China’s Credit Crunch

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We hear, read and listen day in and day out that it’s the Dollar that’s dead, that’s it’s the USA that will be knocked off the top of the roost and come hurtling to the ground with its neck being throttled by 1.364 billion Chinese hoards. We learn that it’s the USA that is the corrupt one and that the Federal Reserve can’t solve the financial woes of the country. The banks don’t have the money and no end of Quantitative Easing will solve the problem. But, it’s the Middle Kingdom that looks as if it’s in for a rough ride now as the credit crunch gets ready to punch the Chinese guys right in the eyeballs.

The People’s Bank of China has announced that it’s going to be delaying transfers of cash funds in both Dollars and also Yuan. Hey! I thought the Yuan was meant to be the up-and-coming world reserve currency that knew no problems and felt no crisis? It was only the Dollar that suffered, wasn’t it? The People’s Bank has invoked the need to update systems and do some maintenance. Apparently, it’s nothing to worry about and is just the ‘normal system maintenance’ that always takes place at this time of the Chinese Lunar-New Year celebrations. Transfers will be delayed right after January 30th until February 2nd for domestic transfers and it will continue until February 7th and the end of the holiday for foreign currency transfers. 
Right, so there is no problem and the maintenance in the systems are going to take that long to deal with? Let’s hope they don’t get a glitch in there somehow and the entire Chinese banking system goes up in a cloud of mushrooms. There are always delays at the New Year period in China, but, the ones that have taken place in previous years haven’t had the backdrop of the previous problems with liquidity in China. That’s the whole difference in this story and that should be making the rest of us just slightly worried. The Chinese might be stealing the industrial rug from under our feet, but a world without the Chinese finances (at least what they tell us they have) would be a whole different spring roll ahead of us.

Admittedly, as many are willing to express, there is now the race that is on to be the first that predicts the fall of China. But, no need to race, that crystal-ball prediction was forecasted years ago before China even got out of its Communist pants after its long march. 
But, today the financial sector in China is having liquidity problems that are getting worse. January 20th saw the interbank rates increase as much as 10%, when the PBOC stepped in. That was an increase from 3% the previous week. It is now at more stable (although still high) levels of 4.65%.

The POBC has urged banks in China to deal better with liquidity in particular at this time of year and to rely less on short-term funding.
But, the holiday-period is a frightening time for the banks as their liquidity drops and therefore trust between the banks gets worse as cash is depleted. The system maintenance comes at a wonderful time. The Chinese are taking a leaf out of the books of the best spin-doctors around and telling the world exactly what isn’t true, but what will be good to hear. Telling us all ‘hey, we’re up it without a paddle’ just isn’t going to instil confidence in the market is it? Welcome to the world of marketing in China.

Lies, lies and wool over your eyes. Until the penny drops, that is.

Originally posted: China’s Credit Crunch

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