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This Insane Debt Chart Explains Why Chinese QE Is Inevitable
Last week we took an in-depth look at how China’s bewildering hodge-podge of hastily construed easing measures can't seem to get out of their own way. Perhaps the most poignant example of this is how the country’s massive local government debt swap effort — which, as a reminder, aims to restructure a provincial government debt load that amounts to 35% of GDP — is effectively making it more difficult for the PBoC to keep a lid on rates, even as the central bank has embarked on a series of policy rate cuts, with the latest effort coming over the weekend. Here’s how we described the situation last week:
Because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.
Or maybe more, according to Nomura, who estimates the burden may be closer to CNY23 trillion. As we saw on Monday, the PBoC has now effectively lost control — that is, the central bank’s latest policy rate cuts failed to arrest the rapid collapse in Chinese equity prices, meaning monetary policy in China, having long ago failed to shore up the decelerating economy, is now utterly ineffective at propping up stock prices as well.
Despite it all, China will likely continue to cut benchmark lending rates and RRR rates over the course of the next six months in a futile attempt to avert an economic and financial market collapse. In the end, the only recourse will be ZIRP and ultimately QE, just as we predicted some four months ago.
Consider all of the above, and then consider the following chart from SocGen which shows the projected supply for local government bond issuance in China. If the new muni bonds issued as part of the debt swap program are effectively treasury bonds — as Citi contends — then ask yourself the following question: how effective can benchmark rate cuts possibly be in terms of keeping a lid on rates with CNY20 trillion in new supply of what are effectively treasury bonds flooding the market? The answer is “not very effective,” which means that someone will need to soak up that supply directly. Enter Chinese QE.
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Bailing out the world aaany moment now...
I think Chinese version of QE already exists
CNY20 trillion in new supply of what are effectively treasury bonds flooding the market? which means that someone will need to soak up that supply directly.
Do I have to explain everything? China is exploding the supply of its Treasuries in order to make the Yuan more international. China wants the world to soak up that supply directly, in order to replace the US Treasuries whic currently are held by everyone.
My god, it's so obvious, and yet whoever wrote this article....
IN ORDER FOR YOUR CURRENCY TO BECOME A RESERVE, IT MUST BE INTERNATIONALLY HELD ON THE BALANCE SHEETS OF MAJOR NATIONS AND TRADING PARTNERS, AND CENTRAL BANKS, AS A RESERVE ASSET. DUH.
The other possibility is that the global Ponzi scheme has reached it's limits.
But, we haven't counted to quintillion yet...
I know many think that the Chinese are going to wipe the floor with the US in the upcoming monetary shift but I see a system is even more precarious than ours. I keep hearing about how they are great planners and ‘play the long game’ but I thought that’s just central planning that we always rail against. We’ll see but I have serious doubts about China.
Cue Professor Larry Lang : ' In China , all provinces are Greece ' circa 2011
http://investmentwatchblog.com/professor-larry-lang-every-province-in-china-is-greece/
does this mean the Chi-coms need to disclose thier gold holdings soon? Show that they've got 20 or more thousand tons of phyzz gold and maybe even more of that in silver?
I agree with the Captain...
..China is a hose of cards.
Confucious say, "Hose of Cards leak much water and get very soggy..."
Just work up a number six on em.
https://www.youtube.com/watch?v=SkQ8_Xr_zVY
"Over? Was it over when the Germans bombed Pearl Harbor? Nothing's over until WE say it is!"
- Janet Yellen
Janet Blutarsky
She sure looks like she could have been his mom ;-)
SWR- I doubt those nations, their trading partners and CBs are going to be buying it in it's current form- municipal debt. Have the PBOC buy it, convert it over to Chinese Treasuries.... then you're cooking with gas.
The key issue is...the issuance of debt, denominated in Yuan, its acceptance, and the creation of massive trading mechanisms for that debt. As the Western currencies die their slow "death-of-a-thousand-(budget)-cuts", the capital will seek someplace to go. It is obvious that the Chinese wish this to be an orderly transition. It is obvious they know they need to massively scale up their international trading platforms. It is obvious that this is just one more step forward.
Will partners in the AIIB maybe be interested in these? Damn right they will. If you want to internationalize your currency, you have got to make it available, make debt denominated in it liquid, and in order to do that it must be both credible and plentiful.
Besides: "the newly issued local government bonds are really just treasury bonds,"
No doubt.
so sw what you are saying is all this debt backed by the faith of chinas' future. ultimately there are some serious issues with your thesis. empty cities and infastructure. overcapacity to the nth degree. i will say it in one word- deflation...
Given your logic, SRW, Detriot debt is now US Treasury debt..... Ain't gonna fly, the rest of the world recognizes Chinese bicycle shop paper when they see it, but nice try in trying to leap most of the tenants of global finance......
Except you are missing the critical point.
http://www.tradingeconomics.com/china/government-debt-to-gdp
Except you are missing the critical point.
http://www.tradingeconomics.com/china/government-debt-to-gdp
"IN ORDER FOR YOUR CURRENCY TO BECOME A RESERVE, IT MUST BE INTERNATIONALLY HELD ON THE BALANCE SHEETS OF MAJOR NATIONS AND TRADING PARTNERS, AND CENTRAL BANKS, AS A RESERVE ASSET." -- YES, of course you also have to be very transparent about your money creation as well...
good luck with that.
Yes, but the problem with Chinese QE is two hours later you want to borrow again.
LOL +100
Honky Tonk Man, that was the line of the day...!!! +++++++++++
Act Rationally©® and BTFD with the money you don't have and stocks you don't understand.
"More free. Shit to the Americans in exchange for more worthless fucking dollars...
WHAT! you give me that advise for free!!!! Was paying top dollar for that sort of info at my bank - damn....
yes but please NIRP my ass first
Chinese QE is inevitable?
Then what was that $23T credit bubble they created? > http://theeconomiccollapseblog.com/archives/the-23-trillion-credit-bubbl...
Oh right... now the Central Bank has to buy all of the aforementioned debt that's gone bad...
at this point, what difference does it make?
Keep it simple, start by publically executing Tim Geithner's "arsonists", then execute Tim for good measure.
We can discuss real ideas/solutions while we make blood pudding...
LOP, many readers here don't know you and might not be aware of you not advocating those actions, but using a bit of satire. You might want to clarify that.
How are things at the NSA? Please, I don't advocate anything.
Such "let the majority eat cake" monetary experiments have been tried before and the outcome will be no different this time around. Won't be a damn thing any single person can do about it either.
I blame the periodic devolution of man...
Cue the feds knocking on Tyler's door demanding your IP address.
Let them. Wait until they realize that the call came from inside their own house.
"Then what was that $23T credit bubble they created?"
That's the feed stock for the QE program. If there was no debt, there could be no QE. That is why debt is good. And the more there is, the gooder things are.
- Paul Krugman
Well...according to Dick Cheney "deficits don't matter either" so it looks like both sides of the aisle are in agreement about one thing at least: "when in doubt just print like mother fuckers...
Totally dumb and spoken like a true ivy league idiot! For how long do you think you can solve a debt based problem by creating more debt? If you monetize the debt, you create more poverty as the more and more of the middle class get destroyed via purchasing power destruction and you shrivel up the middle class. Never forget the strength of America was that it has one of the widest middle class. In turd world countries there are a few rich and a multitude of poor. Middle class does not exist. Mr. Krugman, you fail, Go back to economics 101.
Crap, everything the Chinese has done so far is basically a form of QE so now open the spigots even more until the Yuan looks like the Zimbabwe dollar...brilliant.......
Exponential debt growth. We're a world full of slaves living in a banker's paradise.
QE forever until WWIII....plain and that simple.
Yup, it is indeed that simple.
They have entered bull markets already .
that's a lotta IOUs
23T CNY ~ 3.7T USD: about the same velocity as the Fed, really.
"As we saw on Monday, the PBoC has now effectively lost control"
But what about all that envy-of-the-world centralized control that has clearly beat the stuffing out of stupid old concepts like free markets? Every government and central bank in the world has been envying and trying to copy their amazing infallible system for the last 6+ years. You mean to say they were <gulp>..... copying a bad system? Oh, no, please, say it's not so.
Remember how the networks were blowing the Chinese during the Olympics in 2008 ? They were marveling over how they could get things done with top down management and bemoaning the fact that democracy was so messy. I had a pretty good idea where we were headed then.
Yep. I remember that. I also remember vaguely having seen that movie before somewhere, too. Don't need to sit through it all again to recall how it ended.
Soon to be the "new" reserve currency. Another criminal central banker asked the Chinese "Why the new?." and the answer is why the "new label"is what is new....... Same old, same old crooks and criminals claiming a "free" market and "free" trade. Implosion coming in 3,2,..1.
Err. Triffin dilemma. Gotta run deficits to be the global reserve currency.
Rates? Money? Debt? Listen, money is free, so let's just start at the other end of the ledger and enact a worldwide debt jubliee from the bottom up.
We put the bankers and politicians to work scrubbing toilets and sweeping the streets. Problem solved.
Rotsa ruck, Gookie.
imho that is an idiot chart from SocGen. china only have 18, maybe as u said, 23 trl local debt. the new issued muni bonds are targeted to repay old local gov debt, thay are not "new debt". this is just like fed talked about to purchase muni bonds.
i dont like chinese gov, but before spread bad news, pls make sure it right. otherwise just make u look stupid.
@ Paul Krugman
By monetizing bad debt, CBs are depreciating the buying power of the currency which creates millions of poor who have no assets and their purchasing power is destroyed with the depreciation of the fiat medium of exchange. All that ends up happeing is the divide between the rich and poor only gets steeper.
run Forest run....QE doesn't work....
Sum Ting Wong....
Haven't really been following the China markets for awhile but didn't they launch QE-lite back in April? Anyone remotely sane looking at the result of that implementation would surely think before predicting that they would launch QE AND ZIRP to infinity. I mean, half of that chart is wildly predictive to put it mildly.
There's a HUGE problem with NPLs that has not been addressed and this is my main variable for a potential banking sector collapse in China, not this nonsense. As for the assertion that the China markets are government QE-driven as it is in the West, that really does not hold water when one considers the massive rise in retail investors we have all been witnessing in their tulip mania.
Wishful thinking prehaps but there's a chance that China may go the other way and start their way-overdue cleaning of local government/finance corruption in the way they do best: A bullet to the head and invoice to the family. It has not been forthcoming, that is true, but they might be waiting for things to get really bad in equities to give them reasons to clean house. Nobody outside in their right minds are ever going to buy Chinese LGBs anyway (Except maybe the squids hoping to use it as leverage sometime) and they really don't have the muscle to force satellite states to buy them.
I have it first had that Xi Jinping will be print 3,726.33CNY cheques for every person named Wong in main land China to spend and boost the economy. It's thought the deed poll revenues alone will be in the trillions with the net result the NSA can't track'em all with the same name.
Here is a contrarian view to what ZH projects on what will happen if the FED raises interest rates as it is thought will happen in Sept. 2015 :
http://www.marketwatch.com/story/fed-rate-hikes-wont-destroy-emerging-ma...
remember the days when Roubini was oft-quoted on ZH?
According to Macquarie Research:
http://personal.crocodoc.com/lHeFs3w
China drama & Greek farce
Are Central Banks at the end of the road?
Greek and Chinese dramas question role of Central Banks…
- The latest developments in China and the Eurozone inevitably invite the question whether Central Banks are coming to the end of the road. Given the limited impact of their policies on real economies with stimulus largely being confined within walls of financial assets, has the time of reckoning finally arrived?
- As discussed in the past (here & here), the only sustainable LT outcomes for the over-leveraged and over-supplied global economy are either: (a) allowing the deflationary cycle to go through, thus eliminating global excess capacity in service and merchandise economies; (b) elimination of excess debt via some form of hyperinflation and/or co-ordinated debt cancellation; or (c) banning capital markets via nationalization. Given that neither of these alternatives is attractive, involving pain for either borrowers or savers; intergenerational transfers or courting sharply lower ROIC, CBs would rather kick the can down the road in the hope that a solution would be eventually found.
…and should CBs place monetary policies in neutral gear?
- PBoC’s half-hearted attempts last week to slow the pace of appreciation of the equity market have inevitably and predictably resulted in severe correction. The double-barrel reduction in interest rates and RRR on Saturday is a belated realization that it is courting a significant economic backlash. As discussed here, we do not believe that China’s de-leveraging is either possible or desirable. Having reached leverage of ~3:1, any debate about the evils or virtue of debt has passed a long time ago, and the only viable choice from now on is to continue leveraging, though perhaps at a somewhat slower and safer pace.
- In order to continue leveraging, PBoC has to make sure that: (a) there is no sharp correction in any of the key asset prices; (b) at least some asset prices are appreciating; and (c) there is no further contraction in nominal GDP. This requires a combination of exceptionally stimulative monetary and fiscal policies as well as trust that a country is not yet in a liquidity trap and that it is capable responding to stimulus in safeguarding nominal GDP. The game is no longer about reaching 7% real GDP growth but avoiding zero nominal GDP.
- The same dynamics are playing out in Europe. The battle is between politicians who have not yet grasped that deleveraging is no longer feasible, and the ECB, which is fully onboard. Whether Greece is allowed to exit does not alter the basic argument that the numbers do not work, unless leveraging continues.
China is at very early stages of stimulus
- We maintain that China is at an early stage of significant (probably the largest globally) stimulative action. We expect that over the next two years, RRRs would be reduced to historic levels (i.e. 5-6%); interest rates would be lowered to zero and fiscal spending would become much more aggressive (including multiple banking re-capitalizations). The only question is whether China would send a massive inflationary pulse through global economy or would aim for more moderate impact. Initially, the PBoC would be aiming for moderate outcomes, ensuring support for asset prices but avoiding more disruptive action. However as we progress into 2016-17, more drastic actions might be needed. In the meantime, we remain O/W MSCI China, as equities remain the least systemic asset class that can be leveraged, at least for now.
Am I the only one asking this insane question?
Is the US's trump card the ability to be the only nation in the world who can raise interest rates while the entire rest of the world has to cut them? Would that not flood all investment money to the US, and then couldnt we just sell off our debt?
@phyregold
If the Fed raised interest rates it would kill the fragile economy. If all the economies around are collapsing, our exports would collapse and how do you expect a debtor nation such as ours to buy other people's stuff without vendor financing?
If we raised rates and the world economy took a shit, flight to safety would be to the dollar... We could print up another trillion bucks nearly free of charge and buy resources and manufactured goods with the other peoples money. Same as it's been since the 70s really.
Why would you ask such a silly question?
We wouldn't need to buy other peoples stuff.
We can make better stuff.
sure LGB debt. But what about LGBT debt? given this weeks histori... nevermind.
QE has already started.
China's in the final stages of a monetary collapse due to its inability to transition to somekind of full market-based economy. Mao's old command-and-control structure won't let go; everything's still centrally-driven, just like the emperors of old. Time has caught up with Mao's founding natal chart: Pluto's about to wreck their commie wet dream.
bullion guys its the only cure/protection from this shit...
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