JUNE 20TH, 2013 12:09
Time to sober up as America and China remove punch bowl
The US Federal Reserve has refused to blink. The Chinese central bank has refused to blink.
The authorities in the world's two biggest economies appear determined to strike a blow against moral hazard and clear the froth in asset markets, at least until this exhibition of virtue blows up in their faces.
The term "Perfect Storm" is banned by the Telegraph as a lamentable cliché, so let us just say that this is the moment we long been fearing or waiting for – depending on taste – when markets are no longer given what they want.
The Bernanke Put has become the Bernanke Call. The Politburo Put has become the Politburo Call. Rather than putting a floor under asset markets whenever there is trouble, they are instead putting a roof on asset price rises.
Opinions vary widely on what happened in Washington… Read More
37 Comments
JUNE 20TH, 2013 10:38
We have a little local difficulty in China
Shibor this morning.
Shibor is the Shanghai Interbank Offered Rate, a gauge of liquidity for the banking system.
Note the 175 basis point rise in three-month SHIBOR. Over half of the $2 trillion in wealth management products — described by Fitch as a second hidden second balance sheet of the banks — has ro be rolled over every three months.
The longer this goes on, the more serious it becomes for those swimming naked.
Xi Jinping and Li Keqiang are being really tough. Impressive, if you like that sort of thing.
http://ransquawk.com/headlines/market-talk-that-industrial-and-commercial-bank-of-china-may-have-defaulted-on-a-repayment-and-pboc-is-to-hold-a-special-meeting-with-banks-unconfirmed-20-06-2013
Market talk that Industrial and Commercial Bank of China may have defaulted on a repayment and PBOC is to hold a special meeting with banks - Unconfirmed
'Market talk' - Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.
Update details:
- Of note, earlier it was reported citing China's Bank of Communications chief China strategist that PBOC supplies CNY 50bln in targeted liquidity ops and PBOC in talks with other banks to supply cash.
ICBC is number 1 on the Forbes Global list of Public companies - larger then JP Morgan , HSBC GE , Exxon/ Mobil or Royal Dutch Shell ... and they may have defaulted !
Liquidation Wave Sweeps Globe In Bernanke Aftermath
Submitted by Tyler Durden on 06/20/2013 - 07:03
The global liquidation wave started with Bernanke's statement yesterday, which was interpreted far more hawkishly than any of his previous public appearances, even though the Fed had been warning for months about the taper. Still, markets were shocked, shocked. Then it moved to Japan, where for the first time in months, the USDJPY and the Nikkei diverged, and despite the strong dollar, the Nikkei slumped 1.74%. Then, China was swept under, following the weakest HSBC flash manufacturing PMI print even as the PBOC continued to not help a liquidity-starved banking sector, leading to the overnight repo rate briefly touching on an unprecedented 25%, and locking up the entire interbank market, sending the Shanghai Composite down nearly 3% as China is on its way to going red for the year. Then, India got hit, with the rupee plunging to a record low against the dollar and the bond market briefly being halted limit down. Then moving to Europe, market after market opened and promptly slid deep into the red, despite a services and mfg PMI which both beat expectations modestly (48.6 vs 47.5 exp., 48.9 vs 48.1 exp) while German manufacturing weakened. This didn't matter to either stocks or bond markets, as peripheral bond yields promptly soared as the unwind of the carry trade is facing complacent bond fund managers in the face. And of course, the selling has now shifted to the US-premarket session where equity futures have seen better days. In short: a bloodbath.
China Interbank Market Freezes As Overnight Repo Explodes To 25%
Submitted by Tyler Durden on 06/19/2013 - 23:24
It seems liquidity (or counterparty mistrust) is beginning to reach extreme levels in China as the nation's banking system is now quoting overnight repo transactions at 25%. The explosion in funding costs echoes the collapse in trust (and surge in TED spread) among US banks in the run-up to the Lehman bankruptcy. MSCI Asia-Pac stocks are down over 3% with China's Shanghai Composite -2.5% at seven-month lows.
- China’s 1-day Repo Rate Climbs to Highest Since at Least 2006
- MNI - CHINA OVERNIGHT REPO FIXING AT RECORD HIGH
Chinese Bank Bailed Out Through PBOC "Targeted Liquidity Operation" Amidst Liquidity Crunch
Submitted by Tyler Durden on 06/20/2013 - 07:22
It was only a matter of time before at least one Chinese bank (and then many more) needing to rollover overnight/short-term funding and unable to do so in an interbank market that is now completely frozen, had to be bailed out. Sure enough, according to Hao Hong, the chief China strategist at Bank of Communications Co., who cited unidentified industry sources, the People’s Bank of China used "targeted liquidity operations" to supply 50b yuan to a bank in China. Bloomberg reports that the overnight cash supplied was at 5.1%, while the 1-week at 5.4%. Hong added that more banks are in talks with PBOC to obtain funds amid a cash squeeze, as expected. The problem is that the PBOC can't continue targeted bail outs, and will sooner or later be forced into a broad liquidity providing move, which will unleash a repeat of the 2011 in China scenario, which did not have a very happy ending.
http://www.zerohedge.com/news/2013-06-19/chinas-red-flags
China's Red Flags
- China
- default
- Government Stimulus
- Gross Domestic Product
- Money Supply
- Newspaper
- Recession
- Shadow Banking
- Yield Curve
UPDATE: China 7-day repo +374bps to 12%! China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.
Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse - with 1Y IRS now at all-time record highs.
Many are now questioning whether the dramatic elevation in short-term financing rates is "here to stay," and with the Chinese yield curve now inverted...
...in a similar fashion as the US Treasury market prior to the US recession in 2007...
and for a similar period before the US recession...
the clarion call for government stimulus is loud from the addicts.
However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The markets, even though the Shangahi Composite is trading at near-seven-month lows...
...will be disappointed; and we suspect, as the FT notes, that "the central bank wants to send a warning signal to commercial banks and other credit issuers that unchecked credit expansion, particularly through the shadow banking system, will not be accommodated."
As the PBoC itself noted (via its state-owned newspaper) and we confirmed yesterday, "we cannot use fast money supply growth as in the past, or even faster, to promote economic growth, and must control the pace of money supply growth."
But macro data is almost as bad as it has ever been...
Simply put, as Stan Druckenmiller noted here previously,
In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments.
Despite all efforts to slow inflation (and rein in the credit bubble), the hot money imported from the Fed and the BOJ continues to push home prices ever higher which continues to be the key marginal variable for the PBOC - as long as the hot "carry" money is exported by the Fed and the BOJ, the Chinese economy will continue to suffer.
http://www.telegraph.co.uk/finance/china-business/10130280/Chinas-central-bank-tightens-screw-on-shadow-banking-system.html
China's central bank tightens screw on shadow banking system
China's central bank has sent a "warning signal" to the country's overextended lenders, as it rejected a plea to increase money supply, pushing short term borrowing costs to a six-year high.
3:19PM BST 19 Jun 2013
Overnight borrowing costs in China jumped more than two percentage points to 7.69pc, while the seven-day repo rate climbed 1.4 percentage points to 8.24pc, the highest level since October 2007.
Authorities were forced to extend trading by 30 minutes on Wednesday as lenders scrambled for funding amid the liquidity squeeze.
The People's Bank of China (PBOC) has joined the government's efforts to tighten the screw on the country's shadow banking system, which has fuelled the explosive credit growth that has helped to drive China's economic rebound, but also raised doubts over the ability of borrowers to repay loans.
"The PBOC is trying to teach the banks a lesson," said Klaus Baader, chief Asia economist at Societe Generale.
"It's hard to believe that the PBOC like wants to massively destabilise the banking system. They will eventually relent, but they want to force banks to be more responsible with their liquidity," he said.
Sun Junwei, an economist at HSBC, said the squeeze was likely to continue until the beginning of July, when maturing PBOC bills and government bonds injected cash into the market.
"This is a warning signal to make sure off-balance sheet lending is curbed. Officials want to make sure banks' borrowing and lending is well matched and that implies tightening is going to stay for a while," she said.
China's liquidity squeeze has already hit some lenders. Earlier this month, Everbright Bank defaulted on a 6bn yuan (£625m) loan.
Meanwhile, HSBC lowered its 2013 growth forecast for China to 7.4pc from 8.2pc, citing the government's measured approach to creating growth, which would be negative for demand in the short term.
"Top officials seem to be less enthusiastic about launching new stimulus, with their latest policy statements dominated by comments about the need to speed up reforms." said Qu Hongbin, HSBC's chief China economist.
"Beijing's focus on speeding up reforms will, once implemented, revitalise private business," said Mr Qu. "However, it will take time for the impact of the reforms to filter through, so growth is likely to stay lower in the near term, especially given weak global demand." HSBC also cut its 2014 growth forecast to 7.4pc from 8.4pc.
