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Is This Why The PBOC Is Not Coming To The Rescue?

Tyler Durden's picture


We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus).

Via BofAML:

MoM price momentum holds the key


Looking at past few rounds of tightening since 2010, it appears to us that the primary consideration of the government is MoM price momentum, not YoY growth in price.


70-city average primary housing price growth MoM and volume growth YoY



70-city average home price growth YoY


This makes sense because potential buyers tend to be enticed to rush into the market if they feel persistent upward price pressure. Table 1 lists the timing and measures of the tightening policies since 2007.


Why we think prices may soon jump again


We suspect that May numbers might have under-reported the true momentum in the market. Local governments are pressured to control local housing prices so some of them have resorted to short-term administrative measures, e.g., Beijing might have suspended the launch of any new projects priced above Rmb40k/sqm (China Securities Journal, June 13). More important, monetary policy remains fairly accommodating, real business returns remain unattractive, while shadow banking products appear increasingly risky. As a result, we believe that it’s a matter of time till liquidity will return to flood the housing market.


The new administration should be tougher on property


The new administration has a five-year horizon.


In our opinion, it has two options with regard to the housing market:


1) to continue to handle it with kid gloves and run the risk of a property bubble bursting just when senior officials fight for positions in the next administration; or


2) to kitchen sink it, live with pain upfront and try to implement structural reforms – hopefully by year four or five, the economy will be on the mend.


Option 2 sounds more plausible to us.


and from Credit Suisse:

This ... has heightened systemic risk in the financial system, creating policy uncertainty and has further induced market volatility. By allowing the overnight SHIBOR to spike again, the market has a legitimate reason to ask whether the central bank has the will and ability to calm the interbank market which for us brings back the memory of the US government allowing Lehman Brothers to fail.


We have a few observations to offer:

  1. SHIBOR hikes, or even bank failure in settling within the interbank market, happened before, with the latest events in 2011 and 2012;
  2. There appears to be no bank run at the retail level as depositors seem calm, at least for now;
  3. The liquidity crunch has occurred at the interbank market due to duration mismatch and the lack of policy response, but so far, neither have affected the real economy - large SOEs still remain cash rich while SMEs are struggling with liquidity;
  4. How soon the turbulence can be resolved rests on the will of the central bank;
  5. We believe that the State Council has the authority to stop this brinksmanship and probably has the political will to do so, should the situation go too far, but whether they can make a sound judgment on when is “too far,” only time can tell.

The length matters a lot more than the height of the rate spikes in the interbank market. We believe the elevated SHIBOR has not reached its end. The longer this lasts, the more likely that some banks may face serious liquidity issues and that would further undermine the creditability between banks, creating a chain reaction. It is our view that draining interbank liquidity at the interbank market could cause unintended consequences, at a time at which duration and risk mismatch among the banks are severe, account receivables in the corporate sector are surging, and the inflow of FX reserves is decelerating sharply.

As we noted here, while the PBOC may prefer to be more selective (option 1 above) with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold (which we suspect they will) and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities).

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Thu, 06/20/2013 - 18:35 | 3677085 RockyRacoon
RockyRacoon's picture

Maybe they don't see anything wrong with some institutions failing... unlike our Fed.  If they find fraud and abuse they'll take some bankers out back and hang 'em.  At least the population situation might improve.  Their taking a 5 year outlook is better than our markets taking a 5 minute one.  They've had the chance to look around and see what QE has done (Japan and Fed).  Maybe they want to try to head this thing off at the pass.

Nah, nevermind.

Thu, 06/20/2013 - 18:56 | 3677174 123dobryden
123dobryden's picture

so you think chinese fuckers fuck better...

Thu, 06/20/2013 - 19:12 | 3677214 Go Tribe
Go Tribe's picture

I think he's saying they fuck fuckers better.

Fri, 06/21/2013 - 01:15 | 3678246 butchee
butchee's picture

Fuckin' fucker's fuckin' fucked!

Thu, 06/20/2013 - 19:33 | 3677255 bonin006
bonin006's picture

They aren't that primative. A bullet to the head is much faster and simpler.

Thu, 06/20/2013 - 18:21 | 3677090 Unknown Poster
Unknown Poster's picture

If the wave of reflation hits food prices too hard, they couldhave hordes of hungry, angry Chinese looking for regime change. 

Thu, 06/20/2013 - 19:29 | 3677245 TPTB_r_TBTF
TPTB_r_TBTF's picture

no problem...


... the Chinese GovT has even more hollow-points than what the US GovT does.


Thu, 06/20/2013 - 18:34 | 3677117 MFLTucson
MFLTucson's picture

We are discussing a country with 3 Trillion in Foreign Reserves and tons of Gold when we have 22 years of war under our belt, an artificial housing report because most of the homes are owned by hedge funds, a lie for an employment number, no savings, no growth, artificially low rates, no gold and 17 Trillion in debt?  Seems to me that the focus is here, not there!

Thu, 06/20/2013 - 19:32 | 3677252 TPTB_r_TBTF
TPTB_r_TBTF's picture

debt can be inflated away or defaulted on.  Those trillions are China's problem, not the US's.


we have 22 years of war under our belt

So your soldiers have a lot of experience?

Fri, 06/21/2013 - 00:21 | 3678138 matrix2012
matrix2012's picture

It's really hard to see the elephant in the room :-)

Thu, 06/20/2013 - 18:35 | 3677120 skank
skank's picture

Grease - Greased Lightning [ With Lyrics ]

Thu, 06/20/2013 - 18:38 | 3677125 ekm
ekm's picture

Just a reminder:

It all started right after Obama - Xie meeting.

Thu, 06/20/2013 - 22:22 | 3677708 chinaboy
chinaboy's picture


Obama did not meet Xie. he met Xi. BTW, you work for NSA?

Thu, 06/20/2013 - 18:45 | 3677149 razorthin
razorthin's picture

yabut that housing bubble will likely resolve in about 72 hours

Thu, 06/20/2013 - 18:51 | 3677166 adr
adr's picture

Wait a minute, I'm constantly told by the media that soaring home prices are good. Don't the Chinese want to be rich?

Oh, the problem is the soaring values are due to foreign investors buying up property making it too expensive for Chinese citizens to get in the market.

The USA is different how?

Thu, 06/20/2013 - 19:32 | 3677254 rosiescenario
rosiescenario's picture

A bit off topic, but I just have to wonder how much copper is sitting in China??? Could it be as much as 1 year's world output??

Thu, 06/20/2013 - 19:37 | 3677263 q99x2
q99x2's picture

I votefully for hopefully and changefully.

Thu, 06/20/2013 - 19:38 | 3677266 Son of Loki
Son of Loki's picture

Instead of looking the other way, Just think if they taxed some of that embezzled money flooding in from China and Russia to Cali housing market...could be  a nice source of revenue for the Fed and/or Cali.

Thu, 06/20/2013 - 19:44 | 3677282 Librarian
Librarian's picture

So, let's cut to the chase.

Are we boned?

Thu, 06/20/2013 - 22:19 | 3677704 chinaboy
chinaboy's picture

BofAML may have a say on U.S. matters (depends on who in BofAML). Their opinion is worthless as far as most other countries are concerned. Their 'observation' on this one would be a laughing matter in the PRC.

I am positive on the on going SHIBOR events. SHIBOR had been high, Zerohedge reported that before. It was lowered with 'reverse repo' be the central bank. The new premire wants to break that. If fully successful, banks use their money in real economy. If partial successful, banks rely less on borrowing from each other and from the central bank. In a world where printing money is like a birth right, I think Chinese government does the right thing.




Thu, 06/20/2013 - 23:38 | 3678003 jonjon831983
jonjon831983's picture

I headline scanned and skimmed and article saying they are aiming to downsize financial industry "naturally".


If only... but I think there could be an element of it....

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