No-one knows for sure how big a problem China's economy will eventually face due to the massive credit and money supply growth that has occurred in recent years and no-one know when exactly it will happen either. There have been many dire predictions over the years, but so far none have come true. And yet, it is clear that there is a looming problem of considerable magnitude that won't simply go away painlessly. The greatest credit excesses have been built up after 2008, which suggests that there can be no comfort in the knowledge that 'nothing has happened yet'. Given China's importance to the global economy, it seems impossible for this not to have grave consequences for the rest of the world, in spite of China's peculiar attributes in terms of government control over the economy and the closed capital account.
Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks. Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars...
Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn't.
Once the mafia state of mind has seeped into every nook and cranny of the society and economy, it's not even recognized as corruption: it's simply the way the system works. And so the residents of nominal democracies in Asia, Europe and the Americas do not even realize how thoroughly corrupted their societies and economies really are; they cling to the illusions of choice even as their incomes, wealth and political influence are funneled into the hands of various elites by overlapping extortion rackets.
"It's not just tapering that is putting pressure on markets," Marc Faber warns in thie brief clip. "Emerging economies have practically no growth and we have a slowdown in China that is more meaningful than strategists are willing to believe," he adds and this is "causing a vicious circle to the downside" in inflated asset markets as most of the growth in the world over the last five years has come from emerging markets. Faber suggests Treasuries as a safe haven in the short-term; but is nervous of their value in the long-term as "debt is becoming burdensome on the system."
In a month of disturbing images from troubled countries in all parts of the developing world, the biggest threat to the global economy may have been lurking in the shadows...
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."