But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER. This is hitting the emerging market space today.
There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.
Here's the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can't increase the value of collateral or generate income. Once the liquidity typhoon dies down, the insolvent pigs will plummet back to earth. That's what we're seeing in the periphery economies and shadow banking systems around the world.
And so following yet another Fed taper, coupled with another disappointing manufacturing data point out of China, emerging markets did their thing first thing this morning and all the most unstable EM currency pairs - the TRY, the RUB, the ZAR and the HUF - all plunged promptly in the process pushing down the USDJPY which as become a natural carry offset to EM troubles, only to rebound promptly. Specifically, USDTRY blew out 400 pips to 2.3010 highs after which it bounced, and has now stabilized around 2.27, well above the Turkish central bank intervention level, USDZAR is back down to 11.2120 after hitting five-year highs of 11.3850, the Ruble also plunged after which it jumped on speculation of Russian central bank intervention, while futures are tracking even the tiniest moves by USDJPY and pushing the Emini which is trading in a liquidity vaccum by a quarter point for ever 2 or pips. And with all news overnight shifting from bad to worse (keep an eye on declining German inflation now) it goes without saying, that EM central banks around the world now are desperately trying to keep their currencies under control: which is why the market's jitteryness is only set to increase from here on out.
Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future." A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."
The Federal Reserve is the primary engine of income/wealth inequality in the U.S. Eliminate "free money for cronies," bailouts of the "too big to fail" banks that own the Fed, manipulation of markets, the purchase of impaired private assets at high prices, and all the other tools of financialization the Fed wields to enforce its grip on the nation's throat--in other words, abolish the Fed--and the neofeudal structure that feeds inequality will vanish along with the feudal lords that enforced it. We don't need to "fix" things as much as remove the obstacles that are blocking the way forward. The Federal Reserve is the primary obstacle to reducing income/wealth inequality.
In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves] Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity for "instilling market discipline."
The Financial Times no less, warns its readers that they should act like the mighty German Bundesbank and "demand physical gold." The FT also added that gold price manipulation could end in tears.
"The PBOC has not—repeat not—asked Citibank to stop customers from wiring funds. Customers can still log on to their account to put in fund transfer requests at any time. The receiving bank (non-Citibank) will process the funds to be transferred on the next business day, as it always does. Because of the Lunar New Year break, the next business day is Friday Feb. 7. This is no different from the practice of banks throughout the world. Chang's understanding of Chinese culture evidently does not extend to the timing of bank holidays."
China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of outout cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." Belief that contagion can be "contained" brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.
The conventional view of China and India sports not one but two pair of rose-colored glasses: Chindia (even the portmanteau word is chirpy) is the world's engine of growth, and this rapid economic growth is chipping away at structural political and social problems. Nice, especially from a distance. But on the ground, China and India (not Chindia--there is no such entity) are both powder kegs awaiting a spark for the same reason: systemic corruption in every nook and cranny of both nations. The conventional rose-colored view is that corruption will inevitably decline with modernization and economic growth. This is simply wrong on multiple levels...
The PBOC has injected around CNY 400 billion into China's banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the 'confess all mismatched sins' debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% - almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps - the widest in 7 months (since the credit crunch in the Summer). This is far from over...
With China's shadow-banking system turmoiling and data not at all supportive of the same kind of growth investors are hoping for, some were surprised when China's GDP magically turned out at the 7.7% expectations deemed acceptable by the government. As Xinhua reports, not all is as it seems. China's GDP amounted to 56.9 trillion yuan (9.3 trillion U.S. dollars) in 2013. However, the aggregate of the provincial GDP figures, which were independently calculated and released, was about 2 trillion yuan more than the 56.9-trillion-yuan figure arrived at by the NBS, even though three of the 31 localities that were yet to release the figures were not included. This has aroused suspicion (just as we saw with the PMI data in the past) that some growth-obsessed local officials have cooked the books.
While most of the attention in the Chinese shadow banking system is focused on the Credit Equals Gold #1 Trust's default, as we first brought to investors' attention here, and the PBOC has thrown nearly CNY 400 billion at the market in the last few days, there appears to be a bigger problem brewing. As China's CNR reports, depositors in some of Yancheng City's largest farmers' co-operative mutual fund societies ("banks") have been unable to withdraw "hundreds of millions" in deposits in the last few weeks. "Everyone wants to borrow and no one wants to save," warned one 'salesperson', "and loan repayments are difficult to recover." There is "no money" and the doors are locked.
Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.