How China Is Keeping Its Financial System From Collapsing, In One Chart

Tyler Durden's picture

Overnight, Bloomberg has posted the latest article in a long-running series of warnings about the dangers of China's, now $9 trillion - and fast approaching 100% of GDP - shadow banking system, which it says is playing a "game of chicken with investors", and which boils down to the following: if there is a high profile failure of any one of the countless wealth management product, or WMPs, which comprise the vast majority of China's shadow banking system, and if the government does not bail it out - as it has threatened on several occasions to do - there may be a mass "run on the shadow bank", resulting in unknown adverse consequences for China's broader financial markets.

Indicatively, WMPs comprise the biggest category of AMPs, with assets of around 29.1 trillion yuan ($4.2 trillion) at the end of December, according to the CBRC. They’re also the products most widely viewed as risk free by Chinese savers.

That said, the stresses facing China's "risk free" shadow banks are nothing new - we first profiled their plight back in 2014 - and over the past few years, the PBOC has been actively involved in providing the much needed liquidity support to not only China's "shadow" financing vehicles, but its entire financial system.

This is what DB wrote in a April 7 report: "as we wrote in our January report “PBOC liquidity facilities: Doing whatever it takes” we believe if necessary the PBOC will provide as much liquidity is required to meet the goals of the Chinese leadership, even if this involves a degree of “Moral hazard”.

And visually, this is how China's central bank has quietly engaged in the biggest bank bailout of the past two years, with virtually no discussion in the mainstream press.

Is it time to panic, then? On one hand, no. As DB writes, "the rapid expansion of the PBOC domestic balance sheet that we have seen over the past 12-18 month is we think of particular note. We continue to believe that the chance of an uncontrollable domestic liquidity event remains remote unless we see a major policy mistake."

However, in a subsequent post we will lay out the DB case for why while not imminent, the time to be increasingly worried about China's market is fast approaching.

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Harnar's picture

Does anyone know what happened to "thelibertymill.com" getting a redirect to http://scottmoresimft.com/

 

Does anyone have the IP of thelibertymill.com?

hedgeless_horseman's picture

 

We continue to believe that the chance of an uncontrollable domestic liquidity event remains remote unless we see a major policy mistake."

 

"The system will be fine, provided nobody panics."

http://www.zerohedge.com/news/2017-03-02/systems-down-all-thursday-after...

Stuck on Zero's picture

Clearly the Chinese Central Bank is playing a Martingale Strategy in the capital markets poker game.

Rabbi Chaim Cohen's picture

Clearly, Chinese banking support is a direct byproduct of the reason world power seems so bent on starting WWIII ASAP... the debt-fueled inflationary world economy in endgame.

JRobby's picture

"No one suspects the shadow banking system !!"

The cunning !!!!

Justin Case's picture

The Liberty mill = 54.152.163.13

You may not always connect to sites directly. They have cloud servers or other protection in place to prevent DDOS attacks and or other domain assigned to that IP.

I can connect no prob. so site is up.

Bam_Man's picture

If the "Mainstream Press" don't report it, then that means it's not really happening, right?

They are going to need a "gold-backed" Yuan, cause the Yuan they have now is living on borrowed time.

Justin Case's picture

China isn't planning to back the currency with gold. Their intent is to use gold for trade, eliminating the discrepencies in manipulated currency values from country to country looking for trade advantages.

Ghordius's picture

+1, but even there, I'd say they keep it as a threat and as a back-up plan

DaBears's picture

Then the Chinese will rush to exchange Yuan for gold by the trillion$, which there aren"t enough gold in the whole world that can cover. Getting your hands on physical gold in China is nearly impossible now days unless you pay unrealistic premium for gold jewelry.

GunnerySgtHartman's picture

"Games of chicken" never end well, especially when you're talking this amount of money.  Ask Lehman how well their game of chicken in real estate worked out.

 

Oh, wait ...

Justin Case's picture

Lehman was the sacrificial lamb. They were long big time in the PM's and had to be taken down and fire ringed ASAP.

Pasadena Phil's picture

Are these WMPs and AMPs supported by HFT algos trading in dark pools using index ETFs and derivatives to rig the market? If so, they'll be fine. Just keep printing money and issuing bogus government economic data. It's been working for us so....

peterk's picture

just watch US LIBOR.. thats the trigger

buzzsaw99's picture

broader markets in china are never at risk. mr. valentine has set the price. the biggest risk for them continues to be outflows. ironically their biggest problem is also the solution to their biggest problem, that is to say a weaker currency. however that in turn stokes their real biggest fear, which is a disgruntled population due to currency debasement. for that they have guns.

OCnStiggs's picture

China has the gold to make that move. They have said that a GBY is in their future. And the current Yuan is trashed by owning US debt, which will never recover. Their only choice is going to a Gold-Backed Yuan (GBY). I have seen rumors they intend to do that in June. That will shake the world fiats for sure.

Must be the same reason Greenspan is pushing the idea to replace the USD. With a worldwide fiat meltdown starting, where else can state banks head? More phoney paper? Nope. The US has waffled between gold and fiat a few times and each time we return to gold. There are no other alternatives.

Plan accordingly.

LawsofPhysics's picture

Unfortunately, in order for a communist, centrally-planned, and controlled state economy to exist, they must be able to devalue their currency on a whim...

Go ahead China, peg to gold, I triple dog dare you.

withglee's picture

Their only choice is going to a Gold-Backed Yuan (GBY).

Want to explain why and how that works. Bet you can't!

Justin Case's picture

One of the major problems, despite the large Chinese economy, is that the yuan is not a freely floating currency. For this reason alone, it is not going to be a contender as a reserve currency. How could it be, if it is not openly traded?

As for the idea of a gold-backed yuan, Bloomberg ran a story last week pointing out that it would require an exchange rate of as much as $64,000 per ounce. With gold currently trading around $1,200, this seems highly unlikely. And if gold were to go anywhere close to $64,000 per ounce, then the world will have more important stories to deal with.

The Bloomberg story also stated the following: “Theoretically, to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal, they estimated. That’s nine times the nation’s official holdings and about 6 percent of all the bullion ever mined globally.”

In other words, there is no possible way the Chinese central bank could have a fully backed gold standard with the current yuan in circulation. It would require some sort of new currency to be issued, which in itself would create a lot of problems with all of the contracts and debt denominated in yuan.

Consuelo's picture

 

 

"Is it time to panic, then?"

 

Well ---- of COURSE IT IS...!!!!!!!

The only problem is, I've been 'panicking' about China since 2008...   Can we at least have an intermission...?

debtor of last resort's picture

By 2020, China reaches 500% to underlying GDP ratio.

https://surplusenergyeconomics.files.wordpress.com/2017/03/china-2-19-3171.pdf

 

No wollies no wollies...

 

Justin Case's picture

"By 2020, China reaches 500% to underlying GDP ratio."

Japan is still way ahead, they're half way to that ratio now.

Most of China's debt is internal and not dependent on IMF banks or treasuries or foreign bond holders. They have a new infrastructure and at the same time they are constructing the One Belt One Road mega project.

scraping_by's picture

"Most of China's debt is internal and not dependent on IMF banks or treasuries or foreign bond holders."

Important point. Most developing nation financial crises are caused, not an accident. Most of the hand-wringing about the PBOC balance sheet assumes the IMF or the Bank of England or JP Morgan is going to come along and force the national economy into a debt-austerity-recession-debt death spiral. The way they've done in Africa, Asia, South America, and now, Southern Europe.

But China hasn't drunk the globalist Kool-Aid. The have a nationalist economic policy and, in the event they drive their customers into recession, can draw in and sit while the troubles pass. Insert clever Confucian saying here. 

Justin Case's picture

"China hasn't drunk the globalist Kool-Aid."

Exactly. This is why all the demonization of Russia and China. The globalists want control over the money supply via private banking system. Once that is inplace the money changers control the country and economy.

Russia and China are protecting their incomes on 2 fronts. The west knows the sanctions on Russia are having the opposite effects intended. Russia has prospered. The globalists have to find a way to cut off Russia's revenue from gas and oil. Syria is the pivital point for the mideast suppliers to deliver gas and oil to EU, sidestepping Russia.

China wants to ensure freedom of navigation through the South China Sea for it's massive exports. No one has moar interest in that passage than China. If merica gets a foot hold in there they can disrupt or close the passage China's export income gets impacted severly. There is another route but the costs would be extemely moar expensive. Little wonder that merica has pin pointed these 2 areas as points of interest.

Cut the 2 powers down to size economically. Woar would be far too expensive, where as Syria was thought to be a push over is turning out to be moar dificult than the globalists anticipated. Putin knew their strategy before they started.

Chess master vs checker players

OpenThePodBayDoorHAL's picture

Um, uh, the US has a nominally "capitalist" system, that's why on the day the US could have bought 100% of insolvent Citibank's Class A equity for $4B, instead we gave them $174B in direct gifts and > $1T in guarantees. Nationalization was never on the cards politically.

The Chinese however do not have such a constraint, at the flick of a switch they can do a debt for equity swap, nationalize any SOE or bank they want and nobody would blink an eye. Because after all they are "communists" and just a decade or so ago these were state-owned entities anyway. They are already quietly doing these swaps.

Justin Case's picture

It's difficult to find very many reasons to label China as communist these days. The ruling party in China still calls itself communist. The international media still likes to refer to China as communist. But where is communism still manifested in China today? Where are the basic Communist values of sharing and equality evident in Chinese society now? They cannot be found. Quite simply, China is no longer a communist country.

If we are looking for evidence of communism in China, the first and most important place to look is at the economy. The economy in China is now decidedly capitalistic in nature. Average Chinese citizens can start their own businesses and put their income into private bank accounts. Chinese citizens can buy stocks in companies and enjoy the revenues or suffer the losses. As of just a few years ago, private property rights have been greatly enhanced in China, and Chinese people can now be more secure that their land will not be taken away from them. Let us not forget about the heavy international investment that has been permitted in China which has played a major role in fueling this developing and booming economy. As a result, there are very rich people and very poor people in China as well as an emerging middle class. Chinese citizens, who always carried a good sense for business but were restricted from entrepreneurship in the past have now been more free to take risks and build successful companies. Thus capitalism has transformed the Chinese economy and changed people’s lives forever.

Some people just can't understand that China now employs capitalist and socialist economic policies! Its ridiculous! How can people be so stupid! China has been reforming from communism for 30+ years now. So many people never change their mind, but never over something so stupid! its not like this is up for debate, 10 minitues on google will show anyone that China is no longer 100% communist.

HRClinton's picture

I'm told that there is no problem until the Debt/GDP reaches 9.99 E+99

They got plenty of zeroes and ones until then.

CHX13's picture

Isn't it ironic that essentially-bankrupt-themeselves-DB is fingerpointing at China here? 

shortonoil's picture

 

It looks like the PBOC's liquidity creation requirements are now growing exponentially. How will they get an infinite currency supply into a finite financial system? It sounds like the perfect recipe for an infinite supply of non performing assets. After that, back to the water buffalo and rice paddies!

It is no wonder why anyone with the means is trying to leave.

GunnerySgtHartman's picture

Vaguely reminiscent of a Ponzi scheme, isn't it?

Lady Jessica's picture

And one that must inevitably be slowing the real Chinese economy.

However well the PBOC practises "window guidance" for the productive sectors, there is this mounting countervailing force of the credit ponzi.

But the Chinese are master propagandists.  Their state media may be able to conceal this process for a very long time.  Of course, capital flight - most importantly flight of the Chinese themselves - is evidence that some already see the writing on the wall.

Why do the Chinese think this is so different from 1980's Japan? 

GunnerySgtHartman's picture

Why do the Chinese think this is so different from 1980's Japan?

Because they think "we're not Japan, we're smarter than Japan."

The markets will prove them wrong.

Bogdog's picture

Q: "How will they get an infinite currency supply into a finite financial system?"
A: Just ask Janet.

RougeUnderwriter's picture

Everybody Wang Chung Tonight

Bogdog's picture

obligatory: sum ting wong.

EX-floor hedger's picture

...and we should believe something written by DeutscheBank????....

venturen's picture

They want to be just like the west & Japan....totally broke and skyrocking debt.  https://www.youtube.com/watch?v=7tbobaz8nn4

 

 

83_vf_1100_c's picture

  The chinese copy everything thr West does right down to the money printing. Well, not evertyhing. No transgender bathroom, PC bullshit, importation of muzzie refugees, bombing other countries...yet. They don't need to attack the West. Whitey is on the decline.  They need but wait us out.

quax's picture

As long as this bubble doesn't pop Chinese investors will keep biding up Canadian real-estate. Nowadays all these bubbles are interconnected which makes for a pretty risky and unstable environment.

Let it Go's picture

The ongoing efforts of China to stabilize their sagging economy by flooding the markets with liquidity have resulted in a ripple effect and added to the nervousness of markets. When coupled with the overcapacity that developed as the country raced ahead on a wave of easy and cheap money it now finds itself in a situation similar to that which America faced in 1929.

A question we must ask is just how large this newest wave of liquidity really is and where it will lead. China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. The article below delves into China's debt problem.

 http://brucewilds.blogspot.com/2016/06/chinas-debt-problem-grows-more-ominous.html