priority reform aimed at getting its financial house in order," WSJ reports. The abrupt about-face by Beijing, which will now allow local governments to once again tap shadow banking conduits for high interest loans, comes as the PBoC gets set to ramp up an LTRO-like program designed to essentially monetize trillions in local government debt. The interplay between the debt swap program, Chinese-style LTROs, and the decision to drop the ban on LGFV financing could set the stage for a dramatic increase in the country's already massive debt pile.
China has officially entered the realm of "unconventional" monetary policy, joining the Fed, the ECB, the BoJ, and a whole host of other global central banks in an attempt to bring the supposedly all-mighty printing press and the unlimited balance sheet that goes with it to bear on subpar economic growth. We suspect the results will be characteristically underwhelming (at least in terms of lowering real interest rates, although in terms of boosting risk assets, the results may be outstanding) meaning it's likely only a matter of time before LTRO becomes QE in China just as it did in Europe.
Take note, Gold is officially money for the most powerful entities in the world. They are not only accepting Gold as collateral but are openly trying to insure that they have their own Gold in safe custody.
An inauspicious start to China's local government debt swap initiative has the PBoC scrambling to determine the best way to facilitate the successful issuance of new municipal securities as several provinces have reportedly canceled or delayed offerings. Now, the question is whether Chinese LTROs will be enough, or whether outright QE will ultimately be the only option.
Following yesterday's early MNI rumor that a Chinese QE is being "considered" and which sent the Shanghai Composite surging 3% and led to an initial boost in US stock futures, overnight the PBOC scrambled to once again deny such speculation. Of course, going full "cold Turkey" on Chinese stimulus would be too much for the market to handle, so in a piece by the WSJ also released overnight, the author said the PBOC would pivot from outright QE to mere LTRO, which is also not new and was reported over a week ago here in "China Floats QE Trial Balloon, PBoC May Launch LTROs." In any event, for now at least, Asian stocks are not happy despite Apple's latest blockbuster results, and neither is Europe, with the Stoxx 600 down 1%, and even the E-mini is hugging 2100 unable to levitate on any imminent central bank intervention.
It is only fitting that the next business day following a headline that "Global Futures Slide China Tumbles On Short Selling Boost" we would see China, in an apparent panic, not only cut its RRR by 100 bps to 18.5% - far more than expected and the most since 2008 - but, more importantly, hinted that the Friday regulatory decision to encourage short sales and tighter margin rules on "umbrella trusts" was in no way meant to pop that the Chinese stock bubble, ridiculous as it may be. End result: after Chinese futures crashed by up to 6% on Friday after the Shanghai close, overnight the SHCOMP was down just 1.64%, erasing the bulk of the futures loss. More importantly, US equity futures have seen a strong bid this morning in yet another attempt to defend not only the Apple Sachs Industrial Average from going red on the year but the all important 100 DMA technical levels.
The situation in Greece boil down to the single most important issue for the finacial system, namely collateral.
A number of economists have proposed the implementation of what has been dubbed "QE for the people." They seem to prefer to apply the principle "When in trouble, double." Given the massive mistakes which were made by central banks from Weimar to Bernanke and the relentless attempts to use the printing press to finance governments, it probably shouldn't take much to convince people of alternatives, and not more of the same, right?
This is why the Greek debt crisis continues without end. The minute Greek bondholders have to take a REAL haircut, the wheels come off the EU and the $100 trillion bond bubble finally blows up.
The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today... Whether this is seen as good or bad by the average citizen is not even up for debate: it is simply what the political and bureaucratic elites have long ago decided is good for the citizenry, since they think they know best.
All of the biggest problems in the financial world revolve around the bond markets today: Greece, Japan, the Fed's interest rate hike, etc.
While the economy is showing some signs of impact from falling oil prices, a port strike in California, weak global demand for exports and an exceptionally cold winter; the markets are pushing all-time highs. There is much hype being placed on the ECB's plans for launching QE in March, however, much remains to be seen as to just how effective it will be in a negative interest rate/deflationary enviroment. But then again...there is always "hope."
While economic indicators make "very poor bedfellows" for managing portfolios, they do provide some indication as to the relative risk of owning assets that are ultimately tied to economic cycles. Despite commentary to the contrary as of late, economic cycles have not been repealed, and the current economy is likely running on borrowed time. It is important to notice, that despite the "hype" of the mainstream media about the economic recovery, activity never rose past previous peaks in this cycle.
All of the biggest problems in the financial world revolve around the bond markets today:
The dark truth about the Greek debt negotiations that Central Banks have been trying to hide.