Yesterday, Barclays' Ben Powell of macro sales sent out the following note to clients, which referenced a as of then unconfirmed report in the China Securities Journal: "China putting 1Tr RMB into its banks?? Very positive no? The attached bloomberg story suggests that China may inject >Tr1 Yuan into its banks deposits before the end of the year. This is a meaningful number vs the Tr7.5 RMB that the banks are expected to lend in 2011 as a whole. So what? 2 things. Most obviously this is cheap liquidity to Chinese banks that should see SHIBOR continue to fall and banks shares to rise. And secondly more broadly this would seem to suggest (again) that the rumours of easing are true. This will add fuel to the soft landing argument that I have been pushing. Remain long Chinese banks on very simple easing + bearishness = up thesis." Granted the Barclays spin was to go long China (incidentally just in time for the biggest drop in the Chinese market since October 20), but the real take home here is that China is now actively pumping money to bail out its own banks once again! And not just token money - €158.2 bilion. So how much money will be left to fund the European bailout which is oh so contingent on Chinese generosity? The short answer? Pretty much nothing, as confirmed by the fact that today's €3 billion EFSF deal was underbid and the underwriters were left holding about €500 million of the total issue. As usual, good luck Europe with your multifunctional Swiss EFSF Army knife.
More from Bloomberg:
More than 1 trillion yuan (about 158.2 billion U.S. dollars) of treasury deposits are expected to be allocated by the Ministry of Finance (MOF) to government departments in November and December, according to a report by China International Capital Co., Ltd. (CICC), the country's top investment bank.
China allocated 700 billion yuan of deficit in the 2011 Budget adopted in March this year.
MOF data showed fiscal revenues amounted to about 1.2 trillion yuan between January and September. That implies fiscal expenditure will top 1.9 trillion yuan in the fourth quarter of this year.
As the massive fiscal funding was made near the year-end in the past years, CICC predicts the country's banks will boost their capital strength by 1.2 trillion yuan.
Liquidity conditions for Chinese banks started to improve since the beginning of November, after People's Bank of China (PBOC), the country's central bank, stopped draining liquidity from banking sector through its open market operations this week.
Last week, PBOC released 96 billion yuan of cash into the money market in its first liquidity injection through open- market operations in four weeks.
So while China is desperately trying to steer the crash landing into some semblance of softness, Europe is left to hope, and pray, that Beijing will find several billion under the couch to last its BTP purchases for at least one more day.