- China’s Record Capital Outflows Spark Financial Stability Fears (FT)
- U.K. Inflation Falls Below Zero for First Time Since 1960 (BBG)
- Islamic State Solidifies Foothold in Libya to Expand Reach (WSJ)
- Judge sentences 11 Afghan police over lynching of woman in Kabul (Reuters)
- The $18 Trillion Global Economic Boost If Everything Went Right (BBG)
- Eurozone Prices Confirmed Flat Year-on-Year in April, Core Inflation Inches Higher (Reuters)
- Greek Finances to Stagger On Longer Than You Think (BBG)
- Athens sees EU deal soon, Greeks' approval of government stance dwindles (Reuters)
In a stunningly honest turn of events - though likely self-preserving - a number of senior financial services executives are reportedly urged authorities around the world to bolster their crisis-busting arsenals amid fears that ultra-low interest rates have increased the risks of financial instability. As The FT reports, the heads of companies including HSBC, UBS and BlackRock will on Monday release a joint statement demanding policy-makers "address emerging market inefficiencies in the financial system, such as over-exuberance within asset classes." Policy-makers must “lean against something that is making people feel good but is actually going to give them a hangover they will find difficult to cope with."
"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.
According to Fitch, nearly 40% of credit in China is outside bank loans, meaning that between forced roll-overs, the practice of carrying channel loans as "investments" and "receivables", inconsistent application of loan classification norms, and the dramatic increase in off balance sheet financing, the 'real' ratio of non-performing loans to total loans is likey far higher than the headline number.
With a global population of 7.3 billion this works out out at over $27,200 of debt for every man, woman and child alive today.
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.
As data on non-performing loans at Chinese banks shows the biggest sequential increase on record in Q1, Fitch wonders if perhaps the data actually obscures a far larger problem. Official figures on China's NPLs are obscured by a number of factors and may be grossly understated the ratings agency suggests. Furthermore, Fitch says "a protracted downturn in property markets could threaten the solvency of Chinese banks, given their modest loss-absorption capacity."
The financial markets don't just dominate the economy - they now control everything.
The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail which can be instrumental in moving forward the Federal Reserve’s timeline for lift-off zero bound rates. The intuition here is stooped in concepts of volatility and how market structure evolution may contribute or detract from asset volatility. Volatility is the square root of time. Financial repression times time equals volatility. Financial repression and/or macro-prudential policy times time equals the inverse of financial stability. Financial stability inverted equals volatility squared.
Today, China remains central to the notion that the world is in recovery. It is believed to be growing at 7%: not as rapid as the 9% growth we’re used to seeing, but still dramatically higher than any of large country... Only the whole thing is bogus.
Being grateful boosts your happiness. Here are ten sickening wonderful things we're grateful for in the new normal...
The built-up tensions and fragilities are begging for release. The unfortunate consequence of not allowing the process of “creative destruction” to occur in banking and Big Business is that the historic forces behind it will seek expression elsewhere in the realm of politics and governance. The desperate antics of central banks to cover up financial failure can’t help but provoke political upheaval, including war.
China may allow commercial banks to swap the local government bonds they purchase for cash loans from the PBoC, WSJ reports. The country's local governments are laboring under a debt load that totals 35% of GDP and much of it carries relatively high interest rates. A new program will allow localities to swap a portion of that debt for lower-yielding bonds. If China does indeed roll out an LTRO-like initiative, the banks which buy the new local government bonds would then be able to pledge them as collateral for cash from the central bank.
Trying to make sense of the global capital markets.
The endgame has indeed arrived. At the very least, the international elites seem to think success is within their grasp, for they now openly expose their own criminality. But they do so in a way that attempts to divert blame or to rationalize their actions as being for the "greater good." All signs and evidence point to what the IMF calls the "great global economic reset.”" The plans for this reset do not include U.S. prosperity or a thriving dollar.