Meanwhile In China...

Tyler Durden's picture

With the ongoing obsession over whether the Fed will or won't taper, most forget that this is largely pointless, if usefully distracting from real issues, conversation. Best case: Fed tapers by $20 billion in September, market tanks as bond yield surge crushing interest-rate sensitive stocks (dividend payers, REITs, builders) and killing what little is left of the non-institutional bid in housing (Exhibit A: mortgage applications). In the meantime, "the grand scheme of tapering things" looks like this.

So while the Taper, if and when it happens, will have only one actual result: to unleash the UNtaper, this is little comfort for one country that has to live with the $160 billion per month hot money flow impact of both the US QE and now that of Japan: China.

As explained previously, China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place.

In a nutshell, the country's economy is rapidly slowing down as shown by a variety of external metrics such as the plunge in Caterpillar Asia sales, and the lowest electricity consumption since 2009. This is further compounded by the fact as of late, record endogenous credit injections, which currently stands at a level of 240% of GDP...

... have had little residual positive impact on China's GDP as shown here:

The above is the topic of a recent Albert Edwards paper looking at China's "Minsky moment" which can be found here. Of course China could overcome this macoreconomic slowdown by injecting even more credit, however, it is here that the Fed and the BOJ come in, because the Chinese economy is already flooded with exogenous, Bernanke and Kuroda-created hot money on the margin, and inflation is far higher than the government would like to admit.  One needs to only look at house prices which increased for the 12th consecutive month despite ongoing failed efforts by the government to cool down the housing market using decree after decree.

So thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.

Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling. To wit:

  • A lack of liquidity in China’s banking system may threaten some companies’ ability to roll over debt, deteriorating banks’ non-performing loans and increasing risks of hard-landing in economy, Bloomberg economist Michael McDonough writes in note to clients.
  • PBOC may be forced to inject liquidity via open market operations to offset surging money-market rates.
  • China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in market overnight: MNI cites three unidentified people in interbank market
  • China’s 1-day repo rate surges 240 bps today to 8.5506%, highest since Jan. 2012; 7-day repo up 151 bps to 6.8317%, highest since Feb. 2012; Nomura attributes liquidity squeeze to pre-holiday cash demand and policies to curb shadow banking and capital inflows

Problem is the PBOC can't simply "inject liquidity" as it will flare up what is already an unstable "inflation monster" (the cousin of Abe's deflationary nemesis).

But if China is indeed the latest to see its liquidity transmission mechanism fail, then surely its economy will follow immediately? Well, yes. Only problem is that all macroeconomic data out of China is made up.

Recall from "China's Data Manipulation In One Chart, And Why The Real Data Implies Weakest GDP Growth In Over 20 Years" which we posted a month ago after China reported the latest set of blistering trade data, when we said that "breaking down the true numbers behind China's economy, who using real export and import data ex-manipulation and fudging, that China's reported 7.7% GDP would translate into a 5.5% Q1 GDP growth, the lowest rate of growth in 20 years!" In other words, if one takes away China's ability to manipulate data, the recent trade surplus, will not only be unwound but likely result in accelerate GDP contraction.

Recall also from "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event" that China's SAFE has done just that when it passed new regulations on May 5 to end China's Copper Financing Deals, whose function was to not only serve as a source of collateral rehypothecation, but led to the surge in Hong Kong trade discrepancy, where copper (and its current account boosting trade with HK) was being arbed to profit from the domestic (CNY) to foreign (USD) interest rate differential.

All of the above would imply trade data for May would be atrocious. And, sure enough, as reported last night it was.

  • China May Exports Rise 1.0%; Est. 7.4% Rise (range 3% fall to 17.1% gain, 38 economists).
  • Imports dropped 0.3% vs est. 6.6% rise (range 2.8% fall to 16% gain, 38 economists)

Slowly but surely, the real Chinese economy is starting to peek through. What's worse is that since trade data is a key component of the GDP equation, suddenly China's entire growth picture will be repriced by the market, far lower.

Yet despite this ongoing slowdown, the PBOC continues to be limited in what it can do from a liquidity injection standpoint.

So China, thanks to the PBOC's own failed policies and thanks to the other central banks, suddenly has no way out. Naturally, this has lead to an immedate outpouring of warnings from "very serious people" overnight who have finally come to the same conclusion as we did months, if not years ago. Some snippets:

  • Global investors will be “shocked” at China’s decelerating trade growth and it’s unlikely the government will loosen monetary policy to boost  economic growth gievn the outlook for inflation, according to Gavin Parry, the managing director of Hong Kong-based brokerage Parry  International Trading Ltd.
  • China’s trade data will hurt the stock market though losses won’t be massive given that expectations of economic weakness have already been reflected in the nation’s equities, according to Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million.
  • Investors should avoid buying Chinese stocks as the nation’s trade data show economic growth is slowing and liquidity conditions are  tightening, according to Hao Hong, chief China strategist at Bank of Communications Co. "The reverse of export growth was expected, but not the magnitude,” Hong says in an e-mailed response to questions today. “The concurrent fall in import growth confirms earlier allegations on suspicious trades.”

All precisely as we have warned.

The good news is that according to the US' own propaganda machine, the US economy and its consumer is strong enough to be the world growth dynamo and pick up the baton from a China whose dreams of 7% (and declining) GDP have been maybe permanently dashed. Of course if it isn't, and in the PBOC does indeed have no choice but to step in and prevent its economy from going into a tailspin and its banking system house of cards to tumble down, and does what all other central banks are doing by unleashing another epic stimulus round, then make sure all your hard commodities are nailed down. Because the explosion in demand for hard assets will be unlike anything seen yet.

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Deo vindice's picture

When the west's economy's hope is in the strength of an economy of a nation they are at ideaological war with, then you know the whole thing is a mess and the world's economy is in trouble. Deep trouble.

tickhound's picture

By ideological differences you mean Creditor vs Debtor?  You mean extreme resource gathering?  You mean excessive consumption, pollution and waste?  You mean state controlled press vs state controlled press?  You mean warrantless detentions? 

OR is it that Americans reward and incentivise the weakest of its culture of ideology by allowing them to stay home, not work and have many, many babies vs. the ONLY ONE child left behind China strategy?

But I will agree with you.  The world is in trouble.  Deep trouble. 

Stampare e' prestare.  Print and lend, print and lend....

The few ideological differneces I see are all linked nicely together in one giant magnetic PONZI of public sacrifice.

malikai's picture

Seriously, how can people here even think that there is any ideological difference between the oligarchs in either country?

The only question is which gang of theives and rapists are ruling over you.

HomeBrewPrepper's picture

More empty cities. Nothing to see here....
Move along

yabyum's picture

Bright spot! If  bankers are the root of the problem they will be charged for the single 7.62 that will take their head off.

malikai's picture

I prefer to call them organ donors.

Of course that would never happen here.

One quip, as I understand it, your lead recipient/organ donor actually takes a .45.

SIOP's picture

I read this article replacing the word China with America in my head and the description seemed to fit pretty well overall! : )

Kirk2NCC1701's picture

Meanwhile in China and elsewhere, they are buying up bullion. Given last night's spanking of PM prices.

yogibear's picture

"The good news is that according to the US' own propaganda machine, the US economy and its consumer is strong enough to be the world growth dynamo and pick up the baton from a China"

Wasn't the spinning propaganda machine touting that China would pull the US out of it's slump.

They need to get their lies straight. Fortunately for them Americans have a very, very short memory. As long as the government's BLS cooks the numbers and continue to increase the lies people are more than willing to increase debt and keep the Fed banksters living the good life.

In the mean time I see more new immigrants in Nursing homes and on welfare. Their network gets the word out fast on how to collect money from SS, medicaid and housing.

Good deal for immigrants (illegal and legal) in the US. Pay nothing in and get hundreds of thousands in benefits.


Ham-bone's picture

Not sure but seems so long as US and EU and Japanese and and and all are marginally importing less Chinese goods...exporting fewer dollars to China thus China not mopping up all this into Yuan....well there should be plenty of room in the short term for very inflationary efforts by the Chinese central plannners?  This isn't '09 or '10...there is no global driver to goose Chinese exports...even with all the printing we are looking at global deflation?

Chinese will print but declare moratoriums on housing lennding or other decrees to channel the new credit...likely ultimately unsucessful but what else can they do? 

Urban Redneck's picture

I thought China was a BRIC nation, not a Banana Republic- 240bps overnight is NUTZ.

deepsouthdoug's picture

Those Chinese Commies will grab all the public's gold.

SeattleBruce's picture

And the American Commies will try to do the same...

q99x2's picture

Give everyone money, money, money for everyone.

kito's picture

Your hard commodities should be nailed down because the Chinese are grabbing all of them through deals in south America and Africa......while the u.s dicks around in military stupidity the Chinese continue to stockpile what they need for the future......'s picture


indeed..they also have a monopoly on the available rare earth materials

jonjon831983's picture

The historical monopoly of the last few decade is based on price undercutting.  Once the price normalizes or it becomes unattractive to buy REE's from China then refining of REEs will begin to grow elsewhere as mines have already been starting to come online since China's last tightening of REEs.

tickhound's picture

Yeah what happened?  We used to be so much better at enveloping and consuming than the Chinese.

Non Passaran's picture

It is very kind of the US taxpayer to subsidize Chinese deals in 3rd world countries.

emersonreturn's picture

as china continues to accumulate gold, why does the bankocracy continue to undercut it?   

sloq's picture

Coming soon: "Very sorry - all your gold are belong to us"

OnceandForever's picture



There is this...soon China will have to stop building cities that no one can afford to live in... Oh the humanity !!!

Non Passaran's picture

Haha great that's exactly what I said I expected (a drop dust to the ongoing crackdown on fake stats) in a comment 2 days ago.

Ham-bone's picture

OK - ZH has been great regarding determing where the US gold is (or isn't), the lack of transparency in the gold system and lack of clear accounting.  Would be great if ZH would turn it's eye toward Chinese (or Russian) gold...what do we know?  What do we suspect?  When the Chinese tell us they have 3k or 5k or 7k tons...NOW we believe the Chinese?  Now we believe their leaders really care about their nation, their people more than themselves?  Is there anyway to verify their claims???  Where is this gold???  We know it's gold and not tungsten because???

Not saying they don't but let's turn the same cynical eye on the Chinese we rightly turn on the Fed, the US gov.  Lets lay our cards on the table and see what we know, what we suspect, and what's possible round the holdings of gold.  I just don't believe the Chinese gov really cares about anything but the Chinese gov...somehow I have a funny feeling Chinese gold could be slipping through the hands of the Chinese people and back into Switzerland in the names of the same old 40 families???  Same as it ever was? 

Pseudo Calm's picture

Oh please can we have a Chinese sneeze so the AU property market can take a 30% cut and I can actually afford to buy - i'ts rediculous at the moment...

All the macro lies are hiding the rot in the true economy & society

garypaul's picture

I feel your pain dude. It's even worse here in Canada.

jonjon831983's picture

Depends on why you want to buy and what do you mean by affordable... 

If property takes a massive 30% cut, by that time as a small investor or home buyer, you might have trouble getting a decent mortgage because in that scenario the banks might tighten lending rules in an attempt to protect themselves from further downside.  Also, if you are buying to live - if the place you are looking for becomes an overnight forest of "For Sale" you might not want to live in that neighborhood: the place you live is only attractive because of the community that lives there.  ie. it might become a cesspool of backyard mosquito pools and theives tearing up copper wire during the day or more positive scenario it becomes a rental market and you get sketch neigbors who come and go.

Muppet's picture

Like I have the capacity to give a shit about China.   My hands are full trying to interprete the US catastrophe.    Far second, I try to stay informed about Europe, then third Japan (esp. Fukishima).   

My "best" China opinion is... rotz of ruck, bitchez


garypaul's picture

Oh crap, I knew I should have bought something gold-related on Friday afternoon. Instead I went inverse SPY. I'm going to have my *ss handed to me on Monday!

Non Passaran's picture

I did the both, but in case of SPY I went 2X.
I'm not too concerned at this point. My gut feeling is this correction will continue.

moneybots's picture

"the Great Rotation out of bonds and into stocks"

But who will be rotating out of stocks?  For those rotating out of bonds into stocks, someone has to sell stocks for them to buy.

adr's picture

The solution to the hot money problem is so simple and should be easy for the Chinese. 

Send hit squads to take out the squid's heads, along with a few other top banksters, boom no more hot money flowing into China.

Imagine waking up one morning and seeing that Blankfein, Dimon, and the rest of the parasitic class were all dead.

My god, I think I would finally feel what freedom feels like. Like absolute euphoria.

Non Passaran's picture

Except that the hot money in China is largely money that their exporters park outside of China and bring in at opportune times.

Yen Cross's picture

    China had been letting the Yuan appreciate against the usd, to offset internal inflation. It looks like the liquidity crunch, and overall slow down put the brakes on that theme.

Smegley Wanxalot's picture

Was: Indo-China

Soon to be: Implo-China

Son of Loki's picture

With increase mortgage rates house sales have completely frozen where I live and houses only sell at 30% discount below list price now....sort of like clothing. No one is sucker eough to pay full price anymore.

CTG_Sweden's picture



My impression is that China could have moved faster into higher added value production and increased productivity and increased wages faster than they have.


One example: In the US, assembly line worker wages make up a mere 10 % of the total costs for auto manufacturers. So if we assume that Chinese auto workers only get 20 % of the pay an American auto worker gets that means 2 % of the total cost. And that means in turn that a 2 % increase in productivity in Chinese auto plants would be enough to offset doubled wages for assembly line workers. Remember that Henry Ford in early 1914 could double the pay to his assembly line workers to $5 a day. Since an entry-level Model T at that point sold for $440 that meant that pay for 88 days of work equalled a new Model T. And that was 99 years ago!


But it´s much harder to double the pay for shoe manufacturing workers since labour costs for such products constitute a higher percentage of the total cost. Therefore, I assume that China would have been much better off if they had invested less in housing and more in factory equipment and tooling and raised wages.


Furthermore, it seems as if the Chinese leaders understand that excessive housing, especially unoccupied housing, does not result in sustainable growth. And injecting more liquidity does not solve the problem I described above if this money is not used for increased productivity.


I don´t get why the Chinese leaders seem to do very little to encourage increased productivity in the Chinese economy although they openly say that they want more sustainable growth (than building new houses can create). There got to be a reason for that. Since they understand that unoccupied housing does not create sustainable growth and since most of them are engineers and since engineering usually takes more brains than basic economics I don´t understand why they seem almost reluctant to encourage higher productivity, a faster transition to higher added value production and higher wages. And they got all the blue-prints on how to move forward.


One problem is of course that China´s exports to a large extent depends on cheap labour. But if they increase the domestic purchasing power and reduce imports of goods like aircraft and produce them in China instead it should be possible to offset reduced exports of goods that depend on cheap labour.

jonjon831983's picture

Telegraphing much? "Xi Joins Li in Indicating China Tolerance for Slower Growth Rate"


"China’s President Xi Jinping indicated a tolerance for slower expansion to avoid environmental degradation, adding to signs that the government will limit temporary boosts for the economy as officials map out plans for market-based changes to drive long-term expansion."


I doubt any money movers and those in power really care about the environment (unless the population becomes outraged enough and starts acting up), but to claim tolerance of slower expansion due to that sole reason ... lol.  Grasping at straws.

Fire Angel's picture

This is by far the best analysis currently available on the current state of affairs in China. Thank you, Tylers. Fire Angel