With China finally realizing that it has drunkenly staggered into its own Lehman moment, complacently ignoring the risks until now amid hopes that Beijing would step in and make everything wonderful and instead Evergrande management finding itself held hostage in company offices by furious wealth product investors who just got the memo that the money is all gone, overnight Beijing finally showed the first signs of cracking when the stingy PBOC- which until now had merely been rolling existing liquidity keeping the overall total unchanged - injected the most cash cash into its banking system since February, in a clear sign authorities are seeking to avert the funding squeeze amid the intensifying debt crisis at China Evergrande which earlier this week sent funding conditions to the tightest levels in 4 years.
The People’s Bank of China added 90 billion yuan ($14 billion) of funds on a net basis through 50 billion in seven-day and 50 billion in 14-day reverse repurchase agreements on Friday offsetting 10 billion in maturities, the biggest one-day injection since February; it marked the first time this month it added more than 10 billion yuan short-term liquidity into the banking system on a single day.
While Evergrande's insolvency is clearly the big catalyst, not helping the funding stress is a seasonal spike in demand for cash as banks are hesitant to lend toward the end of the quarter ahead of regulatory checks. Liquidity also tends to diminish at this time of year ahead of a one-week holiday at the start of October.
“Avoiding a systemic liquidity squeeze is the absolute priority for the PBOC and it has means to do so,” SocGen economists led by Wei Yao wrote in a research note. “A Lehman-style financial-market meltdown is not our top concern, but an extended and severe economic slowdown seems more probable."
We bet to differ: we understand that SocGen would want to maintain its China business, and as such describing what is going on there as a "Lehman event" would surely close the doors for future business, which is why one has to read between the lines, and the message there is catastrophic as we explained last night.
It's also why despite the one-time liquidity boost, the PBOC is still keeping the bulk of its powder dry, and the central bank has yet to push money-market and overall interest rates lower. However, it's just a matter of when, not if and the market knows it, which is why it has started to tighten monetary conditions ahead of the PBOC's intervention, by sending the seven-day repo rate, an indicator for interbank borrowing costs, higher by 14 basis points to 2.4% on Friday, the highest since June 30.
In many ways, China's hands are tied because in addition to (N)evergrande, the broader economy is already seeing the wheels come off as strict movement controls put in place to curb Covid-19 outbreaks have hammered retail spending and travel, while steps to cool property prices have sent property sales plunging. On Wednesday, the country reported a sharper-than-expected slowdown in retail sales in August, along with weaker growth in industrial production and fixed-asset investment. Meanwhile, new property sales collapsed by 90%!
“It’s fair to say that the Evergrande situation and its repercussions on the broader property market will have a far greater direct impact on Chinese growth than any of the other regulatory crackdowns,” said Alvin Tan, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “I would not be surprised that the PBOC is acting to contain the fallout in the money markets.”
As discussed last night, the confusion over the Evergrande is endgame has prompted China experts to game out potential worst-case scenarios - including a "nightmare" chaotic bankruptcy one - as they contemplate how much pain the Communist Party is willing to tolerate.
Of course, in China where social stability is paramount, investors realize that they need to generate just enough disconent for Beijing to step in, and sure enough as signs of financial contagion increase and as the tens of thousands of angry protesters take to the streets to either besiege Evergrande offices or take management hostage, the pressure to intervene gets higher by the day.
Should Beijing turn a cold shoulder and should a worst case scenario materialize, numerous industries would be exposed to credit risks in a "freefall" Evergrande default, Fitch Ratings warned. It said smaller banks and vulnerable developers would be hurt the most.
But with more than $300 billion in liabilities, Evergrande’s liquidity stress is stoking worries over the broader Chinese property industry. Both Morgan Stanley and Goldman Sachs slashed forecasts for the industry citing the potential of an Evergrande default to roil its suppliers, other developers and financial markets.
As Bloomberg notes, much hinges on how big the real-world impact winds up being on the wider property sector, where some 70% of Chinese household net worth is parked. A crisis there would inevitably lead to a Chinese depression. Meanwhile, risks are growing that consumers could retrench further as the company falls behind on promised construction work and faces repayments on wealth management products sold to individuals.