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Guest Post: Is The Chinese Juggernaut Losing Steam?

Tyler Durden's picture




 

Submitted by Matt Dale of Mao Money, Mao Problems,

 

Back in December, 2011, I wrote about the insane leverage ratio at the People’s Bank of China.  The post generated a lot of buzz, but no one could actually answer the question of what happens when a central bank becomes insolvent.
 
We might get an answer to that question quicker than we expected.  At current exchange rates, it will be one of the most expensive lessons in history.
 
When I wrote the original post, the chart looked like this.  The trajectory of the ratio meant it would pass 1400 in a few months.
 
Today, it looks like this.  Usually, when excessive leverage is involved, it is never a good thing (for the institution) when the amount of assets flat lines, or even slows down.
 
The People’s Bank of China’s balance sheet has definitely shown a noticeable slowdown.  In the past, its balance sheet had the amazing ability to increase by a trillion renminbi every few months.  The current balance seems to be stuck at around ¥28 trillion, which it passed in July, 2011.  It broke through ¥29 trillion in January, but then fell back into the ¥28 trillion range.  For our purposes, we can say that it will take over 11 months for the PBoC to add another trillion renminbi to its balance sheet.  The last time it took the PBoC 11 months to add one trillion renminbi to its balance sheet was way back in 2002, so times have changed.
 

Remember, the PBoC had ¥28.6 trillion in assets at the end of June, 2012, but only ¥22 billion in capital.  If its assets decrease by ¥22 billion (or -0.07%), it is insolvent.  Since peaking out in January, 2012, the PBoC’s balance sheet has lost ¥895 billion, so maybe it already is.  Maybe nothing bad will happen.  After all, who needs shareholders equity when you can print money?

 

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Wed, 08/01/2012 - 21:13 | 2670815 Gringo Viejo
Gringo Viejo's picture

HELL YES IT IS!...SHOW ME THE MONEY!

Wed, 08/01/2012 - 22:11 | 2670954 zaphod
zaphod's picture

Remeber this the next time there is a ZH article saying China will be the next reserve currency for the world...

Thu, 08/02/2012 - 00:51 | 2671183 ACP
ACP's picture

That brings up a good point. Which country will have the next reserve currency?

China has printed as much money as the US & the EU combined (in $US) and Germany is surrounded by soon-to-be-hostiles, as well as Russia, which is a wild card......not to demean Russians, but Russian logic sometimes leads to irrational behavior from their leaders (ask any Russian).

Canadia? Iceland? Whoever has the largest supply of natural resources and the ability to protect them?

Thu, 08/02/2012 - 01:37 | 2671217 Handyman
Handyman's picture

US still has the most gold.

Thu, 08/02/2012 - 08:49 | 2671643 _ConanTheLibert...
_ConanTheLibertarian_'s picture

you mean the most tungsten

Wed, 08/01/2012 - 21:16 | 2670819 Number 156
Number 156's picture

How do we know this is even accurate? consider the source.

I bet you its worse, in horrific proportions.

Wed, 08/01/2012 - 21:19 | 2670821 LawsofPhysics
LawsofPhysics's picture

But, but, won't they simply sell treasuries? I hope so, because I am thinking that this season I will only sell them soybeans in exchange for gold.

Does anyone really believe the numbers from any state source? Let alone a communist state.

Wed, 08/01/2012 - 21:39 | 2670873 Number 156
Number 156's picture

Muppets beleive in everything.

Wed, 08/01/2012 - 21:18 | 2670824 Cdad
Cdad's picture

I've said it before, and I'll say it again...the Chinese are the WORST capital allocators on the planet...and so speed bumps on the way to China's supposed world domination are to be expected.  And as the author mentions...who cares?  They'll just print more money while continuing to lay claim to EVERYTHING.

I know...let's build yet another city that no one lives in!  Brilliant!

Wed, 08/01/2012 - 22:08 | 2670945 deepsouthdoug
deepsouthdoug's picture

Stupid Commies with money!

Thu, 08/02/2012 - 07:49 | 2671421 Peter Pan
Peter Pan's picture

"Stupid commies with money" is understandable but what is the excuse for intelligent and experienced capitalists?

Wed, 08/01/2012 - 21:27 | 2670848 q99x2
q99x2's picture

Where's Ying Ling?

Wed, 08/01/2012 - 21:32 | 2670858 nmewn
Wed, 08/01/2012 - 21:55 | 2670882 sunaJ
sunaJ's picture

You bring it up, so I have to ask, What obsession is it with Germans and winner-picking animals, anyway?  Der Spiegel is saturated with cute animals that happen to perform better than stockbrokers in picking game winners (may we call it better-than-chance)?  After all, if you have even 50% of the animals that don't make it to their news desk because they do not get the pick right, then what is the fuking obsession with it?  Or make a bunch of videos of the same animal with different picks and submit the winner ex post facto.  Gotta be a cultural/revenue thing.

Wed, 08/01/2012 - 21:57 | 2670921 nmewn
nmewn's picture

Stockbrokers are old, grizzled, dirty and scarred...the animals you depict are soft, warm, clean & fuzzy...till they get older.

You'll notice the attraction of Knut faded right about the time he grew up and wanted to kill the people who fed him ;-)

Wed, 08/01/2012 - 23:52 | 2671123 Oleander
Oleander's picture

Playing ping pong with Ning Ding, she lost gold today.

 

Wed, 08/01/2012 - 21:30 | 2670851 Jason T
Jason T's picture

 when their bank bursts, it's backed by infrastructure VS remnents in cesspools all across America (i.e.money US borrows to pay out in food stamps)

Wed, 08/01/2012 - 21:38 | 2670868 LawsofPhysics
LawsofPhysics's picture

How many people need to be fed in china again? Gold for soybeans? Sounds good to me.

Wed, 08/01/2012 - 22:06 | 2670940 deepsouthdoug
deepsouthdoug's picture

Those ghost cities infrastructures

Wed, 08/01/2012 - 21:34 | 2670856 socalbeach
socalbeach's picture

Robert Murphy of the Mises Institute wrote a couple articles discussing the possibility of Fed insolvency, and his conclusion was it is a non-issue.  The first one makes the point that the liabilities of the Fed are legal tender, and if you go to the Fed to try to redeem a $20 bill say, they would ask if you want 2 10's or 4 5's.  The 2nd covers an accounting change the Fed made in early 2011 that places losses into a liability account as opposed to reducing equity.  So if under normal accounting equity were to become negative and thus the entity insolvent, instead the liability account would go negative and equity would stay positive.

I'm not sure of the applicability of these 2 articles to China's central bank, but it's work exploring. 

Links:

https://mises.org/daily/4869

https://mises.org/daily/5057/Accenttchuate-the-Positive-The-New-Accounti...

Wed, 08/01/2012 - 22:06 | 2670930 sunaJ
sunaJ's picture

Silly that we let rational thought get in the way of manipulated balance sheets.  You are right, but you just have to learn the accounting practices of these douchebags to realize that they are truly insolvent.  It's the power of language that they wield, but through decryption of their language, you still get to insolvency.

Wed, 08/01/2012 - 22:08 | 2670944 FreedomGuy
FreedomGuy's picture

This is the problem when we surrender authority to government and assume they will work for our good. In the effort to be or become economic gods our government and it's created agencies are going into the no man's land of economic theories. No one knows how this will play out. I think it is safe to say that currency is or has become divorced from any reality.  Many economic friends of mine talk about the "real economy". It is the true trading of goods and services. It is about real things that are produced whether it is a service like doing your finances or a product like coal or autos. They have real value and money is necessary as a form of accounting to trade them.

Let's say I am a doctor. If you come to me for a typical office visit you are trading me your labor for mine at the market rate. Money is simply a receipt for that labor to show you did (let's say) $75 worth of work and I am trading you the exact value in my time. We could barter and you could fix my sink for the equivalent amount of time but for a specialized society, money is essential. It is the reason that counterfeiting is so evil. When you print "fake" money it steals. If I go to my HP printer and print money and go to you as a doctor I am lieing by saying I did $75 worth of work and you give me the same amount of your labor...only I did not produce anything, actually. So I lied and stole from you, two sins in one action!

What the government is doing is destroying the money because it is not tied to anything of any value anywhere. It is convenient notations somewhere in a book. It is essentially counterfeiting its own currency. It is violating all normal accounting rules and doing things that would jail or fine private businesses.

I compare it to speeding tickets. All cops and government officials speed. However, they do not ticket each other. Speeding laws are ostensibly for the collective good but tickets are only for citizens and to raise revenue. It is two different sets of rules. Check on John "Crash" Corzine when he was governor of NJ.

This is what libertarian and small government types try to explain to any and all will listen. Government works in it OWN interest. Not yours. Your interest is the stated reason but when push comes to shove it serves itself. I would also add that nowadays as all major governments have sunk into some sort of collectivism-socialism. Governments tend to like each other better than their own people. So China will watch and use this Fed accounting if it suits it's purposes. The EU will screw over the citizens (like Germany) of it's own country to try and help other governments. Germany should just smile and watch the PIIGS sink but they have gone collective. Responsible German government will make it's citizens pay the price of stupid governments.

In all forms of collectivism the responsible pay for the irresponsible. In central plannning men learn they are not gods and cannot control all the variables. We will all learn this lesson for the 256th time in the last century.

Wed, 08/01/2012 - 22:04 | 2670935 RagnarDanneskjold
RagnarDanneskjold's picture

SAFE invests the PBOC's assets. It's like saying a Kennedy is broke because his trust fund is not on his personal balance sheet. The bigger problem for the PBOC is the dirty dollar peg. U.S. dollars are flowing out of the banking system and if they're forced to defend the peg, it could precipitate a crisis. 

Capital fleeing China; China must float the yuan and slash taxes
Wed, 08/01/2012 - 22:08 | 2670946 geewhiz190
geewhiz190's picture

this is very interesting in that it would explain why the PBOC is in the brokered bank CD market in a big way.  what is more is that the PBOC is willing to pay more for deposits than any other bank in the market.

Wed, 08/01/2012 - 22:16 | 2670966 FieldingMellish
FieldingMellish's picture

Because both China and Europe are compelled to print, the US will be compelled to print. Last currency to the bottom is the rotten egg... forget that.. they are all rotten.

Wed, 08/01/2012 - 22:40 | 2671012 Tirpitz
Tirpitz's picture

"Usually, when excessive leverage is involved, it is never a good thing..."

... unless we talk about central banking. Never thought that they, as well as the Fed and the ECB, can/will simply write their losses off and continue as life is just so dandy?

Wed, 08/01/2012 - 23:05 | 2671060 reader2010
reader2010's picture

I can assure you the real numbers are at least several folds worse than their polished numbers. They've got tanks and machine guns for any social crimethink and unrest. 

Wed, 08/01/2012 - 23:55 | 2671129 JohnKozac
JohnKozac's picture

House prices there are so ridiculous, not to mention the Uber-Bubble in Hong Kong from what I have read. USD$1.2 Million for a 1,275 sf condo near the HK CBD ?!

Reminds me of Japan in 1985 before their Uber-Bust when condo prices in Tokyo CBD were USD$6,000 per sq foot. Then the Bubble met the Pin and Sayonara -- 25 years (and counting) of depression.

 

Thu, 08/02/2012 - 00:35 | 2671157 akak
akak's picture

No no NO!

For the Great "People's Republic" (just don't ask exactly to which people the "republic" belongs), the direction of growth (and their blobbing-up of world resources) has only one possible direction: Up!

Just ask our dear friend AnusAnonymous, who is an expert on China along with their own unique brand of citizenism --- he will tell you that the leaders of the great Middle Kingdom can do no wrong, are all-knowing, and will confidently and omnisciently lead the Chinese people nowhere but into greater and greater prosperity (just as long as they don't ask for more freedom).

Thu, 08/02/2012 - 00:00 | 2671131 hyper-critical
hyper-critical's picture

PBOC has been wholesale liquidating treasuries since the last week of 2011 (please don't quote TIC data to me...you'll just demonstrate you don't know what you're talking about), and its state-directed banks recently began positioning for yuan devaluation. I am Jack's medula oblongata.

Thu, 08/02/2012 - 00:40 | 2671173 silverdragon
silverdragon's picture

Quoting govt data is pointless both in China and the west.

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