China's Red Flags

Tyler Durden's picture

UPDATE: China 7-day repo +374bps to 12%!

China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.


Via Market News International:

HSBC chief China economist Qu Hongbin on June flash PMI (48.3 vs 49.2): "The HSBC China Flash Manufacturing PMI dropped to a nine-month low of 48.3 in June, following on the sequential reduction in both production and demand.
Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures. Beijing prefers to use reforms rather than stimulus to sustain growth. While reforms can boost long-term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth in 2Q."


All these major liquidiaty problems do make us think a little about the end of CCFDs and as we warned "The Bronze Swan" as financing via copper collateral is under pressure and the bank that 'own; the warehoused copper have no need to hold (and in fact are willing sellers as the carry costs rise)...


Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse - with 1Y IRS now at all-time record highs.


Many are now questioning whether the dramatic elevation in short-term financing rates is "here to stay," and with the Chinese yield curve now inverted... a similar fashion as the US Treasury market prior to the US recession in 2007...


and for a similar period before the US recession...


the clarion call for government stimulus is loud from the addicts.

However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The markets, even though the Shangahi Composite is trading at near-seven-month lows...


...will be disappointed; and we suspect, as the FT notes, that "the central bank wants to send a warning signal to commercial banks and other credit issuers that unchecked credit expansion, particularly through the shadow banking system, will not be accommodated."

As the PBoC itself noted (via its state-owned newspaper) and we confirmed yesterday, "we cannot use fast money supply growth as in the past, or even faster, to promote economic growth, and must control the pace of money supply growth."

But macro data is almost as bad as it has ever been...


Simply put, as Stan Druckenmiller noted here previously,

In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments.

Despite all efforts to slow inflation (and rein in the credit bubble), the hot money imported from the Fed and the BOJ continues to push home prices ever higher which continues to be the key marginal variable for the PBOC - as long as the hot "carry" money is exported by the Fed and the BOJ, the Chinese economy will continue to suffer.

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BeetleBailey's picture

The US is paralleling China as to transparency.....both suck.....but it used to be a so much

LetThemEatRand's picture

Except in these strange days U.S. whistleblowers go to China.  For the rule of law.

Oh regional Indian's picture

When the world of finance goes tits up, the real world is brought into the bankers playground, the theater of battle.

All the pieces are in place.

What A Riot...


Dareconomics's picture

China is in the midst of a liquidity crisis, but the PBOC seems clueless.

q99x2's picture

Better double up on my courses for this fall.

dale digler's picture

Stay away from China. Far, far away.

lolmao500's picture

Excellent. Now the Chinese bubble needs to blow up ASAP so we can have our jobs back.

prains's picture

except your new job will be making and filling body bags

Golden_Rule's picture

7 day repo rates up over 600 basis points the last two days (sub 6 to 12%)....  shit is gettin hairy

max2205's picture

Ever see 1 billion people try to cross a bridge....

kliguy38's picture

no but i gotta feelin' I'm about to see um try

Never One Roach's picture

The housing market globally is going to take a 30-40% hit at least imho. Just as the entire world housing market Bubbled up with global EZCredit and Free's going to revert to the norm in a painful correction.


The rates in the USA have inched up less then 1% and the housing market is frozen...dead ....very little selling.....


With higher rates an dliquidity problems as well as dismal jobs and payroll numbers, it's going to get worse.


And this is my optimistic viewpoint. I won't tell you my pessimistic scenario.

DormRoom's picture

Can't wait to see how all that rehypothecated copper unwinds.  It'd be an interesting study for other rehypothecated collateral chains.


Like CDOs, rehypothecated chains are financial weapons of mass destruction.  And it'll be interesting to see how they are effected, once global printing press slow down.

ApollyonDestroy's picture

They can fix all of this by capturing the Senkaku Islands asap. Fuck Japan. I'm ready for some world war already!

Winston Smith 2009's picture

"They can fix all of this by capturing the Senkaku Islands asap. Fuck Japan. I'm ready for some world war already!"

This is one area where I think/hope Kyle Bass may be wrong.  China has nukes, Japan doesn't. However, we do and we are a signatory of a mutual defense pact Japan, a pretty one-way agreement if you ask me.  So, I think the risk of nuclear engagements would prevent conventional engagements on the island (actually oil - big surprise) issue or, at least, prevent them from escalating.

The Shootist's picture

Compared to todays action in US bonds, scale of 1-10, how big are these rate hikes?

fonzannoon's picture

Bonds are going to puke again tomorrow. The curve is bear flattening.

More carnarge for emerging markets to come. It's ugly in bond land.

earleflorida's picture

"How much investment is optima"   by Michael Pettis  [6/10/13]

@   ,... and while your there, why not give a friendly read via "Pepe Escobar"

thankyou Tyler

FieldingMellish's picture

Maybe a nice little war would help the economy perk up? Japan, you interested?

chump666's picture

The plunge in markets last session was the massive USD buyup close of Asian session.  Huge dip buy from 80, drove up long dated rates at the same time.  Bernanke's pre-written speech of tapering just added to the sell off.  The Fed won't taper though.  They will need to control the rate movements, so if anything more QE, which will mean China will buy up more USDs.  That cycle (liquidity squeeze) has been going on for at least a year or so now.  The Gold plunge is also a warning, with indust commodities, that China's deflating the commodity market at a rapid rate.    Problem China has is it's property market which is inflated.

A mess.


Apostate2's picture

Spot on Chump as usual.

shuckster's picture

China owns between 10-20% of our debt. At the conservative debt number of $11 trillion, they own $1-$2 trillion. With a monetary base of $2.5-$3 trillion, that means they could cause a 30% reduction in the money supply by dumping treasuries. Granted, the Fed owns a large portion, but its always been my assumption that Fed printing derives its value from foreign lenders, not from the actual printing. As soon as foreigners (China in particular) stop lending to us, we will only be lending to ourselves and our currency will depreciate rapidly (aka 100% monetization of debt). Once the Fed quits with the QE and just starts printing money to service obligations (which is basically what it already does), that's when hyper-inflation kicks in. For now, we are looking at deflation. $85 billion a month printed cannot cover a $1, 2 or $3 trillion reduction in money supply via selling of Chinese treasuries. Probably what will happen is China comes onto the market to sell them and the Fed prints right there on the spot. China then goes and tries to dump them on some other sucker and finds out how worthless they are. China, in other words, is the one who determines if/when hyperinflation kicks off, not the pontificating Americans who are living at the expense of everyone else

Matt's picture

If they were smart, the Fed would buy China bonds and China buy UST and avoid wiping each other out.

Jendrzejczyk's picture

Let's trade trillion dollar coins and call it even.

Winston Smith 2009's picture

"With a monetary base of $2.5-$3 trillion, that means they could cause a 30% reduction in the money supply by dumping treasuries."

Thing is, if they ever tried that, we could simply default on the debt just held by them and they know that.  No one else would buy that debt.  They don't want the war that that would probably cause any more than we do.

Nah, the real owners of the world, multi-national corporations, have all kinds of disadvantages for those in supposed democracies, but the one good thing they do is make wars less likely between major trading partners.  The wars will always be with piss-ant nations that can't retaliate.

Schmuck Raker's picture

I think the Powers That Be in China may be quite happy with sub-par growth, even in the area of 2- 3%. As long as they believe they are approaching a more consumer driven model. Not that that is necessarily a good idea.

JOYFUL's picture

As gold in USD breaks below $1300... and shows no sign so far of slowing down... is this the day of the long-prophecised de-coupling of the metal from western management?

Two recent articles point in that direction... with the first, when the dynamics of the market change so that government intervention no longer works to supress the price(1976)... are we on the cusp of a repeat of that event? If so, the ever-optimistic amongst us will assume it's meaning to be that the POG is set to soar... the more worldy of us can predict that when faux-market intervention fails... tptb will simply step in directly to eliminate the competition to their printing machinery. Feel free to use your imagination to understand how they will do this.

and in the second... Stewart Thomson boldly calls the gold bull market in the west 'dead'/// sound like trouble Mr\Ms PMbug? Hold on a minute, and put that thinking cap onto your exoskeleton! Stewart says:

The West owns very little gold now, so the ability of Western investors to drive the price a lot lower, is highly questionable. Also, the power of Asian media is something that the gold bears may be underestimating. My main sources of news are mostly Asian, and websites like “China Daily”, are beginning to get a following in the West....China Daily’s site is growing fast. It reputedly has 500 million users. There’s also a US edition. Asian media is generally pro-gold, while Western media seems to feature a lot of “gold-haters”.

It will happen in one day. There will be a shift in control of precious metals pricing... from London\NYC to Shanghai\HK... it will happen overnight... literally. The price of gold in the west may go below $1000... and stay there![see above]

But it will be trading multiples higher in the countries of the east and the BRICs... how is this possible? It is all in who controls price perception. When the complicit media of the fallen lands runs outta runway ... it's all over.

Now that gold has cracked $1300... we may just be witnessing this historic event. And it's all good... unless you made the mistake of refusing to get out of favor of somewheres more gold friendly whilst the getting was good.

Ghordius's picture

- del - excellent comment - del -

howenlink's picture

+1000. Thanks for posting this.

orangegeek's picture

Communists trying to take over the world once again - we all know how this ends.

CutOut's picture


Why did HEART's posting frequency suddenly drop ?

Informed ZH readers remain curious as to why HEART repeatedly posts crap such as Boston Marathon bombing fake injuries/fake blood/crisis actors garbage which is 100% DISINFORMATION.

HEART intentionally conflates ridiculous,nonsensical Boston bombing speculation with credible information.
This a well known disinformation tactic designed to contaminate and discredit genuine factual content.
Thus HEART has confirmed he's a disinfo operative.
Boston Marathon bombing disinfo example #3616167

ZH is being targeted by FedGov spambots & human operatives saturating the comment sections with garbage and disinformation in addition to down voting certain posters.

They are not harmless trolls, they are professional operatives attempting to undermine and discredit ZH via multi nics & sock puppets.

Attacking this post by constant down voting speaks for itself: the shills exposed themselves.

Case closed.