The Reflation Party Is Ending As China Withdraws Market Liquidity For First Time In Eight Months

Tyler Durden's picture

Since institutional memories are short, it is time to remind readers that it was the threat, and subsequent reality, of China overheating in the spring and summer of 2011 (when record high food prices sent the entire North African region in a state of coordinated revolt and gradually moved far east), when even the Great firewall of China could not block news of frequent break outs of localized violence from hungry and angry mobs, that halted and broke the spine of the great reflation trade then (and yes, 2013 has so far been a carbon copy replica of 2011 as we summarized in "It's Deja Vu, All Over Again: This Time Is... Completely The Same").

Furthermore, as only Zero Hedge forecast back in mid-2012, when ever other commentator was shouting over the rooftops that an RRR or interest rate cut out of Beijing was imminent, the PBOC would be the last to stimulate the market with monetary easing as it was well-aware that an entire developed world reflating at the same time would hit none other than China the fastest as the hot money flew straight into Shanghai. Just as it did in 2011. So instead China proceeded to engage in a series of daily reverse repos, or ultra-short term liquidity injections that prevented the advent of wholesale inflation: after all the Fed, the BOJ, the ECB and soon, the BOE, were doing it for them. And the last thing the country with the highest allotment of CPI, or book inflation, to food and energy can afford, is to let foreign central banks dictate its price level. After all, it has more than enough of its own.

Well, the Chinese New Year celebration is now over, the Year of the Snake is here, and those following the Shanghai Composite have lots to hiss about, as two out of two trading days have printed in the red. But a far bigger concern to not only those long the SHCOMP, but the "Great Reflation Trade - ver. 2013", is that just as two years ago, China appears set to pull out first, as once again inflation rears its ugly head. And where the PBOC goes, everyone else grudgingly has to follow: after all without China there is no marginal growth driver to the world economy.

End result: China's reverse repos, or liquidity providing operations, have ended after month of daily injections, and the first outright repo, or liquidity draining operation, just took place after eight months of dormancy.

From the WSJ:

Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.


The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.


The People's Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn't offered repos since June.


"The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions," Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.22% wrote in a research note.


The central bank had pumped a record amount of cash into the interbank market ahead of the weeklong Lunar New Year holiday, which ended Friday. The break typically spurs increased spending for gifts and travel, and shuts down financial markets.


Also pumping cash into the system have been overseas investors, as the economy picks up steam and expectations of yuan appreciation grow. The central bank and financial institutions bought a net 134.6 billion yuan of foreign currency in December, almost double the 73.6 billion yuan in November, according to Wall Street Journal calculations based on official data.


"The PBOC's move Tuesday was also likely triggered by an increase in capital flows into China and worries about inflation," said Yang Weixiao, a senior fixed-income analyst at Lianxun Securities.

How perceptive.

The next question is how soon until the PBOC makes a courtesy call to the Fed, the ECB, and all other central banks, and politely requests that they shut it all down. Because while there may be slack elsewhere, China will no longer absorb the same systemic excess liquidity that has pushed gas prices to the highest level on this day in history, at the fastest pace in years.

Finally, for those wondering just what signal gold was waiting for to surge in the same parabolic fashion as it did in 2011, the answer is: this. Because unless the PBOC can get inflation under control, and this time it means getting one more central bank to cooperate with the BOJ now acting on behalf of Goldman's open-ended easing paradigm, the locals will hardly be preserving their purchasing power by warehousing pork and rice...

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doomandbloom's picture

back to beef from horse?

Catullus's picture

You could always float your currency to firewall yourself from other countries dilluting their currencies...

But then why would the client state to the West do that?

monogratis's picture

Considering that China produces most of its' own stuff today, they are the least affected by a higher currency... stronger yuan will lower input costs such as oil and raw materials... and central bank accumulate precious metals at a discount...

I would guess the Chinese are banking on a Euro and Yen currency crisis to occur soon and a rush into the US dollar... thus, they have little to lose by allowing currency to rise a bit.  

falak pema's picture

tighten monetary belt in Chintok sends shock waves accross the CB networks of world; and puts a brake on global QE-squidding  to infinity?

Humm, sounds like a left turn where the Squid-Sargent shouted "right turn everybody".

Its not just cyber wars from China-brassballs; its monetary nut cracking suite as well. 

CPL's picture

So basically; everyone will end up betrayed, nobody wins, everyone loses and Warren Buffet is eating cat food with a stick in a tent city.

TheFourthStooge-ing's picture


So basically; everyone will end up betrayed, nobody wins, everyone loses and Warren Buffet is eating cat food with a stick in a tent city.

So there is a silver lining to this cloud.

espirit's picture

Buffet will be lucky to have cat food, unless he has bodyguards.  He's too old to keep me from taking away his Tender Vittles.

NihilistZero's picture

Taking away his Tender Vittles???  Do you have a post apocalyptic plan to rape Warren Buffet?  May I join :-)

billwilson's picture

They always do this after New Year. First they have to add prior to New Year, then take away afterwards. CASH is king during the red envelope season ... then it goes back into the system.

disabledvet's picture

"thus causing the yuan to dramatically weaken." everyone but the USA is all in on the "mercantilist bandwagon." we already have the Crazy Currency shit. Now come the price wars...

Sudden Debt's picture


MFLTucson's picture

None of us old enough to read this will live that long and Newth Gingrich is not running the Congress.

TheFourthStooge-ing's picture


None of us old enough to read this will live that long

But, but, but America will be exporting crude oil in five years! I read it on the innarwebs!

and Newth Gingrich is not running the Congress.

You're right, I guess things could be worse.

Bunga Bunga's picture

After some (minimum) wage hikes everyone gets into the 35% bracket.

MFLTucson's picture

Will have no effect on inflation in China because the driving force of inflation is the money printing in the western World of Jewish gangsters!

MSimon's picture

You long industrial ovens?

Monedas's picture

Shake your snake !

TheFourthStooge-ing's picture

Snakebite, the year of the snakebite
Snakebite, the year of the snakebite
Snakebite, the year of the snakebite
Snakebite, the year of the snakebite

The pig was long, the times were lean,
The PBoC said "it's now time to get mean".
They tightened up the spigot on the money hose,
Financial systems up in smoke, that's how it goes.

MFLTucson's picture

My guess is that this is just one more game in the world of fraud and decpetion to buy Gold cheaper!

Never One Roach's picture

Embezzling money over there by bankers, real estate developers and local gubbermint officials is going to get tougher.

SheepDog-One's picture

Pretty bad when China is the one who cares more about internal economic strife than anyone in the west.

Zwelgje's picture

You still see the west as some standard?

SheepDog-One's picture

Well, that's basically the point I made.


topshelfstuff's picture

China, like most EastBloc countries raise the Minimum Wage yearly, after Chinese New Year by an average of about 20% ... that not only preserves Purchasing Power, it adds to it above Inflation. You can gooogle each country. Venezula for example raised Wages 30%, and changed the Peg to the USD to 6.3 to 1, from 4.3 to 1......or....did Ven Peg to the renmimbi ???

Jason T's picture

the wages are rising because labor productivity is rising as well.  They earned those raises.

US labor productivity only grew 0.2% in 2012... that's why real wage increases were nil to down.. US labor didn't earn a raise.

LawsofPhysics's picture

Riiiiigggghhhhtt.  Nevermind that these countires have already experienced the death of their currencies in the not so distant past as well as cronic poverty, corruption, overnight devaluations (do some math moron on the change in that peg, that's a 40% reduction in your purchasing power overnight), and big jumps in inflation.  I am sure that has nothing to do with it.  < sarc off >  Totally fucking stupid.

Double.Eagle.Gold's picture

Careful there, you'll cut your hands on his teeth.

Jason T's picture

print money and save the world.   .. That road to hell is paved with good intentions don't you know.  

rwe2late's picture

 These days,

the road to Hell is paved with not-so-good intentions,

don't YOU know?

100pcDredge's picture


Stop pumping.


AntiMort's picture

Good move.  Delaying the pull out always leads to disaster.

unrulian's picture

OK...who the f has been using my computer? Andrea Bochelli targeted ad??? 

LawsofPhysics's picture

Yes, allow the yuan to appreciate...

I wouldn't hold your breath...

yogibear's picture

China can take down the US without firing a shot. Take down the US economically and you bring down the US. 

The US will be unable to afford it's military and must do drastic cuts.

Keep printing Bernanke and the Fed. The more you print the bigger the chances you trigger an all out currency collaspe!

Countries like Ruissia and China just has to trigger a world  dumping of US dollars and they will bury the US.

LawsofPhysics's picture

and then what?  You really think that all that military hardware and people in the U.S. are actually going anywhere?  How stupid are you?  It's a global market now.  The collapse of the U.S. will be no different then the collapse of the former Soviet Union.  The russians don't trust china any more now then they did pre-collapse.  Wake the fuck up, unless the BRICs are going to offer up a new currency backed by something fucking real, nothing will change.  At the present time, no one has been able to devalue as fast as the Chinese.  Ben and the fed are fucking amateurs by comparison.


Riddle me this, now that it is indeed a global market, precisely who is the earth settling it's trade accounts with and what are they giving us of real value in exchange for our labor?  Try again moron.

Double.Eagle.Gold's picture

I agree completely, except for the FACT that all of the electronics inside each and every US Mil. Std. piece of equipment are currently manufactured in regions controlled by China. Everything from Army nightvision to Airforce F16/18's, all of the electronics are manufactured in Asia, and all of this stuff is built using just-in-time delivery systems.

All China has to do is survive the first 45 days and the USA's logistics systems collapse.


astoriajoe's picture

I think the courtesy call from china came when we tried to pull the trillion dollar coin bullsh*t.


toys for tits's picture



China appears set to pull out first

As usual they're against impregnating the bitch.

Smuckers's picture

Is that a water hose graphic, or a Peter North money-shot?

Pass the horsechips.

WhiteNight123129's picture

Well Chinese governement advised its people to buy Silver 11 USD. THere are no taxes on Gold and Silver holdings in China. China knows they can NOT afford to fleece their depositors, as those people have been working hours and hours to save. As long as salaries grow faster than inflation it is ok. But do not count of the POBC to print to bail-out the local municipalities. That would mean losing control for Beijing and historically the over independence of local fiefdom was what brought empires down. If they let the local SOEs go bust they keep the power, if they bail them out they lose it. If they sacrifice the SOEs and do privatizations to repay for debts, Yuan will rule the world of finance and China will be very prosperous after an initial crunch.

matrix2012's picture

Dr. Stephen Leeb - China Will Send Gold & Silver to the Moon (Oct 2011)

"This is the thing that worries me, everyone talks about inflation and China coming apart, Eric, but no one seems to be talking about the fact that China is planning to spend half a trillion a year on new energy.  This includes hydro, wind, nuclear, you name it.

China has well over 50% of the solar industry and no doubt, as part of that strategy, has been accumulating massive amounts of silver and they will continue to do that.  This is one reason that silver is certainly headed to three digits. 

Another thing about China is they have no tax on gold bullion.  There is a tax on jewelry and numismatics but China does not tax gold bullion.  This means gold is already a de-facto currency in China....

“The implication for gold, given that it is becoming currency in China, given the fact that the Chinese government is doing everything they can to encourage their populace to own it, given that it is the only currency that has a chance of appreciating along with materials over the next three to five years, gold is just something that you’ve got to own. 

Gold is certainly going to be part of any future reserve currency basket, that and the Yuan.  I don’t think the dollar is going to make it (in the basket).  China remains an extraordinarily strong competitor."


And it seems that the Chinese govt has been actively encouraging its people to buy gold and silver (to such extent that the PRC govt even advertised the buying opportunities of those precious metals) after the 2008 GFC.