China never had an actual economic model or growth model. It simply printed an obscene amount of money, especially after 2008, and used it to build factories, 30-storey see-through apartment blocks and highways into nowhere cities, without giving much if any thought to where this would lead when their formerly rich western customers had less to spend on its ever increasing amount of ever more useless products. It was "to infinity and beyond" from the start, but that’s a line from a kids’ fantasy story, not a 5-year plan or an economic model.
If you think all this is a solid foundation for ever-higher profits, by all means go buy stocks with all four feet. But don't be surprised if the rest of the market disagrees at some point - for example, when even flim-flam accounting can't hide the fact that profits are in a free-fall back to "normal" levels 60% below current levels.
In the aftermath of China's record credit creation spree, a question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.
If WMP buyers decide to ‘go on strike’ for whatever reason, a liquidity crunch in the shadow banking sector could quickly develop in our view.
Suddenly the Chinese market realized what we said earlier in the weekend, namely that with the much anticipated G-20 meeting a complete dud, and with no major stimulus on the horizon, suddenly the trapdoor below Chinese stocks opened and the Shanghai Composite has started the new month tumbling over 4%.
“Keeping the previous language would be very disappointing and would be viewed as either complacent or reflecting policy paralysis. [They need to] man up and tell member countries that monetary policy should be accompanied by fiscal expansion.”
Last April, China had an idea about how to boost the country’s dying credit impulse. One idea was to supercharge the country’s nascent ABS market which was barely producing $50 billion in supply per year. That effort failed in large part due to banks' unwillingness to offload their good assets in a time when NPLs are rising. So you can probably guess what Beijing's "solution" is.
- Europe shrugs off pre-G20 China stocks slump, sterling steadies (Reuters)
- China Unveils Its Deliverables for G-20 -- And No Plaza Pact (BBG)
- Foreign Money Could Be Slow to Enter China’s Bond Markets (WSJ)
- China Urged to Stomach Much Higher Fiscal Deficit (WSJ)
- Trump's Momentum Has Republicans in Congress Confused and Cowed (BBG)
"In a scenario in which investors are not bailed out and thus become more cautious, eg, rolling over some of the debt instruments in the shadow banking sector, some borrowers may struggle to obtain credit, for example, developers and coal miners. Whether this scenario would trigger a chain reaction is a key risk that needs to be monitored."
All signs are that things are in fact in danger of getting out of hand...
With some 1,000 of the 3,600 P2P sites operating in China deemed "problematic", it's not a matter of if we see another Ezubo, but rather a matter of when.
"The harm is obvious. It's going to damage financial reforms, cause social unrest and destabilize the regime to some extent."
Issuing more credit will only make the 2016 crash worse. Trying to stop the current crash with more credit and lower interest rates is like sending the cavalry on suicide charges against entrenched machine guns, artillery and tanks. The coming financial slaughter will be as senseless, wasteful and ineffective as any suicide attack in the Great War.
Systemic fragility doesn't respond to central bank jawboning or Keynesian claptrap; unlike those "policy tools," fragility is real.
China's mid-tier banks are piling up exposure to the riskiest subset of borrowers at a time when economic fundamentals are deteriorating on a near daily basis. Meanwhile, this exposure is being carried on a line item that allows the banks to avoid provisioning for the losses that will almost certainly materialize in the not-so-distant future. At one bank, this one line item is larger than the entire Philippine banking system.