The last two weeks have seen US equity markets on a one-way path to the moon, breaking multi-year records in terms of rate of change and soaring to new all-time highs. However, away from the mainstream media's glare, another 'market' has been soaring - but this time it is not good news. Chinese overnight repo rates - the harbinger of ultimate liquidity crisis - have exploded from 6-month lows (at 2.5%) to 4-month highs (6.7% today). The PBOC even added liquidity for the first time in months yesterday (via Reverse Repo - at much higher than normal rates) but clearly, that was not enough and the banks are running scared once again that the re-ignition of the housing bubble in China will mean more than 'selective' liquidity restrictions.
“The surge in money rates and the very volatile intraday trading shows the market is totally confused about the PBOC’s intentions,” says Frances Cheung, Hong Kong-based rate strategist at Credit Agricole CIB. “The central bank’s reverse-repo operations yesterday are deemed not enough by the market.”
It would seem yesterday's reverse repo - at considerably higher than normal rates - was a shot across the bow of Chinese banks that the liquidity spigot may not be as open they hoped.
As MNI reports, the 1Y Chinese Treasuries went off at 4.01%, significantly higher than market rates at 3.8% and were only 1.22 times oversubscribed (as opposed to a more normal 2x).
Traders said demand was weak because liquidity is tight on end-of-month squeeze...
Is the Fed finally getting to China?
As we noted previously,
Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, the country grows; if it's shut - it stagnates, as we described in "China: No Leverage, No Growth."
But a far bigger problem is that while China's debt is already at record levels, it needs an increasingly greater "credit impulse" to generate the same or smaller amount of GDP "growth" as before, a phenomenon we described in April.
The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.
But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic superbubble house of cards crashing on everyone's head, a key issue is that the price discovery process of insolvent entities in China is simply non-existent.
Which all ties rather nicely into Michael Pettis recent note that China's hidden debts still need to paid...