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China's Liquidity Crisis Worsens As Fed Vs PBOC "Taper" Wars Escalate

Tyler Durden's picture


While global currency wars have esclataed over the last 4 years (as we noted here), the potential return to fund outflows triggered by the Fed taper, combined with higher demand for funds ahead of Chinese New Year, means there will be continued pressure for China’s money market rates to stay high heading into January. With China's reform and rate liberalization plans, it seems 2014 may be the year of the Taper Wars.

None of this should come as a big surprise (given we covered the debt problem is great detail here)... but bringing us up to date on the impact of the Fed's tapering and liquidity flows, WSJ reports,

Analysts said the short-term cash injection didn't help the underlying problem of banks struggling with funding, in part because the injections go to bigger banks and the funding problems are mostly at midsize and smaller lenders. "It's mostly meant to prevent financial institutions from suffering an exhaustion of their cash supply, but it doesn't represent an easing in funding conditions," said Wu Sijie, senior analyst at Guangfa Bank.




During the squeeze in June, there were rumors that a bank had defaulted on a loan to another bank, but no bank admitted it. However, ahead of its initial public offering in Hong Kong last week, China Everbright Bank disclosed in its prospectus that two of its branches failed to pay 6.5 billion yuan of interbank loans due on June 5. Everbright Bank said it had the cash on hand to repay the loans, but a failure by its branches to tell headquarters that they were short meant the bank was unable to cover the loans before the end of the day.

and Bloomberg's Tom Orlik,

The beginning of the end of QE3, marked by the U.S. Federal Reserve’s decision to taper its purchases of bonds, could trigger a reversal in China’s capital flows and compound the year-end cash crunch. China’s money market rates pushed above 7 percent Thursday. That conjured flashbacks of June’s liquidity squeeze and forced the People’s Bank of China to wade into the market with a liquidity injection. As of Friday early afternoon, conditions remained tight.

The year-end cash crunch is unexpected because December typically sees massive inflows of cash from the spend-down of fiscal deposits, which approached a trillion yuan in previous years. Capital inflows from September through November, tracked by Bloomberg’s new China Estimated Capital Flow index {CNNMHTMY Index <GO>}, should also have improved liquidity conditions.

Against that backdrop, the current squeeze is a reminder of stressed conditions in China’s financial sector. Chinese banks now rely more on the interbank market for funding because of increased competition for deposits — the result of bottom-up interest rate liberalization and pressure from rolling over non-performing loans.

The central bank retains enormous resources to prevent a liquidity squeeze from turning into something more severe. The PBOC sits on about twenty trillion yuan of reserve deposits, which could be released into the system.

At the same time, the PBOC also wants to tamp down credit growth, and teach banks to manage liquidity without relying on the central bank’s eleventh-hour interventions. A complex market in which big banks attempt to manipulate the system to get higher returns on their excess deposits adds to the difficulty and increases the chance of missteps.

Cross-border capital flow is a key factor affecting China’s interbank market. Inflows add to liquidity and push rates down. Outflows can add stress as funds exit the market.

To track those flows, Bloomberg has created the China Estimated Capital Flow index. The monthly series takes the sum of FX purchases by banks and change in FX deposits as total flows into the country. Netting out the monthly trade and direct investment balances provides an estimate of portfolio flows.

With a current account surplus and controlled capital account, China does not suffer from the volatility introduced into other emerging markets by international capital flows. Still, over the course of 2013, the index illustrates the impact the Fed’s policies have on China’s capital flows and on the mainland’s money markets.

In May and June, the suggestion of a taper in the Fed’s asset purchases saw rates in the U.S. rise. That triggered a sharp reversal for China’s cross border flows, with an exodus of capital contributing to the spike in money market rates. Since September, the delay in U.S. tightening seems to have stimulated a return of capital inflows.

A potential return to fund outflows triggered by the Fed taper, combined with higher demand for funds ahead of Chinese New Year, means there will be continued pressure for China’s money market rates to stay high heading into January.

A far-reaching commitment to reform by China’s leaders has buoyed confidence in the outlook for 2014 and beyond. December’s surge in rates is a reminder that there’s no easy fix for an over-extended financial system. Necessary shifts such as interest rate liberalization can add to the pressure. With rates high, credit growth is likely to decelerate, and equities may extend their lackluster run into the New Year.


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Mon, 12/23/2013 - 20:14 | 4272118 fonzannoon
fonzannoon's picture

if it really was the fed vs pboc then China could sell some treasuries, especially at the short end, and make a point. But no...

Mon, 12/23/2013 - 20:33 | 4272150 Clint Liquor
Clint Liquor's picture

They are probably just having a hard time finding enough empty Container Ships to send them back in. You know, a Trillion dollars of UST stacked on top of each would reach Mars.

Mon, 12/23/2013 - 20:40 | 4272166 zaphod
zaphod's picture

The US and China merely talk about printing less money, and the financial system becomes stressed.

There simply is too much debt and too many bad loans for the current supply of fiat money to cover it all. The only way out is to print to moon, every banker knows this.

Mon, 12/23/2013 - 21:00 | 4272211 NoDebt
NoDebt's picture

Someday when 500% debt/GDP ratios are considered normal/sustainable and you have to pay 3% a year to put your money in the bank because they change the currency twice a year (BitCoin being long since outlawed and gold illegal to own in any amount greater than 2 oz.), we'll look back and think about how good we had it in 2013.

Mon, 12/23/2013 - 20:46 | 4272173 BandGap
BandGap's picture

SOS = Same Old Shit

China isn't going to do dick, we owe them too much. They can make it uncomfortable, that's all.

Mon, 12/23/2013 - 21:18 | 4272252 ZH Snob
ZH Snob's picture

a debt-based monetary system cannot last.  the world is in its last gasps of debt splurge before it simply caves in on itself.  after that, no one will accept debt as a form of payment for goods.  product for product, something for something will be the only acceptable method of exchange.  there will still be loans and debt, but they will not be accepted as an asset, and the banks will have a strict reserve responsibility.  the punch bowl will be broken, and the world will be forced to sober up.  this might take years or only months, but the final results are inevitable.

Mon, 12/23/2013 - 21:40 | 4272307 dryam
dryam's picture

I'm starting to suspect many of us will be dead before we get to that reset point. Drink up & be merry.

Tue, 12/24/2013 - 00:19 | 4272618 walküre
walküre's picture

They control the media. They control news, truth, opinions and perception. They declare what's fake is real and what's real is fake. This is any tin pot dictator's wet dream. The Roman Empire lasted several hundred years even after their problems of overexpansion and funding issues became apparent. Rome had a propaganda machine but nothing like this.

When people in the streets fight over who gets to wear the latest sneakers rather than fighting over who is in charge of their lives, the powers that be have achieved ultimate and full control over the system.

My prediction is that any collapse if and when it happens will be planned to suit their needs as they will never want to be caught off guard. Short of an asteroid hit on earth or a super deadly ravaging (not man made) virus, there's nothing that can change the status quo which they have created and which they control.

Mon, 12/23/2013 - 21:33 | 4272297 darteaus
darteaus's picture

Closer to a Mars bar.

Mon, 12/23/2013 - 20:34 | 4272157 Zero Point
Zero Point's picture

0.001% Vs everyone else.

The same Vs that has existed throughout history, and the true reason for all wars.

Likely by the same families, which just ain't humanly possible imo, but here we are.

Mon, 12/23/2013 - 20:34 | 4272158 slotmouth
slotmouth's picture

I think they are (not at the short end).  That is how they are injecting liquidity. That was the real reason their treasury accumulation declined after the last shibor spike.  They are dumping them again to inject liquidity, but it isn't working.  That would explain the move in treasuries last night.

Mon, 12/23/2013 - 20:48 | 4272185 Cognitive Dissonance
Cognitive Dissonance's picture

What move in Treasuries last night. They busted all the trades. Never happened. /sarc

Mon, 12/23/2013 - 21:37 | 4272304 game theory
game theory's picture

It *is* the Fed versus China. Who are you rooting for?

Mon, 12/23/2013 - 20:14 | 4272119 max2205
max2205's picture

20 trillion used to be a lot of money

Mon, 12/23/2013 - 21:32 | 4272296 darteaus
darteaus's picture

In Zimbabwe.

Mon, 12/23/2013 - 20:17 | 4272125 ChaosEquilibrium
ChaosEquilibrium's picture

That is weird?...I was just reading a Chinese newspaper and it was talking about 10% growth, 1% inflation, a billion yuan to every person in China, an increase in the Chocolate ration, and a free imported chicken(guaranteed from the USA and disease Free)!  The next story indicated that the word 'cash' is a good....and the word 'crunch' is a creation of evil western capitalists and does not and has NEVER existed!  There are NEVER shortages in China!

Mon, 12/23/2013 - 20:27 | 4272140 disabledvet
Mon, 12/23/2013 - 20:55 | 4272196 ich1baN
ich1baN's picture

Tell that blissful news to my chinese girlfriend who works in beijing and has not been paid in 6 months for the 2nd time in a row.


I've told her to buy silver and she listens to me very well.... So far she has stacked everytime I ask her too. She is soo good hehe.

Mon, 12/23/2013 - 21:04 | 4272231 SmittyinLA
SmittyinLA's picture

yes, I understand all the women in China are single 

Mon, 12/23/2013 - 21:34 | 4272295 darteaus
darteaus's picture

Many grandmas are...hmmm...possible retirement strategy?

Mon, 12/23/2013 - 20:17 | 4272128 Rainman
Rainman's picture

"Taper wars"...who coulda seen that Black Swan a comin ?

Mon, 12/23/2013 - 20:43 | 4272172 Osmium
Osmium's picture

"Taper Wars"  Sounds like a new show on A&E.

Mon, 12/23/2013 - 20:40 | 4272165 max2205
max2205's picture

When Russia invaded Georgia the Fed killed oil which sank Russian equities.

When China threatened Japan the Fed...... Fill in the blanks

Mon, 12/23/2013 - 21:02 | 4272225 SmittyinLA
SmittyinLA's picture

ya that oil drop never made sense to me either

Mon, 12/23/2013 - 21:51 | 4272330 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Taper wars sounds like a new reality show.... I can see a cheesy TLC style production following around FED banking 'personalities' and other 'personalities of other Central Banks having them do hokey contrived shit for ratings next.

Tue, 12/24/2013 - 11:16 | 4273271 Ban KKiller
Ban KKiller's picture

Bank numbers out of China are as reliable as  bank numbers out of the U.S. 

Big banks today, here, there, everywhere, are continuing criminal enterprises designed to seperate you from your fiat. 

Do NOT follow this link or you will be banned from the site!