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Why Chinese Inflation Risk Is Over Three Times Greater Than In America

Tyler Durden's picture


As everyone awaits (or doubts) the next coordinated central planning bank action - whether Fed QE (Lockhart stymied?), ECB 'bottomless pockets' (Merkel's back), or China RRR (reverse repos?) - the prices of things we need (as opposed to want) continue to rise. Nowhere is this more important than in China with its extremely high levels (and volatility) of deposit flows increasingly levered to re-inflationary actions by the PBoC. The critical aspect of the following analysis is that in the US, the stock market acts as an 'inflation buffer' for the rich's excess disposable income; in China, this is not the case and given the greater than 3.4x leverage compared to the US, PBoC actions flow much more rapidly through the populace to the things they need - and right now more inflation is not what they need or want - which perhaps explains the reverse-repo 'gradual' tightening.


1) Chinese deposit volatility is massively high and extremely prone to 'inverse' window-dressing (as Bloomberg's chart of the day pointed out yesterday) which makes the PBoC's role as credit-monitor very hard. The chart below shows the outrageously obvious pump up in deposits (lower pane) as banks offer incentives to attract deposits and meet PBoC regulatory needs - only to let them flow back out and tighten their offers after...


2) This exaggerates any mistake or action they make but more critically the fact that in the US Depo-to-GDP is 0.55: 1 (USD8.8tn Deposits against USD15.8tn GDP) but in China it is 1.9:1 (USD13.8tn Deposits against USD7.3tn GDP - USD equivalent) - a 3.45x ratio that greatly exacerbates any easing impact of a RRR as deposits flow more dramatically; which leads to a critical and most important point;


3) Why do Chinese people not like their stock market? In the US those 'deposits' flow straight into an inflation buffer - the US equity market (or AAPL). The lack of flows into Chinese stocks given the size of their deposits suggests legacy savings attitudes remain solid or fear of fraud are prevalent.


The point being that if the US had the same amount of cash in deposits as China (on a relative basis), the US would have an epic inflation problem right now but since the rich, who have all the disposable income, simply redirect cash into the stock casino market, stocks serve as an inflation offset.

Without a wholesale shift in Chinese attitudes towards risk, given their clear 'trust' issues, inflationary impacts of PBoC action will remain far more important than the Fed's (for now).


Charts: Bloomberg

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Tue, 08/21/2012 - 12:59 | 2724258 SeverinSlade
SeverinSlade's picture

Fantastic points.  Accurately explains why the PBoC is so hesitant to do further massive stimulus (see: soybean and corn prices).

Tue, 08/21/2012 - 13:02 | 2724273 ACP
ACP's picture

Or that they haven't yet perfected the art of manipulating stock prices upward while manipulating pm/commodity prices downward.

Tue, 08/21/2012 - 13:20 | 2724355 Cognitive Dissonance
Cognitive Dissonance's picture

The Chinese just need more buy-in into the PONZI potential.

Promise them a fully paid retirement (with full health care) in 40 years if only they would work their asses off now, and then spend like crazy on the weekends.

Come on, there are 1.3 billion suckers over there. How hard can this be for crying out loud? We did our part over here in America. Time for them thar Chinese to put their consumer shoulders to the wheel and heave ho.


Tue, 08/21/2012 - 13:34 | 2724433 francis_sawyer
francis_sawyer's picture

Some are actually celebrating the good news...



Tue, 08/21/2012 - 13:23 | 2724359 falak pema
falak pema's picture

maybe we should export them Ben and JAmie as a groupon couponned package deal!

but seriously they should go massively into gold to calm the increase in money supply. 

And then ration food to their population. Slim fast and good abdos for all. 

Tue, 08/21/2012 - 13:27 | 2724389 bank guy in Brussels
bank guy in Brussels's picture

The really key factor is that, since the late 1970s - when they had some guaranteed health care under Mao, and a 'barefoot doctor' programme for common citizens that was admired throughout the world -

Since the late 1970s the Chinese have had neither guaranteed health care nor any reasonable insurance they could buy, and they are just starting to remedy that recently.

Chinese consumer savings habits, are ultimately the result of the need to have cash so they are not dumped outside the hospital door and left to die

Contrast China with South Korea - which actually is the MOST successful economic growth story in the world, along with Taiwan - the only two economies to have consistent 5%+ growth over the past five decades

One absolutely key element in South Korea's success, is that since the 1960s era of South Korea's autocratic quasi-dictator Mr Park, health care was provided near-universally for South Korean workers families, despite their initially making very little money ... but they did not have to worry about their children dying for lack of health care

Park judged that Koreans would not feel as free to work hard and become the most successful growth economy of the world, if they were constantly worried about health care

Now, despite Park being a 'dictator' of that era ... Park's daughter has just been nominated to be the new President of Korea in the upcoming election, and she may win.

In China, meanwhile, that is the reason that old Chinese often still revere Mao ... under Mao they had health care.

Tue, 08/21/2012 - 13:42 | 2724475 reader2010
reader2010's picture

But Mao managed to starve more than 40 million peasants to death in just three short years between 1959 and 1962. What a historical accomplishment, according to David Rockefeller.

Tue, 08/21/2012 - 14:07 | 2724587 Metalredneck
Metalredneck's picture

Who said Joseph Stalin was not a role model?

Tue, 08/21/2012 - 14:09 | 2724602 reader2010
reader2010's picture

Unlike Stalin, Mao needed no bullets at all.

Tue, 08/21/2012 - 14:36 | 2724734 Silver Bug
Silver Bug's picture

The chinese train is coming off the rails.



Tue, 08/21/2012 - 20:59 | 2725900 geewhiz190
geewhiz190's picture

maybe.  wealthy chinese have no interest in putting their cash in the chinese stock market-they are doing everything they can, legal and otherwise to get their money OUT of china is fast as possible. 

Tue, 08/21/2012 - 13:00 | 2724260 qussl3
qussl3's picture

When the leadership themselves choose to warehouse their wealth offshore, why the heck would the populace ever trust the institutions?

Tue, 08/21/2012 - 13:48 | 2724498 old naughty
old naughty's picture

Which nation is "offshore"?

So, laundering corrupt intake is accepted there?

Double standard. ;p

Tue, 08/21/2012 - 13:07 | 2724289 madcows
madcows's picture

Sweet.  We're all poor and in debt, so we don't have inflation.  Problem solved.

Tue, 08/21/2012 - 13:13 | 2724318 No Euros please...
No Euros please we're British's picture

Whilst I realise it's just a barborous relic and you can't eat it, could the Chinese not buy physical gold as a hedge against inflation? Shoot me down in flames, just a thought.

Tue, 08/21/2012 - 13:14 | 2724321 BigPerm
BigPerm's picture

They have a inflation buffer... its called GOLD bitchez

Tue, 08/21/2012 - 16:27 | 2725182 BRoquet100
BRoquet100's picture

And silver, titanium, lithium, rhodium, platinium, etc..

More back doors than a porn orgy.

Tue, 08/21/2012 - 13:15 | 2724323 Confundido
Confundido's picture

The author may have forgotten to mention the Vancouver real estate market as the other escape valve for Chinese money. But hey....who is to blame? The Chinese or the Bank of Canada that doesn't allow the Canadian dollar to appreciate and manipulates it to be around parity, via repos?

Tue, 08/21/2012 - 13:21 | 2724326 Cognitive Dissonance
Cognitive Dissonance's picture

"The lack of flows into Chinese stocks given the size of their deposits suggests legacy savings attitudes remain solid or fear of fraud are prevalent."

Those damn Chinese need to more fully embrace the consumer mentality of spend now and never save later. It's all their fault that I might never be able to collect the SS and company pension I'm entitled to. I did my part to support the PONZI. Now it's their turn.


Tue, 08/21/2012 - 13:19 | 2724347 Dr. Engali
Dr. Engali's picture

My inflation buffer is shiny and heavy. It's the metal of kings. Preferably with an eagle on it.

Tue, 08/21/2012 - 13:20 | 2724353 reader2010
reader2010's picture

In China, everything is a fraud. Even the most recent demise of the serial killer story itself was a fraud. 

Tue, 08/21/2012 - 13:21 | 2724357 ParkAveFlasher
ParkAveFlasher's picture

The Chinese and their crusty old millenia of civilization and insight into human nature...barbaric...they should be living it up, installing inground pools and ensuite marble bathrooms, vacationing on the Gulf of Mexico, eating boxed food, buying APPL and Cadillacs, etc.

Tue, 08/21/2012 - 13:24 | 2724376 Lore
Lore's picture



"PBoC actions flow much more rapidly through the populous to the things they need..."

That's 'populace.'  Good article. Inflation follows paths of least resistance. But this statement should give us pause:

"the rich, who have all the disposable income, simply redirect cash into the stock casino market, stocks serve as an inflation offset."

Define "rich." Aren't algorithms crowding out real market participants?  Is that the tax base of the future?  Did I just solve the problem of how to fund those entitlement programs?

Tue, 08/21/2012 - 13:30 | 2724418 diogeneslaertius
diogeneslaertius's picture





Tue, 08/21/2012 - 16:26 | 2725181 BRoquet100
BRoquet100's picture




.... what....



Tue, 08/21/2012 - 13:42 | 2724478 dadichris
dadichris's picture

Don't forget that bulk currency exports by drug cartels help keep down inflation.  i.e. War on Drugs "Win" = Higher Inflation

Tue, 08/21/2012 - 14:14 | 2724627 Lore
Lore's picture

Hey yeah!  And there's some serious moolah ripe for taxation!

Tue, 08/21/2012 - 13:44 | 2724482 Pretorian
Pretorian's picture

Wait I use to read here that bad loans are mounting and there is no coverage for it,  suddenly I see on ZH this massive China deposit rate and talk about inflation?WTF

Tue, 08/21/2012 - 15:59 | 2725055 laomei
laomei's picture

Um, we mostly tie up our funds in bonds and other shit, no one actually just sits on the cash beyond a certain amount that is kept close in hand.

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