Ten days ago, we penned "Chinese Liquidity Shortage Hits All Time High [8]", in which we predicted ridiculous moves in the Chinese interbank market as a result of short-term funding literally evaporating as a result of the PBOC's stern refusal to step in and bail out its banking sector (despite the occasional rumor of this bank bailed out or that) by injecting trillions in low-powered money. A few days later this prediction was confirmed when the overnight repo and SHIBOR market for all intents and purposes broke down as was also reported here previously [9]. Now, for the first time, China, via the Politburo's Chinese Hilsenrath-equivalent, Xinhua, has provided its own version of events which is as follows: "It is not that there is no money, but the money has been put in the wrong place."
Oh, so in a world of $12 trillion of excess liquidity provided by central banks in the past 5 years there is a slight capital misallocation problem the world's central-planning states (virtually all of them these days)? And despite injecting trillions, none of this cash is actually going to growing the economy (as we have discussed [10]for the past two years and most recently here [11]). Why thanks for clarifying (and confirming) all of that China.
From the FT: [12]
The government has yet to give an explicit explanation for the central bank’s move to allow rates for lending between banks to surge on Thursday. But the commentary from Xinhua, which Beijing often uses to make policy statements, comes the closest it has yet to that.
The news agency argued that while banks, the stock market and small and medium-sized enterprises lacked money, the broad money supply M2 had still expanded by 15.8 per cent compared with the same period last year, new loans were still high and total social financing aggregate, a broad liquidity measure, continued to grow rapidly in the first five months of this year.
“Is China really experiencing a ‘cash crunch’ where liquidity is being squeezed?” asked Xinhua, and added that many large enterprises continued to spend heavily on wealth management products, capital was still in search of speculative investment opportunities and private lending continued to be strong.
“This contrast clearly shows that this seemingly ferocious ‘cash crunch’ is in fact structural funding constraints caused by a misallocation of funds. It is not that there is no money, but that the money has not reached the right places,” the commentary said.
Of course, we have covered this topic extensively verbally, as well as visually, both here [11]...
[13]
and especially here [14]:
[15]
The chart above, from "China Joins The Broken "Keynesian Multiplier" Club [14]" is precisely what Xinhua is lamenting: unprecedented credit formation and yet little of it trickling down to economic growth, hence a "broken Keynesian multiplier."
Which, of course, is what we have been warning about since the beginning: under central planning capital is always, ALWAYS misallocated in a way that ultimately makes any eventual marginal credit/money formation meaningless. As China has found out the hard way.
But here is the punchline and what was left unsaid by China: if what the PBOC is implying is true, then between the unwind of the Chinese Copper Financing Deals [16], and the less relevant but still substantial, Wealth Management Products, the country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis.
That's right: a massive deleveraging coming dead ahead in China just in time to shock the market still reeling from the threat of the Fed's tapering. And it is not as if China needs to be spooked any more: "The mood remained jittery at the weekend. When a technical glitch caused by a long-planned software upgrade at Industrial and Commercial Bank of China made cash withdrawals impossible for almost one hour at the bank’s ATMs, many consumers fretted that one of the biggest state lenders was in trouble." Maybe not today, but force deleverage a few hundred billion, and it sure will be.
It also means that there will be no respite for short-term funding, which while maybe not suffering from lack of money, it certainly is suffering from the lack of money in the right place: the first milestone of a failing central-planning regime.
Just as China finally admitted.