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China Goes "Unconventional" In Effort To Tackle Trillions In Debt, Rescue Economy
Two months ago we first explained why Chinese QE may be inevitable. The Cliff’s Notes version goes like this: Beijing needs to prop up its export-driven economy by devaluing the dollar-linked yuan but that’s a risky move primarily because the country has seen $300 billion in capital outflows over the past four quarters and also because China doesn’t want to be seen as a currency manipulator ahead of an IMF SDR bid.
Conveniently (if you’re a central bank looking to adopt unconventional monetary policy tools), China’s local governments are set to embark on a multi-trillion yuan refi effort aimed at bringing the servicing costs of their mountainous debt pile under control.
The idea is to swap the existing high-interest loans — which are a consequence of localities skirting debt issuance limits by tapping shadow banking conduits for cash — for standard muni bonds which will carry yields that are more inline with the supposed credit-worthiness of the issuer. This all sounded great on paper, but when the provincial early adopters tested the waters they discovered that bank demand for the new bonds was tepid, leaving the PBoC with two options: 1) buy the bonds outright, 2) create demand by allowing banks who purchases the bonds to pledge them for long-term cash loans. Option number one would simply constitute Chinese QE, while option number two is akin to ECB LTROs and in either case, it gives the PBoC an excuse to implement a large-scale easing program and in the case of the latter option, the hope is that banks will use the cash to lend to the broader economy thus kickstarting growth. Here’s a bit of color via SocGen (note the projected size of the program):
The PBoC can do something similar to the ECB's LTRO or TLTRO, accepting LGBs as collaterals for lending to commercial banks. The PBoC has introduced a tool of such design: Pledged Supplementary Lending (PSL). This structure will provide incentives for commercial banks to load up on LGBs. The mechanism looks like this: commercial banks retire their loans to local government financing vehicles (LGFVs) that earns 6%, buy LGBs with 3-4% yield, go to the central bank and ask for long term credit at 2-3%, and then lend out to corporates at 6%. Hence, banks can earn 1-2ppt more with such a programme than otherwise.
If we are right about PBoC’s intention of helping local government debt restructuring, the total size of this programme may match the total size of local government’s debt stock at the moment. Considering that issuance for the fiscal spending in the coming years may also need some help on attracting demand, we would not be surprised by an eventual size of CNY20tn.
It could take five years or more, depending on the development of the bond market. The hope is that over time more investors will be interested in LGBs for asset allocation or other reasons. Some foreign institutional investors may already be interested if they have access. The idea is for the PBoC to give a jump-start to the LGB market, instead of dominating the market. Therefore, we do not think that the PBoC will commit itself to a targeted size or a fixed pace, unlike the Feb or the ECB. At best, it may announce a maximum volume year by year, and this year it is likely to be CNY2tn – somewhat bigger than the planned amount of new LGB issuance of CNY1.5tn.
The impact of this program shouldn’t be underestimated. Between the initial CNY1 trillion in new local government bonds issued as part of the bond swap initiative and another CNY600 billion in new supply needed to fund budget deficits, local government debt issuance is set to quadruple in 2015 compared to last year, meaning, as SocGen notes above, the PBoC will need to help create demand. Here's a look at past issuance which should provide a bit of perspective on the relative size of 2015 supply:
As of Monday, this program became official, meaning that LTROs (which can perhaps be described as a QE trial balloon) are now a reality in China.
Via WSJ:
China is launching a broad stimulus to help local governments restructure trillions of dollars in debts while prodding banks to lend more, as fresh data add to signs of a worsening slowdown in the world’s second-largest economy.
In a directive marked “extra urgent,” China’s Finance Ministry, central bank and top banking regulator laid out a package of measures to jump-start one of the government’s most-important economic-rescue initiatives: a debt-for-bond swap program aimed at giving provinces and cities some breathing room in repaying debts.
Central to the directive, which was issued earlier this week to governments across the country and reviewed by The Wall Street Journal, is a plan by the People’s Bank of China that will let commercial banks use local-government bailout bonds they purchase as collateral for low-cost loans from the central bank. The goal is to provide Chinese banks with more funds to make new loans.
In response to the new directive, the prosperous eastern province of Jiangsu this week relaunched a sale of bonds that package the debt of its local governments but that it delayed last month because banks hesitated to buy them…
“The central bank is using this opportunity to provide cheap funding to commercial banks and guide down interest rates,” said China economist Zhu Chaoping at UOB Kay Hian Holdings Ltd., a Singapore-based investment bank. “This will have similar effects as quantitative easing,” Mr. Zhu said, referring to the bond-buying programs used by the U.S. and European central banks to spur economic growth.
Helping the country’s struggling local governments crawl out from under a debt burden that totals 35% GDP and jumpstarting the economy via stepped up lending aren't the only reasons the program is necessary. Beijing’s currency conundrum has caused the PBoC to rely increasingly on policy rates to stimulate the economy and with two RRR cuts and two benchmark lending rate cuts already in the books and at least three more cuts expected this year, it was becoming quite clear that something else was needed given that economic growth is still decelerating and real interest rates are still elevated:
Here’s WSJ again:
Officials at the central bank have in recent days denied the need to resort to unconventional monetary tools, saying, for example, that interest rates can be further cut, as they were Sunday for the third time in six months. But signs abound that the economy is behaving more sluggishly than the government and economists have expected and that officials are casting about for solutions.
Data released Wednesday show investment in factories, buildings and other fixed assetsrose 12% in the first four months this year from a year earlier, the slowest pace since December 2000. The bigger-than-expected drop was driven by anemic investment in property, which has been a drag on the economy. Meanwhile, factory output and retail sales in April also came in below expectations.
The steeper slowdown is forcing policy makers to devise more aggressive measures to prop up growth, if Beijing is going to reach its already-lowered annual growth target—set at 7% for this year, the lowest level in a quarter century.
With that, China has officially entered the realm of "unconventional" monetary policy, joining the Fed, the ECB, the BoJ, and a whole host of other global central banks in an attempt to bring the supposedly all-mighty printing press and the unlimited balance sheet that goes with it to bear on subpar economic growth. We suspect the results will be characteristically underwhelming (at least in terms of lowering real interest rates, although in terms of boosting risk assets, the results may be outstanding) meaning it's likely only a matter of time before LTRO becomes QE in China just as it did in Europe.
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i was hoping, probably naively, that the chinese would serve as a counterbalance to the insanity that is QE, ZIRP, etc that is going on in the west and japan. the recent corbett report on chinese leadership's ties to the western elite and the fact that they are jumping even more heavily on the money printing train is extremely depressing.
same as it ever was. they take on moar debt, we stack moar.
Gold and silver miners had a spectacular day today.
I think Wall Street is prepping for a major default with "Greece" as the hoped for story line as the cause but more the Fall Guy for a whole load of "other shit."
Like if you can see the truth...
http://www.blacklistednews.com/The_Secretive_Bank_of_England___/43899/0/...
Taking out the world economy (Including Banks, Markets, and Currencies) in 3... 2.... 1....
me fucking too.
this will drag out the collapse another 5 bloody years as the wheels of industry grind to a halt
what the fuck is with this generation of oligarchs? It was simple - once or twice a lifetime, do a massive bubble in paper, then when the time is right flip the switch and re-evaluate hard assets/blue chips.
I think these idiots beleive that with the advent of digital transactions they can keep the paper bubble inflated ad infinitum. Well they bloody well cant because the volatility induced by propping it up is directly destroying capital and investors willingness to deploy it
Meanwhile the well to do Chinese keep buying up as much foreign RE as they can possibly manage.
"China doesn’t want to be seen as a currency manipulator ahead of an IMF SDR bid."
All I needed to know. The only reason they are "stacking", is to improve their hand at the IMF table, to get better SDR allocation. Mark my words.
I agree with this.
The whole thing is fraud.
Default to dollars, debt and oil.
Japan had another solid surplus...obviously Europe remains firmly in the mercantilist camp by devaluing as well.
The British Banks are heading to China which says to me China will take the inflation hit.
Sad State of Affairs when Russia has the only honest money outside the dollar.
not entirely, kirk, their actions with alternative banks and transfer systems suggest that they want a fully viable alternative to the IMF/world bank/BIS system, so that IF the IMF doesnt give a proper place at the table, they still have the ability to go elsewhere. Otherwise said, the IMF wont give china shit, UNLESS china has the leverage to opt out.
Whether they go it alone or thru the IMF, gold will have to be reset to extinguish debt.
Therefore the chinese government will creaste SUPPLY, not demand.... Fixed it for you.... How many times does it have to be provent that SUPPLY of Money does not create demand for it.
Oooo double the Chinese inflation! That parabola won't be pretty!
There is some part of human nature that can't deal with abstract financial instruments.
Thinking about money as these packaged, rules-regulated "instruments" is so against the intuitive nature of man, it academizes and intellectualizes something that should be instinctual and obvious. Such as, do I want to purchase a pound of flour, or a pound of grain?
That is the origin of economic thinking. Any system that demands of man that he run the following mental calculation: "Ok, if I go short on these credit-leveraged CDO swamp tranches, and the bond market craters, then blah blah blah blah..." Any system that even introduces these things into the equation is super suspect in my eyes.
In life, in honest dealing, you are supposed to keep things simple. Find a place where things have been deliberately made complex, and in most cases you've found a place where someone has set out to screw newbies based on insider information. Even the idea of financial instruments is somehow instinctively repulsive to me. Just creating them basically guarantees the continued existence of the Finance industry, because only they can understand the fine print.. ugh.
Was thinking along these lines earlier. Most folk find it too terrifying to consider that such things go on for the reasons stated; it actually offends their sense of reality and justice. The great complexity is a refuge for dishonesty, corruption and criminality masquerading as 'finance'
Modern finance is easy to understand. Nobody has the money to pay for anything. A certain group of people have no skills and can't produce anything for themselves. So they came up with a way to allow people to think they can afford things. People buy the things they can't afford and pay the people who can't produce anything for themselves for the privilege of allowing them to buy what they could not afford.
The people who couldn't produce anything and possess no valuable skills now have the money they need to buy things they want. The more they get people to buy things they can't afford, the more money the bloodsuckers get.
This doesn't end well for China.
China’s Total Debt Load Equals 282% of GDP, Raising Economic Risks - Real Time Economics - WSJ
Ah an almost entire gov world of nice quicksand debt!
That must have been why falling into quicksand was pretty much a daily occurrence in all those movies I saw as a child!
lol both usa nd japan are ahead of china in total debt load to their gdp . wsj propaganda tool need to figure that also
Question is can one unteach math to a zillion chinese in one year?
Better make that overnight!
Gonna need some mind erasures!
LOLOLOL!!
Debt is owes itself?
Wow, I wish I had that problem.
Most of that debt is dead man debt, or perpetual slavery.
Want to get out of prison, take on a dead man's debt.
If you're late, back you go.
There are no bankruptcy laws in China.
Generational debt keeps piling up long after the original holder is dead.
I'd love to see a real article on ZH about the Chinese debt problem.
so once again the cure for too much debt, is more debt but at lower interest rates.
So even though you will still be paying back far more than you borrowed, your payments on paper are lower, which allows you to borrow more money and still pay what you were paying, only for a longer period of time.
Just fucked up on every level. But nobody cares as long as it sends stocks up.
Monkey see, monkey do.
Monkey do the same as you.
(They probably don't use that nursery rhyme any more)
My great grand-children will pay you thousands, for one dollar today.
Um, it's not unconventional, it's entirely expected. In fact it has been expected for years now.
Here's what happened:
The central government forced high speed rail, subways, highways and other infrastructure into existance.
The local governments make their money from land sales.
Now, if the local governments will see increased land values from these projects, it only makes sense that the local governments pick up the tab for all the projects. Afterall, the higher revenues can be used to pay it off.
The central government ordered the banks (which it controls) to issue loans to the local government.
The local governments DID see increased revenue, but it's not infinite and they were under pressure to deliver more growth. So a good chunk of that cash went to local projects, many of which were not all that needed.
So what you are seeing now, is the central government issuing government bonds to the banks in exchange for the local debts. This is now a debt that the government owes to itself and can basically just write off as it is all RMB denominated, owned by government banks. But sure, let's cry about it. Next when there is no disaster I'm sure everyone will cry that China is not playing by the "rules".
One thing that amazes me in China is their builidng super highways and bullet trains but blocking 90%+ of the internet.
honestly speaking, as a long time expat. yes shit is blocked, but guess what? most of it is trash anyways. nothing of value is being lost really. my internet is fast as all fuck now, reliable and overall pretty awesome. ok, so they block the NSA spy tools, so the fuck what? The US plays the same game... if you want to operate in the US market, you are required by law to comply with data demands (and oops, that shit gets abused). China has every right to do the same and make similar demands. Don't want to comply for whatever reason? Then you get shut the fuck out.
Wait a fucking second. The Chinese government controls its central bank and issues its own money not as debt as in this land. The central government controls all local governments completely in politics and finance. My question is whom local governments indebted to? If you the central government, the slate can be wiped clean without any problems. Why the hell they have to monetize the local debts? It doesn't add up.
the central government told the local governments to borrow and the state banks to loan to them. the idea was that it would put a cap on the land price gains and keep the local governments from going crazy with new money. this is just transferring the debts where they should have been in the first place, but in the end it's all stupid and effectively being wiped out.
this is a system which cannot and does not exist in the US, and because of that the US has zero understanding of it. it doesnt play the game by US "rules" so they just bitch and moan about it.
If that's the case, why didn't they lend the money to local gov at zero interest with a very long dated balloon payback in the future in the first place? So local gov got forced to pay principle plus interest back. So you're saying interest payment is to make state commercial banks richer? But that is entirely unnecessary since it can print money as money not as debt instrument such as FRN. Any explanations?
because it was an attempt to make things seem normal by us standards i guess? fuck if i know why it was structured the way it was.
the end result is that the banks get to swap debt for bonds, and those bonds are used to meet their capital reserve requirements which frees up more for lending. In return the government "owns" the local government debts, which it can write off entirely, or even more hilariously, investigate for political reasons to hunt for corruption cases. End result is the local governments are now more tied to the central government and can't get get away with as much shit.
Most of these gubmints, Eastern and Western, are desperate for cash and that's why some are taxing bank deposits, increasing property taxes, reducing services, tightening their grip on their economies, etc.
Central bank daisey chain-- the QE handoff. And of course equity futures exploded at 2:15AM EST on no news but hope that the most recent QE provides "growth" ((of course mirroring USD/JPY)