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BookmarkChinese trade data for May came out about as abysmally as we predicted it wouldone month ago [21]. The reason: the Chinese Customs Administration was humiliated at the epic discrepancy in data between Chinese Hong Kong exports and Hong Kong imports from China, with the delta resulting from that other variable we discussed two weeks ago: the Chinese Copper Financing Deals [22]which serve(d) as an interest rate arbitrage conduit. The outcome was a prompt “fix” by SAFE leading to a “normalization” in trade data, which plunged and missed almost all expectations.
It only got worse as the weekend progressed. SocGen recaps the entirety of this weekend’s data dump from Beijing:
“The entire set of weekend releases from China was disappointing. Trade growth collapsed in May, revealing the actual picture of subdued external demand. CPI inflation was nowhere to be seen, while PPI deflation intensified. Activity growth largely disappointed as well on soft domestic demand and supported our call for further GDP growth deceleration in Q2. We expect policymakers to provide modestly more policy easing, including interbank liquidity injection and a stop of fast yuan appreciation.”
[23]
There are some problems with the above, the most obvious one being so obvious that we should hardly mention it: if China was indeed manipulating its trade data, as is now widely accepted (not like there wa any doubt but like with the NSA, an official admission is critical to make the conspiracy theory to fact conversion complete), it is obviously manipulating everything else too. Such as inflation data.
What we do know about China is that the government is desperate to mask the unprecedented influx of hot central-bank created credit-money, which for now at least is being parked mostly in the local real estate market leading to 12 consecutive months [24]of house prices increases.
What we also know is that the PBOC in the past has never been shy about lowering the RRR rate in times when liquidity was truly perceived to be insufficient without an offsetting opportunity cost, nor was it timid to cut rates when deflation was suddenly becoming an issue. Such as now if one believes the conventional narrative and the sellside. Of course, China is doing neither because contrary to what is being (mis)reported, inflation – not from an overheating economy but from hot money flowing courtesy of the Fed and the BOJ – has been and is still a valid concern for the Chinese Politburo.
However there is only so much lack of liquidity that the country’s banking system, deprived of its lifeblood and hooked to waves of de-novo created credit money like any other developed world liquidity junkie, can take.
Which is why as we also reported citing Bloomberg, “a lack of liquidity in China’s banking system may threaten some companies’ ability to roll over debt, deteriorating banks’ non-performing loans and increasing risks of hard-landing in economy.” Indeed, there was speculation on Friday that the PBOC may be forced to inject liquidity via open market operations to offset surging money-market rates.
The catalyst, as Market News reported [25], was that China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in market overnight.
There was more: “Rumours that several mid-sized banks had defaulted on interbank loans added an element of fear to an acute liquidity shortage related to a coming national holiday and a slowdown in capital inflows. The rumours couldn’t be verified.”
What happened was an immediate lock up in the overnight loan rate which exploded to as high as 15%. Elsewhere, 7 Day SHIBOR as shown below, has doubled from 3% to 6% in a few days as the PBOC’s stubborn refusal to join in the liquidity party may soon cost the banking sector, which suddenly can’t roll overnight liquidity, dearly:
[26]
All of the above we have previously touched upon. Which brings us to the topic of this article.
Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in thetowel to Bernanke’s and Kuroda’s liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People’s Bank of China “decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government’s ongoing commitment to its “prudent” monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC’s rarely-used short-term liquidity operation (SLO) tool.
That injection appeared designed to bring down money market rates, which have surged to multi-year highs due to a liquidity shortage blamed on short-term factors such as reserve payments and holiday demand but PBOC mismanagement as well. Newspaper cited research at the weekend from China International Capital Corp saying the PBOC doesn’t want to ease policy with M2 above the full-year 13% target.
In other words, for now at least the PBOC refuses to openly engage in liquidity provision: a step which one etaken, should bring back memories of 2011 and the great inflationary scare that sent ripples through China, leading to rumors of a Chinese Spring, open violence in major cities, and, of course, gold exploding from $1300 to $1900 in a few months.
But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available?
Because when China finally does join what is already an historic liquidity tsunami, courtesy of the Fed, the BOJ, and the BOE in one month, then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world’s most populous country.
