China Bond Yields Soar To 9 Year Highs As It Launches Crackdown On "Off Balance Sheet" Credit

Tyler Durden's picture

As we showed very vividly yesterday, while the world is comfortably distracted with mundane questions of whether the Fed will taper this, the BOJ will untaper that, or if the ECB will finally rebel against an "oppressive" German regime where math and logic still matter, the real story - with $3.5 trillion in asset (and debt) creation per year, is China. China, however, is increasingly aware that in the grand scheme of things, its credit spigot is the marginal driver of global liquidity, which is great of the rest of the world, but with an epic accumulation of bad debt and NPLs, all the downside is left for China while the upside is shared with the world, and especially the NY, London, and SF housing markets. Which is why it was not surprising to learn that China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales, Bloomberg reports.

Specifically, China appears to be targeting that little-discussed elsewhere component of finance, shadow banking. Per Bloomberg, the regulations drawn up by the China Banking Regulatory Commission impose restrictions on lenders’ interbank business by banning borrowers from using resale or repurchase agreements to move assets off their balance sheets. Banks would also be required to take provisions on such assets while the transactions are in effect. Ironically, it may be that soon China will be more advanced in recognizing the various exposures of shadow banking than the US, which is still wallowing under FAS 140 which allows banks to book a repo as both an asset and a liability. 

Recall from a Matt King footnote in his seminal "Are the Brokers Broken?"

Quite apart from the fact that FAS 140 contradicts itself (with paragraph 15 (d) making borrowed versus pledged transactions off balance sheet, and paragraph 94 making them on balance sheet, a topic complained about by many broker-dealers immediately after its issue), there seems to be little consensus as to who is the borrower and who is the lender. As far as we can tell, terms like ‘borrower’ and ‘lender’ are used in exactly the opposite sense in the accounting regulations relative to standard market practice. The description above follows common market practice. The accounting documents seem to refer to this the other way around, a source of confusion commented upon in some of the accounting literature

So while in the US one may be a borrower or a lender at the same time courtesy of lax regulatory shadow banking definition (depending on how much the FASB has been bribed by the highest bidder), in China things will very soon become far more distinct:

The rules would add to measures this year tightening oversight of lending, such as limits on investments by wealth management products and an audit of local government debt, on concerns that bad loans will mount. The deputy head of the Communist Party’s main finance and economic policy body warned last week that one or two small banks may fail next year because of their reliance on short-term interbank borrowing.


“China’s banks and regulators are playing this cat-and-mouse game in which the banks constantly come up with new gimmicks to bypass regulations,” Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., said by phone. “The CBRC has no choice but to impose bans on their interbank business, which in recent years has become a high-leverage financing tool and may at some point threaten financial stability.”

Cutting all the fluff aside, what China is doing is effectively cracking down on the the wild and unchecked repo market, and specifically re-re-rehypothecation, which allows one bank to reuse the same 'asset' countless times, and allow it to appear in numerous balance sheets.

The proposed rules target a practice where one bank buys an asset from another and sells it back at a higher price after an agreed period.

The reason why China is suddenly concerned about shadow banking is that it has exploded as a source of funding in recent years:

Mid-sized Chinese banks got 23 percent of their funding and capital from the interbank market at the end of 2012, compared with 9 percent for the largest state-owned banks, Moody’s Investors Service said in June. The ratings company forecast a further increase in non-performing loans as weaker borrowers find it hard to refinance.

And while we are confident Chinese financial geniuses will find ways to bypass this attempt to curb breakneck credit expansion in due course, in the meantime, Chinese liquidity conditions are certain to get far tighter.

This is precisely the WSJ reported overnight, when it observed that yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing's relentless drive to tighten the monetary spigots in the world's second-largest economy. "The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales."

This should not come as a surprise in the aftermath of the recent spotlight on China's biggest tabboo topic of all: the soaring bad debt, which is the weakest link in the entire, $25 trillion Chinese financial system (by bank assets). So while the Fed endlessly dithers about whether to taper, or not to taper, China is very quietly moving to do just that. Only the market has finally noticed:

The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China's debt markets were rattled by a cash crunch.


The rise in borrowing costs and shrinking access to credit could undercut the recent uptick in China's economy that global investors in stock, commodity and currency markets have cheered. Wobbly growth in China could undermine economic recovery in the rest of the world.


"If borrowing costs don't fall in time, whether the real economy could bear the burden is a big question," said Wendy Chen, an economist at Nomura Securities.


Chinese bond yields are rising amid a lack of demand among the big banks, pension funds and other institutional money managers, analysts say. These investors, traditionally the heavyweights in China's bond market, have seen their funding costs rise in tandem with interbank lending rates, which are controlled by China's central bank. The country's bond market is largely closed to foreign investors.


The yield on China's benchmark 10-year government bond was at 4.65% Monday, down from 4.71% Friday. Last Wednesday's 4.72% was the highest since January 2005, according to data providers WIND Info and Thomson Reuters. The record is 4.88% set in November 2004. Bond yields and prices move in opposite directions.


"The recent sharp rise in bond yields was mostly due to worsening funding conditions and growing expectations for a tighter monetary policy as Beijing seeks to deleverage the economy," said Duan Jihua, deputy general manager at Guohai Securities.


As government-bond yields have risen, the average yield on debt issued by China's highest-rated companies rose to 6.21% as of Friday—the highest since 2006, when WIND Info began compiling the data.

In conclusion, it goes without saying that should China suddenly be hit with the double whammy of regulatory tightening in both shadow and traditional funding liquidity conduits, that things for the world's biggest and fastest creator of excess liquidity are going to turn much worse. We showed as much yesterday:

If the Chinese liquidity spigot - which makes the Fed's and BOJ's QE both pale by comparison - is indeed turned off, however briefly, then quietly look for the exit doors.

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lolmao500's picture

Or aren't they going up because they are trying to start a fight with Japan?

Chinese bitchez be crazy.

Headbanger's picture

China just threw a big wrench into the printing press..

You might want to close your eyes for what happens next.  And duck for cover.

LawsofPhysics's picture

I'll believe it when I see it.  The Chinese invented paper money, they are printing much faster than the Fed, the difference is in what the two are buying.  China is buying real shit to fight a global war with, whereas the fed is simply buying votes and internal peace, for now...

SheepDog-One's picture

Kinda reminds me of the choice 'You want it in the face, or gut punch?'

CheapBastard's picture

Make Moar iCrap and sell it to the West. Then take that money and buy Hard, RE across the globe, etc.

They are no Dummies..

Born Patriot's picture

One of my favorite economists, Dr Paul Krugman, has written extensively about the benefits of extended monetary stimulus. The crucks is that when when inflation is low like it is now, then an expansionary monetary policy can be used to stimulate aggregate demand (spending) and decrease unemployment. Isn't that our Federal Reserve's dual mandate? Maximum employment and price stability?

falak pema's picture

And one of your favorite aunties makes good fresh apple pie. Her dual mandate was to feed you and to teach you logic.

I'll give her the benefit of the doubt for the first. But your auntie, if she be like the FED when on her own, would be up to other tricks; she would be great at auto stimulation.

The crucks would then truly sucks.

Just being logical in my analogy; no 'harf deelings'. 
mkhs's picture

What is a crucks?  Damn illiterate Krugmantards.


ZIRP  stripes away savings income killing demand: less money, less demand.  Further, it forces Gramps, dependent on savings income, into the job market increasing unemployment.  Anti-mandate on all counts.

XAU XAG's picture

Chinese food at a 9 year high tooooooooooooooooooooo


more peeps it Chinese food than own................BONDS


So what's the most important?

VD's picture

But without rehypothecation to the Nth, you can't have a Fed nor its PD owners engaged in business... ergo, Chinese CB has a new monetary gameplan upcoming...

Running On Bingo Fuel's picture

Nonsense. Given the size of their economy. You're comparing tangerines to grapefruits.


NoDebt's picture

"Bond yields and prices move in opposite directions."

So THAT'S how it works!

Something about China in the article, too.  Sounded kinda interesting.  I'm sure it'll be fine, though.  China crashing due to a tidal wave of bad debt?  I doubt it.  That would be like COMEX running out of gold or something.

falak pema's picture

7% yield (not 9) and the yuan hits the ceiling; so much for Yuan-USD currency war race to bottom logic!

Cheap paper meme is now becoming an impossible dream in all major currency constructs. 

The game of musical chairs in currency devaluation war is gonna get more like that on the deck of the Titanic.

Why is that table so unlevel??? Who is pulling those strings???

I smell collusion amongst my ENEMIES...thieves do have this bad habit of falling out.

Yes Siree, we are back at the Preakness, or is it the Kentucky derby?

Who cares its a CB controlled, HFT manipulated circus! 

doggis's picture

So it seems this dovetails nicely in with the Chinese air defense takeover of the senkaku islands.

Turning off the credit spigots means that a call for "nationalism" is needed to distract the masses.



y3maxx's picture

and on this side of the Pond... Broadly speaking, Detente between Iran and the USA is potentially a “Game Changer”. It certainly is a “Democratic” Party Platform choice vs a “Republican” Party one. This new Détente means, Iranian Oil should begin to flow outwards and lowering Oil prices. If Israel and Saudi Arabia are concerned about Iran’s Nuclear, then they can blow it up, its not America’s responsibility. thoughts friends?

TPTB_r_TBTF's picture

And Iran is responsible for Strait of Hormuz.


Cognitive Dissonance's picture

Prisoner's dilemma

<We are all prisoners of the system. That's our dilemma.>

Cursive's picture

@Cog Dis

You're right, it is a prisoner's dilemma...rock meets hard place...the scylla and charybdis...these people are like recovering alcoholics; they booze it up, party and wake up in a pile of vomit swearing to go cold turkey....which lasts about a half day after they check out of the Salvation Army shelter....rinse and repeat

geno-econ's picture

The question is the term of our internment and at what point in time it warrants a prison break, riot , attack on your prison guards or suicidal sacrifice. Longer the enslavement will ensure a more violent outcome.

B.J. Worthy's picture

Dystopia just texted; she'll be here in 5.

lolmao500's picture

China will likely face a revolt before too long.

Stockmonger's picture

China is the new Krugmania.

Quinvarius's picture

Because China would never prop up their own bond market, like we do.  Deflationist chicken littles still running around screaming as the sky rises.

Keynesianism is a political theory with political goals.  You'd do best to remember that as you try to figure out when the money will stop flowing.  It won't ever stop.

oak's picture

china might like to raise  the cny into the region of 5 yuan for 1 us$ early next year.

all-priced-in's picture

I am sure not a historian on China - but

China only does what is good for China

If they can do good for China and also fuck Japan over in some way they consider that an added benefit.

I get the feeling this change in policy is somehow a twofer.





Iam Yue2's picture

Surely there is scope here for Russell Napier to roll out another "most important chart in the world."?