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This Insane Debt Chart Explains Why Chinese QE Is Inevitable

Tyler Durden's picture




 

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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Mon, 06/29/2015 - 15:44 | 6250884 elegance
elegance's picture

Bailing out the world aaany moment now...

Mon, 06/29/2015 - 15:47 | 6250897 Took Red Pill
Took Red Pill's picture

I think Chinese version of QE already exists

Mon, 06/29/2015 - 15:54 | 6250925 SWRichmond
SWRichmond's picture

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.

Mon, 06/29/2015 - 15:56 | 6250946 BlackChicken
BlackChicken's picture

The other possibility is that the global Ponzi scheme has reached it's limits.

Mon, 06/29/2015 - 15:58 | 6250952 Skateboarder
Skateboarder's picture

But, we haven't counted to quintillion yet...

Mon, 06/29/2015 - 16:02 | 6250980 Captain Debtcrash
Captain Debtcrash's picture

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. 

Mon, 06/29/2015 - 16:18 | 6251063 Rainman
Rainman's picture

Cue Professor Larry Lang : ' In China , all provinces are Greece '   circa 2011

                   http://investmentwatchblog.com/professor-larry-lang-every-province-in-china-is-greece/

Mon, 06/29/2015 - 16:19 | 6251069 Save_America1st
Save_America1st's picture

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?

Mon, 06/29/2015 - 17:43 | 6251447 Mark Urbo
Mark Urbo's picture

I agree with the Captain...

 

..China is a hose of cards.

Tue, 06/30/2015 - 15:13 | 6255191 Save_America1st
Save_America1st's picture

Confucious say, "Hose of Cards leak much water and get very soggy..."

Tue, 06/30/2015 - 00:41 | 6252897 Ginsengbull
Ginsengbull's picture

Just work up a number six on em.

 

https://www.youtube.com/watch?v=SkQ8_Xr_zVY

Mon, 06/29/2015 - 15:59 | 6250961 NoDebt
NoDebt's picture

"Over?  Was it over when the Germans bombed Pearl Harbor?  Nothing's over until WE say it is!"

- Janet Yellen

Mon, 06/29/2015 - 16:34 | 6251127 Save_America1st
Save_America1st's picture

Janet Blutarsky

 

She sure looks like she could have been his mom ;-)

Mon, 06/29/2015 - 15:58 | 6250953 NoDebt
NoDebt's picture

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.

Mon, 06/29/2015 - 16:17 | 6251006 SWRichmond
SWRichmond's picture

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,"

Mon, 06/29/2015 - 16:26 | 6251105 Never One Roach
Never One Roach's picture

No doubt.

Mon, 06/29/2015 - 18:14 | 6251554 new game
new game's picture

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...

Mon, 06/29/2015 - 16:29 | 6251097 jcaz
jcaz's picture

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......

Mon, 06/29/2015 - 16:46 | 6251208 SWRichmond
SWRichmond's picture

Except you are missing the critical point.

http://www.tradingeconomics.com/china/government-debt-to-gdp

 

Mon, 06/29/2015 - 16:47 | 6251209 SWRichmond
SWRichmond's picture

Except you are missing the critical point.

http://www.tradingeconomics.com/china/government-debt-to-gdp

 

Mon, 06/29/2015 - 17:14 | 6251341 LawsofPhysics
LawsofPhysics's picture

"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.

Mon, 06/29/2015 - 16:03 | 6250983 HonkyShogun
HonkyShogun's picture

Yes, but the problem with Chinese QE is two hours later you want to borrow again.

Mon, 06/29/2015 - 16:06 | 6251004 ah-ooog-ah
ah-ooog-ah's picture

LOL  +100

Mon, 06/29/2015 - 17:06 | 6251302 Consuelo
Consuelo's picture

Honky Tonk Man, that was the line of the day...!!!   +++++++++++

Mon, 06/29/2015 - 15:45 | 6250885 reader2010
reader2010's picture

Act Rationally©® and BTFD with the money you don't have and stocks you don't understand. 

Mon, 06/29/2015 - 16:00 | 6250966 disabledvet
disabledvet's picture

"More free. Shit to the Americans in exchange for more worthless fucking dollars...

Mon, 06/29/2015 - 16:08 | 6251017 zvzzt
zvzzt's picture

WHAT! you give me that advise for free!!!! Was paying top dollar for that sort of info at my bank - damn....

Mon, 06/29/2015 - 17:30 | 6251390 random999
random999's picture

yes but please NIRP my ass first

Mon, 06/29/2015 - 15:47 | 6250891 ZerOhead
ZerOhead's picture

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...

Mon, 06/29/2015 - 15:48 | 6250907 LawsofPhysics
LawsofPhysics's picture

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...

Mon, 06/29/2015 - 15:58 | 6250955 BlackChicken
BlackChicken's picture

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.

Mon, 06/29/2015 - 17:04 | 6251291 LawsofPhysics
LawsofPhysics's picture

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...

Mon, 06/29/2015 - 16:28 | 6251117 Pheonyte
Pheonyte's picture

Cue the feds knocking on Tyler's door demanding your IP address.

Mon, 06/29/2015 - 17:07 | 6251306 LawsofPhysics
LawsofPhysics's picture

Let them.  Wait until they realize that the call came from inside their own house.

Mon, 06/29/2015 - 15:55 | 6250933 NoDebt
NoDebt's picture

"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

Mon, 06/29/2015 - 16:04 | 6250991 disabledvet
disabledvet's picture

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...

Mon, 06/29/2015 - 18:28 | 6251615 tictawk
tictawk's picture

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.  

Mon, 06/29/2015 - 15:47 | 6250893 KnuckleDragger-X
KnuckleDragger-X's picture

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.......

Mon, 06/29/2015 - 15:47 | 6250895 Dr. Engali
Dr. Engali's picture

Exponential debt growth. We're a world full of slaves living in a banker's paradise.

Mon, 06/29/2015 - 15:47 | 6250900 FreeShitter
FreeShitter's picture

QE forever until WWIII....plain and that simple.

Mon, 06/29/2015 - 15:52 | 6250921 fudge
fudge's picture

Yup, it is indeed that simple.

Mon, 06/29/2015 - 15:49 | 6250908 Max Steel
Max Steel's picture

They have entered bull markets already .

Mon, 06/29/2015 - 15:49 | 6250909 viahj
viahj's picture

that's a lotta IOUs

Mon, 06/29/2015 - 15:55 | 6250939 Skateboarder
Skateboarder's picture

23T CNY ~ 3.7T USD: about the same velocity as the Fed, really.

Mon, 06/29/2015 - 15:52 | 6250922 NoDebt
NoDebt's picture

"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.

Mon, 06/29/2015 - 15:57 | 6250950 Dr. Engali
Dr. Engali's picture

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.

Mon, 06/29/2015 - 16:01 | 6250973 NoDebt
NoDebt's picture

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.

Mon, 06/29/2015 - 15:54 | 6250934 TheAntiProgressive
TheAntiProgressive's picture

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.

Mon, 06/29/2015 - 16:00 | 6250965 Lady Jessica
Lady Jessica's picture

Err.  Triffin dilemma.  Gotta run deficits to be the global reserve currency.

Mon, 06/29/2015 - 16:00 | 6250967 ebworthen
ebworthen's picture

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.

Mon, 06/29/2015 - 16:03 | 6250982 Salzburg1756
Salzburg1756's picture

Rotsa ruck, Gookie.

Mon, 06/29/2015 - 16:05 | 6250994 bluenose
bluenose's picture

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.

Mon, 06/29/2015 - 16:12 | 6251022 tictawk
tictawk's picture

@ 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. 

Mon, 06/29/2015 - 16:12 | 6251029 B2u
B2u's picture

run Forest run....QE doesn't work....

Sum Ting Wong....

Mon, 06/29/2015 - 16:23 | 6251087 YHC-FTSE
YHC-FTSE's picture

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.

Mon, 06/29/2015 - 16:27 | 6251100 giggler321
giggler321's picture

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.

Mon, 06/29/2015 - 16:27 | 6251114 falak pema
falak pema's picture

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...

Wed, 07/01/2015 - 01:42 | 6257101 trader1
trader1's picture

remember the days when Roubini was oft-quoted on ZH?

 

Mon, 06/29/2015 - 16:28 | 6251118 polo007
polo007's picture

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.

Mon, 06/29/2015 - 16:45 | 6251199 phyregold
phyregold's picture

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?

Mon, 06/29/2015 - 18:15 | 6251560 tictawk
tictawk's picture

@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?

Mon, 06/29/2015 - 21:36 | 6252220 InvalidID
InvalidID's picture

 

 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?

Tue, 06/30/2015 - 00:39 | 6252891 Ginsengbull
Ginsengbull's picture

We wouldn't need to buy other peoples stuff.

 

We can make better stuff.

Mon, 06/29/2015 - 16:59 | 6251274 astoriajoe
astoriajoe's picture

sure LGB debt. But what about LGBT debt? given this weeks histori... nevermind.

Mon, 06/29/2015 - 17:05 | 6251298 g3h
g3h's picture

QE has already started.

Mon, 06/29/2015 - 17:55 | 6251485 Salah
Salah's picture

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.

Mon, 06/29/2015 - 18:54 | 6251726 ramgold2206
ramgold2206's picture

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