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PBOC Tries To Pop Equity Bubble, Tightens FX & Slashes Collateral/Margin Availability; Yuan Crashes Most Since 2008
Unlike the Federal Reserve - which openly encourages speculative wealth creation/redistribution and has never seen an equity bubble it didn't believe was contained - the PBOC appears, by its actions tonight, to be concerned that things have got a little overheated in its corporate bond and stock markets as hot money ripped into the nation's capital markets on hints of further easing and QE-lite a few months ago. In a show of force, the PBOC simultaneously fixed CNY significantly stronger (implicit tightening) and enforced considerably stricter collateral rules on short-term loans/repos. With Chinese stocks concentrated is even fewer hands than in the US (and recently fearful of the surge in margin trading), it appears the PBOC is trying to stall the acceleration is as careful manner as possible. The result, as Bloomberg notes, is a major squeeze in CNY (biggest drop since Dec 2008), interest-rate swaps ripped higher along with corporate bond yields, and most Chinese stocks sold off (with two down for every one up) though the latter is stabilizing now.
China Securities Depository and Clearing Corp (CSDC) said in an announcement after the market closed on Monday that with immediate effect, only corporate bonds with the highest rating of AAA and those issued by firms with a high rating of AA and above could be used for bond repo business.
Analysts say the regulators' exclusion of lower grade bonds from being used in bond repurchase contracts, a key source of secondary liquidity in trade, increases the risk of trading such bonds, depressing demand and putting upward pressure on yields.
The move follows through on a decree issued by the State Council, China's cabinet, in early October to clear debt issued by local government financial vehicles (LGFVs), even though the CSDC's ban apparently covers a wider range of corporate bonds, the announcement shows.
"Along with the clarification and clearing of local government debt, our company could take further steps to compress and clear related bonds already being included in the collateral in line with market risk conditions," the announcement said.
Given that more than 1 trillion yuan of outstanding corporate bonds are now deposited at the CSDC, analysts estimate that around 500 billion yuan of the bonds will be excluded from the repo business starting Tuesday, with the yields of credit bonds possibly being pushed up by a few dozens of basis points as their prices fall.
And a considerably stronger fix in CNY...
The fallout:
“As low-rated bonds cannot be used for repurchases on the exchange, this will force many financial institutions to deleverage,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Corp. “When there’s a liquidity issue, all bonds are sold off. They want to grab liquidity first today as you don’t know what will happen tomorrow.”
Bonds...
China Development Bank bond yields rose nearly 30 basis points at market open on Tuesday, traders said, as the market reacted to new corporate bond market restrictions announced on Monday afternoon.
The benchmark government bond future contract also reacted, sliding over 1 percent in morning trade.
The yield on government debt due October 2019 surged 14 basis points, the most for a five-year note since November 2013, to 3.88 percent, according to prices from the National Interbank Funding Center.
The yield on Kashi Urban Construction Investment Group Co.’s 800 million yuan of debt due November 2019 climbed 75 basis points to 7.17 percent, the biggest jump since July, exchange data show. The issuer is an LGFV.
Interest-rate swaps...
China’s interest-rate swaps climbed to a three-month high, bonds dropped and stocks retreated after policy makers narrowed the pool of corporate debt that can be used as collateral for short-term loans.
China Securities Depository and Clearing Corp. has stopped accepting new applications for repurchase agreements that involve notes rated below AAA or sold by issuers graded lower than AA, according to a statement posted on the agency’s website yesterday. The move means that about 470 billion yuan ($76 billion) of outstanding corporate bonds regulated by the National Development and Reform Commission can no longer be pledged for repos, according to Haitong Securities Co.
“The regulation will damp investor demand for lower-rated corporate bonds,” said Yang Feng, a Beijing-based bond analyst at Citic Securities Co., the nation’s biggest brokerage. “That may result in higher borrowing costs for local government financing vehicles.”
One-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose 12 basis points to 3.50 percent as of 10:05 a.m. in Shanghai, according to data compiled by Bloomberg. It earlier jumped as much as 29 basis points to 3.67 percent, the highest since August.
Currency
Despite strongest FIX since March...
- *YUAN EXTENDS DROP, SLIDES MOST SINCE DECEMBER 2008
Stocks
Most Chinese stocks fell after the benchmark index reached the most expensive level in three years and stricter collateral rules for short-term loans prompted investors to sell liquid assets.
China's Shanghai Composite Index fell as much as 1.5 percent.
Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. slumped at least 3 percent. China Securities Depository and Clearing Corp. stopped accepting new applications for repurchase agreements that involve notes rated below AAA or sold by issuers graded lower than AA, according to a statement posted on the agency’s website yesterday. China Oilfield Services Ltd. slid 3.6 percent in Hong Kong after crude declined to the lowest level in five years.
The Shanghai Composite Index (SHCOMP) dropped 0.1 percent to 3,018.67 at 10:37 a.m. local time, with two stocks falling for every one gaining.
“There’s a correction in the Shanghai Composite now after rising a lot the past days"
* * *
Of course - it is not holding as bond market weakness is provbiding the unintended consequence of helping stocks stabilize...
and is now at new record highs as speculators gamble on fighting the PBOC...
But Hang Senf is fading rapidly
- *HONG KONG'S HANG SENG INDEX FALLS 0.9% TO 23,827.37 AT BREAK
despite the PBOC's fear of leverage...
The regulation change is intended to reduce leverage in China’s stock market...
This is because equity rally has much to do with leverage, and more than 80 percent of flows are retail and come with material increase in leverage, Liu says in phone interview.
“Securities firms that provided personal loans to retail investors would borrow money via repos, and the regulation change triggered a liquidity squeeze”: Liu
Move more likely to make leverage less risky rather than curb stock performance, but that’s the chain effect: Liu
* * *
In summary:
- The PBOC has aggressively taken action to reduce leverage in stock and bond market speculation
- The PBOC has tightened monetary policy - raising FX and cutting collateral availability
- The PBOC has created a major squeeze in USDCNY - stalling carry trades
We will see what kind of fallout this creates but for now stocks are holding up as FX and bond markets are turmoiling
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Somebody somewhere just had a hemorrhagic stroke
this on top of "Where's my fucking collateral?"
I love it when a plan comes unglued
Quit being so hard on the Chinese. They're actually pretty cool
"...depressing demand and putting upward pressure on yields..."
" ... with the yields of credit bonds possibly being pushed up by a few dozens of basis points as their prices fall..."
This is what I'm hearing more and more from all different parts of the global economy.
This is the beginning of the final phase. Interest rates finally make their inevitable, destructive climb. It cannot, it will not, be stopped now. As bond yield contagion sweeps the planet, we'll all wish, upon having to choose between ebola and bond yield rise-itis, that we were all infected with ebola. This bond yield shit is far, far more deadly, and will kill a lot more people a lot more quickly.
True, we are blessed that we don't have to deal with all the pollution involved with manufacturing everything on the planet. For the most part all of the Chinese I have dealt with have been traders/surviver to the bone but good folks.
Its going to really suck when that Chinese snapback happens and those 3-day sell rules on foreign stubs bite. The idea was for China to reform by allowing Chinese inflation invest in the world, not sucker global growth starved investors into China to paper over the losses incurred by gold-son malinvestments.
the pboc wants the same thing the fed does, higher trading volume. the old whipsaw is at work in every "market". there is no market, there is only the bank of china.
If it's not important enough to move gold it didnt happen...
Wow. China can't even afford the 9 cents for a bullet in the back of the head anymore. Instead it is just slitting the throats of non-SOE companies and shoving their throbbing corpses overboard. No more credit for you.
This is the flip side of TBTF-- TSTL (Too Small to Live).
long xi jin ping. short everyone else not allied
Is it racist that I thought " long" was a part of his name?
About as racist as engrish.com
http://www.engrish.com/
Or could this be part of the currency war v. the JPY and KRW? As the dollar has strengthened, the CNY has been kept pace with the USD, meaning that Chinese goods are becoming more expensive compared to that of it's close neighbors. Is this just a move to keep pace with Abe-nomics?
@ Wild Bill, ding ding ding, you beat me to it. This is an Asian currency war and not at all related to bubble pricking. Why would anyone believe that Chinese central bankers are more responsible than US, European or Japanese? They are backstreet scum when all is said and done, are they not?
Yep
We've been here before. Chinese currency accommodation with peg to relatively strong dollar means high inflation for China.
The words the Fed never, ever wants to hear - or worse - utter:
"...reduce leverage in stock [...] market speculation"
So the Ruble drops and the Yuan drops and the Dollar rises until...Russia and China peg to gold - maybe by the 20th of the month. Oops.
That can't come soon enough these days
That will be the end of the beginning.
Loyd I think you have a customer.
WOO HOO
GOTCHA
I'd be very surprised if the yuan does not resume it's chase of Stanley Fischer's New Israeli Dollar in a few more trading days.
Maybe after forcing the sale of all those single A bonds Wall St. bought to trade the Chinese bond repo market.
Wer weiss?
Google Finance is currently showing Shanghai down 5.4% That can't be good.
Especially when one considers how much of that is on margin:
http://www.bloomberg.com/news/2014-12-08/five-charts-that-show-china-s-s...
(Hint, Refer to third chart)
Yuan mi long dong.
All other things being equal, it has to be a _good_ idea to only have good collateral in the system.
Watson
The POBC is enforcing good old banking principles.
The lifeblood of the economy is the money market and discounting (repo).
The central´s bank job is to make sure that this market is not tainted with bad credit. The Fed failed miserably at that in 2008.=
I see RMB drop as a good unintended consequence for this still largely non financialized economy. It shall be devastating for the real economies of its Asian neighbors.
I do not see PBOC taming the equity market at least not before Chinese New Year. The market capitalization of the stock mkt vs the GNP is still realitively small and the push up has a large domestic retail support that PBOC is not likely to demolish without first raising domestic savings interest rate. Still juice in the equity market.
This also centralize control of the effectiveness of its monetary policy and reduce the past indiscipline of their provincial govts to embark further upon adding infrastructures to an already overbuilt stuation.
Popping the bubble will have serious consequences...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...