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When Central-Planning Fails: "Stimulative" Chinese Rate Cuts Spark Surge In Borrowing Costs
China faces epic unintended consequences in its efforts to 'manage' everything. As Bloomberg rhetorically asks, what if a central bank cut interest rates and borrowing costs rose?
Well that didn't work out as expected, eh?

The reason is simple - the leveraged-speculative surge into Chinese stocks triggered by the "easy" rate-cuts sparked a major rotation from bonds into stocks - which forced the PBOC to stymie leveraged-trading and implicitly tighten financial conditions dramatically for the stressed corporate bond market.
Since the People’s Bank of China surprised markets with the first benchmark rate reduction in two years on Nov. 21, the five-year sovereign bond yield climbed 15 basis points, that for similar AAA corporate notes surged 37 and AA debt yields jumped 76. While finance companies did start charging less for mortgages, their funding costs rose as the one-week Shanghai interbank lending rate added 37 basis points.
The PBOC move misfired as it triggered an 18 percent surge in the Shanghai Composite Index (SHCOMP) of shares, prompting investors to raise cash by selling bonds and seeking loans, driving interest rates higher. Costs for riskier issuers of notes rose as regulators banned the use of riskier debt as collateral for financing. Investors dialed back expectations for further monetary easing as policy makers seek to cool the stock rally.
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“Financing costs moved in the opposite way than the central bank wished,” said Deng Haiqing, Beijing-based chief fixed-income analyst at Citic Securities Co., China’s biggest brokerage.
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“The fund flows into the stock market could nurture prosperity in the capital market, but the real economy may not necessarily benefit in the short term,” Haitong Securities Co. analysts led by Shanghai-based Jiang Chao wrote in a note on Dec. 7. “On the contrary, it could lead to further scarcity of funds, leading to an increase in interest rates.”
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“The stock market’s siphoning of funds may have threatened deposits even at big banks,” said Li Miaoxian, Beijing-based economist at Bocom International Holdings Co. “The central bank needs to take further action, either by injecting more liquidity, though not necessarily in the form of a reserve ratio cut, or taming the stocks rally, to realize its goal of lowering financing costs.”
China's Irrational Exuberance moment...
The People’s Daily, run by the ruling Communist Party, said on its micro-blog last week that some stock investors weren’t acting rationally, joining the official Xinhua News Agency in highlighting risks from the nation’s world-beating equity rally. That marked a turnaround from three months ago, when official media advocated equity investments.
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Yet again - once again central-planners fall victim to unintended consequence
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Someone can tell in simple sentence - why is it bad?
China is awash in debt and rehypothecated (borrowed against) assets. Rates rising is anathema to their financial system as it is for every other economy built on the expecation of endless costless debt.
Rhetorically, that's a no tickie no laundry, no?
Hint: Market participants in China obviously have higher inflations expectations and thus, in response to a "stimulative" policy move, bid rates higher to reflect higher inflation expectations.
We don't give a damn if you say that's your shirt or not, no tickie, no laundry, buster.
simple like USA...
Exactly. The only complicating factor is that everything is a lie in China (yes, it's even worse than in the US). Everyone's books are cooked. Every number is pulled out somebody's ass. So you'll never know anything's wrong until after the defaults pile high enough they can't be hidden any more.
http://www.inspirationalstories.com/0/91.html
run to the bottom, first will lose
China has approx 50x more sepsis in the bloodstream of its economy and financial sector than any cnBSc, Bloomturd, National Propaganda Radio, New York Slimes or Shylock Street Journal analysis would dare admit.
The fall of China's now nearly 30 year boom, with now at least a solid 7 yearlong septic sludge accumulation in the form of historically unprecedented malinvestment, is going to be epic to witness.
Do you agree that more people will buy cars if the interest rate is 3% versus 8%? Or that more businesses will borrow to expand with a 2% rate versus a 7% rate?
So where is the bank getting the money to lend? If I deposit 10,000 yuan then bank can lend that out. But what if I pull that 10,000 out of the bank and buy stocks? Will there be 10,000 for the next guy to buy a car? No.
But the bank still wants to lend to the guy who wants to buy a car. So where will the bank get the money? It has to RAISE its savings rate in order to try to get someone else to deposit 10,000 yuan. And because it has to pay more on savings interest, it has to charge more for the loan.
NoWayJose,
You take moeny from the bank to buy stocks.
You give money to seller of stocks,
Seller puts the money in bank.
In Canada since there is 0% fractional reserve banking, they don't need any deposits. If you don't believe me look it up. I think it is the only country on earth like his. (Since early 90s)
Not true at all. Every dollar lent out by Canadian commercial banks has to be borrowed from, among other sources, depositors, money market funds, shareholders, bondholders, etc. You are seriously misrepresenting the nature of 'reserves' in the banking system.
There are capital requirements, which are not reserves, they are other investments. Book value of these assets are decided upon by...banks.
No, you misread Bob's post. In the modern banking system, a bank can fund it's loans entirely from loans from other banks. The central bank discourages this practice however by setting a benchmark overnight cash rate. A bank can post collateral with the central bank and borrow at the benchmark rate, and go on to lend that money out without ever taking a deposit.
The only reason banks are still happy to take deposits is that deposits are unsecured by the bank (in many countries, deposits are secured by the government). That is, the bank does not have to post collateral against deposits (which are loans), and given how the modern economy works, deposits are a very stable form of funding because almost all of the money is in the banking system and very little exists as cash.
Time you read how fractional reserve banking works. Just Google it, you won't believen what you read. Essentially, savings are only kept at the banks as a collateral for bad debt but all money going to new credit is created out of thin air. And when the bank fails due to too much bad debt, YOUR savings will be confisquated ( bail-in, as they say ). The bank receives say 5% interest on money THEY create ( which amounts to up to 40 times the amount of your savings, depends on the Tier-1 ratio legally defined in the country where the bank operates ), you get 1% interest on your savings and YOU bear ALL risks if things turn sour. If all is well, the bank bobo's cash in multimillion dollar bonuses.
China making the switch from real estate being where they put their "wealth" to the stock market? They're good at copying us, so maybe they're waking up to the fact that PAPER wealth is where it's at.
it is just another example of 'unintended consequences'. The Fed would say:
"been there, done that"
Some day people will look back and say, "why did they put up with this?"
When a central bank has an elastic money supply, expanding money at say 15%, then anyone lending in that currency is going to want at least that 15% back, plus risk plus a profit.
If the money supply is expanded via interest rate suppression and reserve banking cartel magic, I can't see how they can expect anything other than a demand for higher interest rates downstream.
All Central Planning Fails.
OPEC is not far removed from the Federal Reserve or other Central Banks