Financial "Collateral Damage" Highlights China's And Fed's Impossible Task

Authored by Mike Shedlock via MishTalk.com,

Variant Perception notes China Broad Credit Growth Slows to Zero. The side effect is a huge amount of collateral damage.

The recent tightening of credit we have seen in China is primarily aimed at clamping down on shadow financing. Wealth management products have rapidly grown in size, from only 8% of total banking deposits in 2012 to over 20% today.

 

 

 

The top chart shows China’s banks’ claims on non-banks, which is where a lot of shadow financing shows up. As we can see, growth in this category has fallen precipitously from 70% YoY to 20% today.

 

However, there is collateral damage from this tightening. For one, bank-lending rates are starting to rise as their cost of funding rises (bottom-left chart). Policymakers in China want to confine the rise in rates in to the interbank market, but this a next-to-impossible task. Too great a rise in lending rates would feed negatively into the real economy.

 

Moreover, as the bottom-right chart shows, tightening has led to broad credit growth falling to near to 0% on a 3-month basis. A negative second derivative in credit must be watched for any inhibitive effects it may have on economic growth – especially in a country so heavily credit-dependent such as China. A negative first derivative in credit, as we are on the cusp of today, leaves economic growth even more fragile.

Impossible Task

I don’t agree with VP analysis on everything, but I do agree on most things. I find this report spot-on.

China has an impossible task of slowing its shadow banking sector running rampant and maintaining growth.

China’s Dilemma 

I do not know what China will ultimately choose, but something has to give one way or another.

China’s unpleasant choice is a bubble bust now or a bigger bubble and a bigger bust later.

By the way, the Fed faces a similar unpleasant choice, as do central banks in general. Asset bubbles are everywhere.

Comments

ilovetexas Sat, 07/08/2017 - 17:03 Permalink

What if Chinese has a lot of cash?Do you know for a lot of middle class Chinese, salary is not a major portion of their take-home pay?They borrow, not because they are lack of cash. They borrow, because credit is cheap.

navy62802 Sat, 07/08/2017 - 17:15 Permalink

We could have a nuclear war tomorrow, and I believe the VIX would stay put. These markets are entirely artificial and do not reflect actual business activity.

lesterbegood Sat, 07/08/2017 - 17:26 Permalink

Announcing....BubbleCoin!Mined right here on my very own laptop!Get yours while the current supply lasts!Only gold and silver specie accepted for purchase. 

Ink Pusher Sat, 07/08/2017 - 17:53 Permalink

Just got an email from The FED, NO SHIT. unedited copy below. "Re: Atten:Beneficiary!!Cancellation and Reallocation of $22.5m ndsl""From: FEDERAL RESERVE BANK <webmaster@ndsl.or.kr>Sent: July 7, 2017 11:05 PMSubject: Re: Atten:Beneficiary!!Cancellation and Reallocation of $22.5m ndsl Federal Reserve Bank of New York  33 Liberty Street New York, NY 10045 Tel:+(646-628-9389)Atten:Beneficiary,What is going on ?We have been waiting for you to send the requested fee needed to secure the documents for the release of the $22.5m to you but till this moment we have not received any payment from you.Its important you note that failure to receive the payment today we would have no option than to cancel and reallocate the said funds $22.5m to the representatives in according to section 34 sub section 75 of international remittance policy.Attached are the scanned copy of your representatives. Awaiting your urgent response.Scott AndersonSenior Personal AssistanceChairman Board of Governors,Federal Reserve BankTel:+(646-628-9389)MSG END-------------------------------------*The best part is we now know the FED is based in South Korea!TRACK & TRACE IP SOURCE RESULT 203.250.196.39 This IP was reported 5 times. See below for details.ISPKISTIUsage TypeUniversity/College/SchoolHostnamexmail.kisti.re.krDomain Namekisti.re.krCountry Korea, Republic ofCitySeoul, Seoul-teukbyeolsi

Let it Go Sun, 07/09/2017 - 07:07 Permalink

Almost a decade ago Ben Bernanke as Fed Chairman, started us down the path of quantitative easing and artificially low-interest rates. A great deal was made of his having studied the great depression era and claims he knew how to avoid a great deal of financial pain.Today we find we are still trapped in the box Ben Bernanke built with no way out, compounding our problems is the fact we never received the promised economic growth promised to flow from his financial remedy. The article below explores this situation.http://brucewilds.blogspot.com/2017/06/america-is-still-trapped-in-box.html