Spot The Real Liquidity Bubble

Tyler Durden's picture

Overnight the PBOC released the latest Chinese bank loan and liquidity data for the month of January. Those who have been following our recent series on Chinese liquidity measures will know that when it comes to the real marginal source of global liquidity, it is China that is the true unprecedented juggernaut, putting both the Fed and the BOJ's "puny" QE programs to shame (see "Chart Of The Day: How China's Stunning $15 Trillion In New Liquidity Blew Bernanke's QE Out Of The Water", "Some Stunning Perspective: China Money Creation Blows US And Japan Out Of The Water"). And January's data was simply the final exclamation mark in a decade-long series in which China's prosperity has been simply the result of an exponentially increasing amount of loan and liquidity creation by the Chinese semi-national and government backstopped financial system.

Here are the numbers:

Total Chinese loan creation in January was CNY 1.32 trillion, or $218 billion. While January traditionally sees a pick up in loan creation (and demand), the 174% increase in bank loans from December was an unprecedented number, was above the CNY 1.1 trillion, and CNY 250 billion more than a year ago. More notably, this was the largest monthly bank loan injection since January 2010. The last time China scrambled to inject massive amounts of bank loans was in late 2008 and early 2009 when the world was ending, and it was China's money that stabilized the global financial system far more so than the Fed's whose QE 1 did not begin in earnest until March 2009.

The far broader monetary aggregate, Total Social Financing, which is the most encompassing calculation of credit and liquidity created in China in any one month, rose to CNY 2.58 trillion. This was more than double the December's $1.23 trillion, and beat last January's CNY 2.545 trillion. In fact, this month's broad liquidity creation was the largest monthly amount in China's history!

 

Here is what Reuters had to say about the overnight data:

January’s lending surge aside, China’s central bank has consistently signaled in recent months that it wants to temper credit growth to slow a rapid rise in debt levels across the economy.

 

It has focused in particular on keeping short-term interest rates elevated to force banks to stop lending to speculators or high-risk borrowers.

 

Analysts polled by Reuters in January said they expect China’s economy to grow 7.4 per cent this year, an enviable performance for a major economy, but still the worst for China in 14 years. The economy grew 7.7 per cent last year.

Here's the problem: one can't put the January lending surge aside, as it came at a time when for the second time in six months the PBOC tried to taper, only to be forced to not only bail out its money markets, but is on the verge of a bankruptcy tsunami involving its shadow banking products, the first of which it also bailed out despite repeated warnings this time it means business and would let it die. In this context, the January number is precisely what it appears: the bank's logical response to a liquidity crunch as the Chinese regime finds itself in the same spot that the Fed has been in for the past 5 years - it must keep the monetary spice flowing, or else the party is over. And just like the Fed, and now the BOJ, so too does China not want to deal with the fall out if all it takes to created yet another quarter of increasingly subpar economic growth is another record of funny money conceived out of thin air.

The only problem is that it is becoming increasingly difficult to hide all the pieces of funny money, most of which result in bad and otherwise impaired loans, under the rug. And just to show the problem in its context, here is how China's banks created some 50% more in bank loans in January than the QE credit money created by both the Fed and the BOJ combined.

And finally, here is China's nearly half a trillion in total liquidity added to the system in just one month (some deleveraging, right?) looks compared to the Fed and the BOJ's much maligned and unprecedented uncovnentional monetary policy.