Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.
While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.
When it comes to the gyrations in the stock market, there are those who, quite foolishly as of late, believe that market moves are driven by such arcania as fundamentals and/or technicals, or, much more relevant lately, are purely a function of overall liquidity in the system. Which brings us to China where unlike the US, the stock market has been in full on collapse mode until last Monday when the government, rightfully so, decided to bail out its own banks while letting European ones fend for themselves. Yet, unfortunately for China bulls such as Jim O'Neill, we have some bad news: the core indicator of overall systemic liquidity, M2, just tumbled to a 9 year low as of Friday, printing at 13% on expectations of 14%. Not only that, but the direct loans in the financial system, dropped far below the 550Bn CNY estimate, at just 470Bn, the lowest since December 2009. Granted, this is all "on the books" stuff (yes, we know, we know, communist regime and goal-seeked econometrics - check), so who the hell knows what is happening with the uncontrollable shadow banking system. Well, nobody, but since robots only have overt data to play with, regardless of how manipulated it may be, the following two charts will probably be a wake up call to anyone expecting a China driven "risk renaissance" absent the PBoC deciding to do away with its inflation-fighting regime, and launching into print speed ahead (something several hundred millions migrant workers would not be delighted with).
Following last week's near record surge in M2, which was merely the result of a complete panic in markets resulting in a scramble for deposit accounts out of money markets (these tumbled by $82.5 billion in the week to $1688.5 billion, the lowest since September 2007) and other "unsafe" venues, amounting to $159.1 billion, this week M2 has risen by a far more modest (though still abnormally high by historic standards) $42.2 billion. What is disturbing is that unlike in the past when record surges in commercial bank savings deposits have seen a prompt unwind in the following week, this time around last week's $58.4 billion spike in such money was followed by another massive $51.7 billion, as cash ran to the "safety" of FDIC insurance. And just as disturbing, the huge $99.3 billion in additions to plain vanilla demand deposits did not see any unwind, with just $8.3 billion leaving bank teller windows in the past week. End result: M2 has just hit another new all time high of just over $9.5 trillion (which helped today's LEI number beat expectations). And if QE3 proceeds as planned, and it US consumers actually start borrowing, this number is going much, much higher. Which will be bullish, for makers of wheelbarrows.
About a month ago we penned a post to refute some misconceptions about a material spike in M2, which led such luminaries as Andy Lees and Art Cashin to get confused that this may be an indication that either the government was forcing money into the population with the end of QE2, or that this was actually a confirmation that QE was working. It was neither. As we explained it was a combination of the Treasury general account on the Fed's balance sheet soaring (from a balance sheet standpoint), and due to the repeal of Regulation Q (from an actual flow perspective), that led to the move. Sure enough, in the 3 weeks following, M2 dropped to very much unremarkable weekly change levels. Until the week of August 1, or the week in which the specter of a US bankruptcy came to life, and in which the market took its first notable leg down. In that week, the broadest publicly released monetary aggregated - the M2 - soared to an all time high $9.5 trillion, or a $159 billion weekly change. This make it the third largest weekly spike in history After the Lehman bankruptcy and September 11. Then again, this data includes the traditional seasonal fudge adjustments by the Fed. A look at the non-seasonally adjusted time series indicates that last week's spike in M2, primarily in demand and savings deposits at commercial banks, was the highest on record! Sure enough, the bulk of this cash ended up in America's largest depository institution, Bank of America. And yes, this was in the week prior to the massive market rout. Yet as the charts show, following every massive inflow of money into demand deposits and savings accounts, it goes right back out the next week. Which is why we wonder: is Bank of America, so flush with cash a week ago courtesy of the debt ceiling fiasco, suddenly cashless, as investors follow up with the kneejerk withdrawal of capital from the depositor bank due to worries of bank runs and other less quantifiable reasons? Does this explain why, in addition to the fact that the bank's sale of its China Construction Bank stake is not going well, BAC may soon be forced to enter the capital markets to raise equity capital, just as we have been predicting all along?
In the past two weeks, one of the curious development the monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.
Goldman Sachs summarizes the just released monetary update from China, which some expected could announce a formal rate hike over the weekend.
- May monetary data confirms our understanding that there was no loosening of monetary policy in May.
- We believe policy makers will maintain a tight policy stance at least for another month from now.
- We expect a normalization of monetary policy (not an aggressive loosening as in 2H2010) in 2H2011 when inflation is expected to moderate.
- Commercial banks extended Rmb551.6 billion in loans in May (market consensus: Rmb650 billion), down from Rmb739.6 billion in April. Outstanding CNY loans grew by 17.1% yoy in May (our forecast: 17.1% yoy, market consensus: 17.2% yoy), down from 17.5% yoy in April. The mom; s.a. ann. growth rose to 16.7%, up from 10.6% in April.
- M2 growth came in at 15.1% yoy (market consensus: 15.5% yoy), down from 15.3% yoy in April. The mom; s.a. ann. growth rose to 14.3%, up from 3.6% in April.
Chinese Economy Slows Further - Monetary Conditions Tighten As Credit Growth And M2 Both Come Below ConsensusSubmitted by Tyler Durden on 03/14/2011 07:44 -0400
While geopolitical/logical news continues to dominate, the global economy still is supposed to be driven by something (even as the major slowdown to Japanese GDP is about to be factored in by economists). Today's important news in regard to marginal economic drivers comes from China where commercial banks extended CNY 535.6 billion in loans in February, down from CNY 1.04 trillion in January, substantially below market consensus: of CNY 650 billion. Same with existing credit: outstanding CNY loans grew by 17.7% yoy in February, down from 18.5% yoy in January (market consensus: 18.0% yoy). Just as importantly, M2 growth came in at 15.7% yoy, down from 17.2% yoy in January (market consensus: 17.0% yoy). China was officially slowing down long before of of the devastating news from Japan hit the tape.
Time for our weekly M2 update. Presented, as usual, without commentary.
Inasmuch as one can trust any data coming from centrally-planned governments, following last night below consensus CPI reading, China continues to telegraph that monetary growth is once again under control (at least for the time being): in January commercial banks extended CNY 1.04 trillion in Loans, up from CNY 480.7 billion in December, which however was well below the consensus of CNY 1.2 trillion. Outstanding CNY loans grew by 18.5% yoy in January, down from 19.9% yoy in December (market consensus: 18.7% yoy). Additionally, the just as "credible" Chinese M2 printed at 17.2% growth yoy, down from 19.7% in December (19.% consensus). The M/M seasonally adjusted annual growth fell to 1.5%, down from 14.5% in December.
Just in case someone was confused about the relationship between liquidity, currency devaluation and nominal (not real) asset prices, the St. Louis Fed was kind enough to email us their weekly M2 level. And after last week's surprising drop, M2 once again rose, this time by a whopping $40 billion. Oh and before someone says that M3 is still declining, it isn't. Or rather the much more important monetary aggregate, that including all shadow banking liabilities is now increasing as we indicated during the last Z.1 spread. In one month, when the next Flow of Funds report is released we are confident we will confirm that in Q4 shadow banking increased by at least half a few hundred billion on an annualized basis. In other words the central bank reliquification is now on in full force, both in America and in every other place that has central banks. Which also explains why central banking hawks are now virtually extinct (cf: Axel Weber).
Desperation kitchen sink anyone? The M2, which up until now was merely diagonal, is about to go parabolic. In the week ending 1/17/2011, Seasonally Adjusted M2 surged by $46.6 billion, the biggest weekly increase in the broadest tracked monetary aggregate (ever since the cost-cutting associated with discontinuing the M3) since 2008. One look at the chart below indicates precisely what is fueling the endless market ramp. Furthermore, for those who realize there is a 93% correlation between M2 and gold, we would certainly recommend putting on the M2/Gold convergence trade on.
As usual, one chart is worth a thousand words, and a couple hundred billion in real, incremental dollars.
One look at the M2 chart below shows that the reliquification of the market by the Fed is proceeding according to plan: having increased for 23 of the past 25 weeks, the M2 has hit another all time high in the final week of 2010 at $8,848 billion, a $14 billion weekly increase, and a $316 billion annual increase (we will present the M2 constituents change next week). But that is not all: more important to those who believe that the Fed merely creates one and zeroes that never do anything practical, and most certainly do not add to inflation, will be delighted to learn that in addition to the $14 billion increase in M2 liquidity, reserve balances added another $26 billion in liquidity, as the absolute number declined from $1027 billion to $1001, or a gross addition of $40 billion in the week. Of course, adding a few leverage factors, and the last week of 2010 saw a gross liquidity addition of well over $100 billion or so. And there are some who wonder why stocks surged to close the year....
In the week ended December 6, M2 rose again, this time by $1 billion W/W, hitting a fresh all time high of $8,813 billion. This is increase 20 of 22 consecutive weeks. Perhaps just as importantly, the non-seasonally adjusted number soared by $43.7 billion, also hitting an all time high of $8,823.6 billion. Yet despite this ongoing surge in broad market money, a rather odd thing happened last week: currency in circulation: a component of the M1 and thus M2, actually declined for the first time in 22 weeks, on both a seasonally adjusted basis ($0.1 billion) and on a Non-seasonally adjusted one ($0.7 billion). Combing through the components of M2, the only actual increase in the broader monetary aggregate was in savings deposits at commercial banks which increased by $42 billion, offsetting drops in every single other category, all of which were negative W/W. The bottom line is that the Fed at least wants those who care and follow this data series, to know that the penetration broad money is spreading. Whether or not this is enough to offset ongoing consumer deleveraging is a different story.
One of the funniest lines in Bernanke's speech last 60 Minutes speech is when he said that the currency in circulation has not increased despite his monetary easing - ergo there is no inflation. Of course, as even doorknobs know by now currency is merely one component of physical and binary money out there. But trust a pathological liar to expect 60 Minutes' viewers to be dumb as a bag of hammers. Of course, a far more important metric of the moneyness of the system, is the M2 aggregate (technically M3 is far more important, but as per the Fed's March 23, 2006 decision, M3 was discontinued as "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." Ah yes, the Fed is worried about costs...) Anyway, the M2 has just risen to a fresh all time record: in the week ended November 29, Seasonally Adjusted M2 was $8,812.2 billion, which is the 19th week of the last 21 in which this metric has increased. Is inflation about to prove just how much of a monetary phenomenon it really is? But not to worry - the Chairman is well ahead of everyone in withdrawing all of this excess money already percolating through the economy.