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Chinese QE Calls Officially Begin: Bond Swap "Sucks Liquidity", "Contributes To Stock Slump", Broker Claims
On Monday, we highlighted what we called an “insane” debt chart and explained what it means for the PBoC. Here’s a recap:
China has launched a bewildering hodge-podge of hastily construed easing measures that 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.
Despite it all, China will likely continue to cut 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.
With that in mind, 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.
As a reminder, we've long said China's LGB refi initiative would eventually form the backbone of Chinese QE. Here is what we said in March when the program was in its infancy: "It seems as though one way to address the local government debt problem would be for the PBoC to simply purchase a portion of the local debt pile and we wonder if indeed this will ultimately be the form that QE will take in China." Similarly, UBS has suggested that when all is said and done, the PBoC will end up buying the new munis outright. From a March client note:
Chinese domestic media citing "sources" saying that the authorities are considering a Chinese "QE" with the central bank funding the purchase of RMB 10 trillion in local government debt. In fact, the "sources" seem to be some brokerage research reports speculating ways of addressing the stock of local government debt, following the MOF announcement that local governments have been given a RMB 1 trillion quota to issue bonds to replace other forms of local government debt.
And so, here we are barely a month into the new LGB debt swap initiative (which, you're reminded, has already morphed into a Chinese LTRO program after the PBoC, recognizing that banks would be generally unwilling to take a 300bps hit in the swap, promised to allow participating banks to pledge the new munis for cash loans which can then be re-lent in the real economy at 6-7%) and the calls have begun for outright QE. Here's Bloomberg:
PBOC should directly or indirectly buy local gov bonds to ease concern that long-term interest rates will climb and help lower leverage, Haitong Securities analysts led by Jiang Chao write in a note today.
Local govts will use up 150-200b yuan of debt swap quota per week: Haitong
About 1.4t yuan of quota remaining, to be used up in 7-8 wks: Haitong
China may announce 3rd installment of debt swap quota in 4Q: Haitong
Local debt issuance sucks liquidity, reduces banks’ capital to buy bonds, contributes to stock slump: Haitong
Note that this rather hyperbolic appeal for implementing full-on QE in China checks all the boxes: there's a reference to bond market illiquidy, an assertion about constraints on bank balance sheets (which, with credit creation stalling in China, is a big deal), and most importantly, a contention that somehow, the LGB debt swap program is contributing to the implosion of China's all-important equity bubble.
A few more 'independent' assessments like these is likely all the PBoC will need to justify joining the global QE parade.
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How long until everyone is doing QE?
Helicopters ?
Airwolf QE Time !
https://www.youtube.com/watch?v=aqcQUmKJEK8
while after China, that bascally IS everyone... everyone relevant at least.
Who's not doing QE? Hell, for all intents and purposes, it's a tradition handed down from undeveloped third world back water cesspools to the developed modern sane world.
And for some of youse out dere, no, I'm not gonna bother to add the sarc tag.
Of course the Chinese are in the synchronized diving league. The USA and UK simply cannot allow a strong alternative currency; they need synchronized diving, not a race to the bottom.
Lately, Zerohedge seems to be the only place that feels real...that is a scary thought.
Lately? It's felt that way since 2009.
Yeah..you're right. The alternate reality just hit hard today.
Strangely, I've been asked to a few lunches, coffees, etc., of late by folks asking the very same questions of the last 5+ years who have now woken up, so to speak.
With each one, I've pointed out that none of the current madness has been unanticipated. There has as of yet, been no Black Swan.
Everything has been right out there in the open for all to grasp if they'd just see instead of look and listen instead of hear.
How many bolted to the nearest coin shop after paying the check?
… you’d be surprised by the number of Thinking People who keep an eye on this “Doom Porn site” !
try theonion.com ...
I can't recall the last time any new physical products actually caused things to "improve". Now it is all money printing, repos, reverse-repos and other black magic. The latest stick save while the entire hockey team has a bad cough and terminal cancer.
Hard to find a more retarded call. But fully expected. After all, from a broker.
Fees.
"Both countries go along as willing pawns simply because they have been re-created post-war as export nations totally reliant on weak currencies."
I understand you are saying China is also an export nation totally reliant on a weak currency, and I can understand the reasons leading to the position they find themselves in. But, unlike the Germans and Japanese, is it of their own making, simply emulating policies of the West leading to the inevitable outcome?
Have they been screwed again by the West? I thought Zhou Xiaochuan was smarter than that.
Please elaborate...
China wants to take the controle of all the liquidity in the financial market. the real battle begin now. les see the checking hand.
The Spice must flow. I wonder how long until India jumps on the QE bandwagon.
The LGBT market is growing pretty exponentially too, but I don't know if that would work in China too well, would it? I assume they're pretty draconian about that, but maybe not? Shrug.
In other news, the Shanghai composite index closed up 5.55% on Tuesday, a 6 year record.
Were some of the huge drops >5.55% in the week or two prior records also?
Here is the starting point.
http://michaelekelley.com/2015/04/28/next-recession-will-start-with-this-country/
Here are some more signs of a coming recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
What was left out of this article was the critical point. This is that the Chinese have a public banking system that means that they can issue money interest free and simply cancel debt when they want to, while the west has a private banking system that means nothing gets forgiven. What this means is China can get away with QE while we cannot.
Ultimately all countries will go QE and Fiat worth nothing.
Sad that the Chinese is entering in that shit it's nearly like a virus.