Despite all the reform policy imperatives to constrict credit and normalize and liberalize policy and rates, the PBOC just provided the largest liquidity injection to its banking system in a year - 255bn CNY. While this is not entirely unusual for a year-end, when Chinese banks have to confess their illiquidity sins and cover mismatches (and are always helped by the PBOC); this year, short-term money-market rates are triple that of last year and there is a very real chance of a very real default within the shadow banking system. Of course, the sell-side are desperately writing cover that this is all priced in and even if the PBOC "lets some Trusts go" then they will come to the rescue and any crisis will be "contained." However, no one knows who will be saved and therein lies the safety-first rub - now where have we heard "contained" before?
- *PBOC TO CONDUCT 75B YUAN OF 7-DAY REVERSE REPOS: TRADER
- *PBOC TO CONDUCT 180B YUAN OF 21-DAY REVERSE REPOS: TRADER
- *PBOC OFFERS 7-DAY REVERSE REPO AT 4.1% YIELD: TRADER
- *PBOC OFFERS 21-DAY REVERSE REPO AT 4.7% YIELD: TRADER
China Repo (lower) and Reverse Repo liquidity provision...(biggest liquidity provision in a year)
Crucially, the PBOC will have to withdraw this liquidty (obviously as the repo matures) if it is merely year-end window-dressing (as is obvious in the chart above with the large downward red bars in each Feb).
For now short-term repo rates are lower
1d: -85bps at 3.48%
7d: -135bps at 5.25%
14d: -34bps at 5.57%
But of course, the big banks always bid first and scoop up the supply - just as we saw yesterday - its the smaller banks that are the most in distress and 7-day repo went through a 8, 9, and 10% rates - these are triple those of the peak rates during last year's new-year liquidty crunch.
And as much as banks will contend - just as the China itself admitted tonight:
Credit default risks with Chinese companies are emerging because of rising borrowing costs and tight liquidity conditions, said the official China Securities Journal in a front page editorial. The government needs policy flexibility to prevent any systematic financial risks.
This problem - described as "contained" by one sell-side shop reminds us of the "it could never happen here" mentality in the 2008 US shadown banking system. Critically, when the PBOC suggests it may let some banks go (to prove its mettle and resolve to fight out of control credut creation); investors will sell first and think later about which are safe and which are not. A 'default' - which looks increasingly likely - may just be the test of just how 'planned' and 'controlled' the Chinese banking system can really be...
We have on little question... for now the only Wealth Management Trust product that is publicly on the verge of default is CEQ#1 and that is only a 3 billion CNY position - so why did the PBOC feel the need to provide more than 80 times that amount of liquidity to the banking system unless it was epically worried about contagion and the total size of the Trust market.
Of course, the knne-jerk reaction is positive (well it is 255 Billion CNY of magic money) but between the BoJ starting its two-day meeting and John Hilsenrath confirming that Taper is here to stay - JPY weakness (and USD strength) are dragging stocks higher with S&P futures +7.5 from Friday's close.