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China Liquidity Fears Ease As PBOC Injects 255 Billion CNY - Most Since Feb 2013

Tyler Durden's picture





 

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.

 

Fun-DURR-mentals?

 

Charts: Bloomberg

 


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Mon, 01/20/2014 - 22:07 | Link to Comment algol_dog
algol_dog's picture

Awesome! I'm gonna make more money tomorrow!

Mon, 01/20/2014 - 22:11 | Link to Comment knukles
knukles's picture

Them Chinese are now as capitalist as Americans are now Communist.
And nobody's happy.

I got an idea, let's all go fight over some shit hole specks of dirt islands populated by a couple skeletons of Japanese soldiers left over from WWII, some glow in the dark centipedes and a whole small beach of discarded plastic floatsam. 

Mon, 01/20/2014 - 22:20 | Link to Comment kaiserhoff
kaiserhoff's picture

Great idea knucks,

but first we have to get involved in another blood feud/civil war in the Middle East, because god's chosen want that pipe line, not the Keystone.  Why didn't they teach us this shit in school?

Mon, 01/20/2014 - 22:28 | Link to Comment DeusHedge
DeusHedge's picture

mm 1% are natural born fighters. The military or jail picks them up. China's 1% is officially 100% larger than ours. Not saying our economy doesn't help the world etc.

Tue, 01/21/2014 - 00:24 | Link to Comment European American
European American's picture

What would happen if China attempted a "take over" of that private US corporation called "The Fed"? Is it possible for "someone" to buy them out? Now that would be interesting.

Tue, 01/21/2014 - 03:40 | Link to Comment Cast Iron Skillet
Cast Iron Skillet's picture

as long as they pack it up and cart it to Peking (or whereever), np.

Tue, 01/21/2014 - 00:35 | Link to Comment Wait What
Wait What's picture

I've always wondered how Chinese, many of whom still live with portraits of Mao in their homes, reconcile their belief in communism while all around them they see capitalism, and some of its worst attributes, taking over. you'd think a lifetime of indoctrination would give them enough insight to say 'hey, wait a minute!' then again, the same can be said of America and capitalism.

Tue, 01/21/2014 - 11:07 | Link to Comment Chief Kessler
Chief Kessler's picture

I'd like to inject some liquidity into my Chinese neighbor, she's smoking hot, bodacious.

Mon, 01/20/2014 - 22:12 | Link to Comment knukles
knukles's picture

Never mind.....

Tue, 01/21/2014 - 08:04 | Link to Comment americanreality
americanreality's picture

Ohh knucks!  It wouldn't be ZH without knucks being knucks.  Classic knucks.  

You guys need better characters. 

Mon, 01/20/2014 - 22:03 | Link to Comment NoDebt
NoDebt's picture

It's a miracle!

Imagine a central bank- ANY central bank- riding to the rescue of the "banking" system (shadow or otherwise) in the nick of time as a liquidity crunch starts to take hold.  Unpossible.  Until the last 5 years straight.  Color me shocked.

Until liquidity stops fixing things, liquidity is what will be thrown at every problem.  Questions?

Mon, 01/20/2014 - 22:08 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Looks like the PBOC just blinked.......again.

<I think they have something in their eye. Must be the smog over there.>

Mon, 01/20/2014 - 22:15 | Link to Comment LetThemEatRand
LetThemEatRand's picture

This is bearish for Gold, right?

New Series 7 multiple choice question:

Which of the Following Should Cause Gold Prices to Fall?

A.  Excess liquidity and pumping money into the financial system?

B.  Lack of liquidity?

C.  Credit crunch?

D.  Abundance of cheap credit?

E.  All of the above.

Guess E and you have a job waiting for you advising a central bank on monetary policy.

Mon, 01/20/2014 - 22:15 | Link to Comment fonzannoon
fonzannoon's picture

and bill fleckenstein

Mon, 01/20/2014 - 22:16 | Link to Comment q99x2
q99x2's picture

All better now.

Mon, 01/20/2014 - 22:21 | Link to Comment Rising Sun
Rising Sun's picture

Asia markets are up again - US index futures are up too.

 

Go communism!!!!!

Mon, 01/20/2014 - 22:23 | Link to Comment kaiserhoff
kaiserhoff's picture

Well done, Tylers. 

Reading Chinese tea leaves is not much fun, and contains no cow bell.

What they do, is velly interesting.

Mon, 01/20/2014 - 22:27 | Link to Comment ebworthen
ebworthen's picture

So another Central Bank providing more liquidity to keep the speculative liquidity driven shadow banking system engines driving the world economies towards collapse humming.

Race to the bottom!

"I got more debt!"

Brilliant.

Mon, 01/20/2014 - 22:35 | Link to Comment Yen Cross
Yen Cross's picture

   PBoC is starting to make the Fed. look like pikers...

Mon, 01/20/2014 - 22:53 | Link to Comment disabledvet
disabledvet's picture

"Too Big to Fail" again. I don't think they have an FDIC in China either...let alone a "comptroller of the currency." This thing is looking more and more like Elon Musk test firing his whole rocket before "launch." Make sure only the "little banks fail"? Good luck...

Tue, 01/21/2014 - 00:53 | Link to Comment walküre
walküre's picture

No checks and balances, no audits, no verifiable accounting, loads of cash from unqualified and unquantified origin.

And the worst part, the elite in the West is going along with it and letting the Chinese take over with Mao paper.

 

Tue, 01/21/2014 - 05:59 | Link to Comment Apostate2
Apostate2's picture

Since the reforms of 1978/79 the Chinese realised they needed new accounting expertise. However the outcrys from Hong Kong about dodgy practices finally had an effect.  Invited in, after the exposure of  CCP accounting, they threw up their hands and said the equivalent of WTF.

The only way we know what is going on is the HK people who deal with this and know how the game is run. Very dodgy but some on the mainland know that fact and want to get away from the Maoist everything must agree with ideological dictates. It is an internal political war vis a vis those who want the hard data and those who still pine for the socialist utopian 'anything goes'. Political power and the challenges will ultimately decide whether the real data trumps socialist manipulation, of course for world peace and the children.

 

Mon, 01/20/2014 - 22:36 | Link to Comment Dr. Engali
Dr. Engali's picture

I'm shocked...shocked I tell you that the liquidity train keeps on chugging.

Mon, 01/20/2014 - 22:55 | Link to Comment nmewn
nmewn's picture

(Audible gasp!)...I thought the ideological purity of the communist kumbaya state made such things unpossible!

The socialist/communist Keynesian model train set (made in China now, by the way) keeps on-a-rollin, all the way to the bridge thats out just up ahead, at Nationalist Gulch.

Everyone in the back of this thing has their ticket punched now, so lets just hang on for the ride and see what happens ;-)

Mon, 01/20/2014 - 23:12 | Link to Comment NoDebt
NoDebt's picture

This is getting too easy to predict, don't you think?  Liquidity drying up?  Son, I got the solution to all that ails you.  Central banks will supply liquidity on demand.  

Zzzzzzzzz.......

Buy everything.  Buy anything.  Doesn't matter.  It's alll going up to a greater or lesser extent (except gold or gold miners which will all be ground into dust, as is their lot in life).  

Somehow this is all going to bite us in the ass eventually.... eventually.  And when it does, we'll richly deserve it.

Mon, 01/20/2014 - 22:52 | Link to Comment Wolf in the Wilds
Wolf in the Wilds's picture

This is the traditional injection for the Chinese Lunar New Year period, when the populace withdraws massive amounts of cash for red packets, the traditional gift of good luck. This will all be reversed after the Lunar New Year period.  This happens EVERY YEAR.. nothing to shout about.

Mon, 01/20/2014 - 23:57 | Link to Comment old naughty
old naughty's picture

except those 'smart' ones who once got the 'large' bailouts would 'tunnel' thru to-and-then-out-of HK.

 

And short will likely be what pboc see coming back.

Tue, 01/21/2014 - 00:56 | Link to Comment walküre
walküre's picture

Every year you say? Is that like a pattern then? Including the liqudity crunch, the yield spikes and so on? Has it always been this way going back 30 years? Of course not!

There's real troube in the system and the PBoC is using the New Year as a propaganda tool to silently provide the starved system with cash.

Problem is that Chinese are parking cash outside the system, buying foreign assets or converting to precious. The Chinese banking sector will never ever have sufficient liquidity unless they print, print, print against NOTHING.

Tue, 01/21/2014 - 01:31 | Link to Comment Wolf in the Wilds
Wolf in the Wilds's picture

Look, this particular liquidity injection is to cover the cash requirements for the Chinese banks over the Chinese New Year.  The amount of cash withdrawals from the banking system peaks during this time annually.  Look at the historical data over the last 30 years and it has been like this ALL THE TIME.  This is some thing that happens in China (and any where the population is predominantly Chinese).  This is not to say that there is no problem with liquidity.  Far from it.  However, this is EXACTLY what the PBOC wants to do.  Do not underestimate the new central commitee's desire to reduce leverage.  I will not be surprised to see some small bank failures to act as incentive for the rest to reduce off balance sheet lending and outright loan creation.  

As for Chinese parking cash outside, that is absolutely nothing to do with domestic CNY liquidity.  That has to do with how fast the Chinese can divest out of useless USD and Treasuries into real assets.

You clearly do not have an understanding of what the PBOC and the new administration is trying to do.  Will they be successful?  Well, I think there will be some economic pain in the short term with the weeding out of overlevered companies in over-capacity industries, and maybe some real estate developers will fail, with some of the smaller banks failing as well, but overall, that is what is required to have long term growth.  The Chinese have an old saying:  Good medicine tastes bad.  That is exactly what they are trying to achieve with this "good" medicine of tighter liquidity to ensure long term growth stability.

Does that mean China is going to crash and burn?  Certainly not.  Does that mean China's growth is going to slow?  Most definitely.  

You can figure out who will suffer more if China slows; China or every other country that is trying to export into China.

 

 

Tue, 01/21/2014 - 05:39 | Link to Comment Apostate2
Apostate2's picture

You are both right. Another Chinese saying is don't pay the doctor if he doesn't cure the disease.

Tue, 01/21/2014 - 00:22 | Link to Comment starman
starman's picture

Investor confidence? What's that?

Tue, 01/21/2014 - 00:58 | Link to Comment Wait What
Wait What's picture

is there anyone on ZH who didn't think the rate spike would be papered over with some liquidity? anyone really that naive? anyone who hasn't been paying attention for the last 5, or maybe 15 years?

Tue, 01/21/2014 - 01:36 | Link to Comment shawnmike
shawnmike's picture

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Tue, 01/21/2014 - 04:27 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

A rising tide raises all boats, but a rising liquidity raises only large boats.

Laws of Nature make sense.  Laws of CBs on the other hand... FUBAR. 

Keep diversifying into the PARALLEL Economy:  Barter, Cash, BTC/LTC, PM, Real Assets.  Else, BOHICA.

Tue, 01/21/2014 - 07:06 | Link to Comment laomei
laomei's picture

Yawn... the only banks that matter are government-owned for all intents and purposes.  Pretending that this means anything is just a sign that you are eating your own bullshit.  Liquidity poured in last year in Feb... why? CNY.  This year in January...why? CNY.  This is a time that payroll goes out with all the good bonuses and everyone is cashing out to make big purchases... homes, cars, vacations, etc.  Hurr, I wonder why they injected liquidity? Perhaps, just perhaps, it's because people over here tend to spend cold hard cash.

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