Econintersect: While many focused on the announcement (repeated from many previous meetings) that the U.S. Federal Reserve would start ending the latest QE (quantitative easing) program sometime in the future as the cause for massive global stock sell-offs Wednesday afternoon and Thursday, some feel that China had a role in the debacle. Some think that China is a bigger deal in this event than is the Fed. One of those is Lee Adler. See GEI Investing.
Short-term interbank interest rates in China continued to soar Thursday (20 June 2013), with the SHIBOR (Shanghai Interbank Offered Rate) overnight rate listed at 13.4% and the 1-month rate at 9.4% as this is written. How rapidly the situation has escalated is illustrated in the following two graphics.
Click on either graphic for larger image.
It is clear that the PBOC (People’s Bank of China) was not engaged in a 0ne-day warning shot earlier in the week when they did not supply the added liquidity the financial system had expected. If this continues through Friday it must be considered that this is where the PBOC has drawn a line in the sand and will try to hold the course until enough steam is released by the overheated banking (and shadow banking) system to bring the growth of credit down to a lower rate.
As reported by GEI News yesterday, in 2013 the rate of credit growth had picked up to a rate of 22-23% for the first five months of the year, compared to 20% growth in 2012. The high rate of growth of credit is needed by a high rate of investment and that is counter to the government’s rebalancing strategy to shift more of the economy away from investment and towards consumption. This is considered essential for China to have a sustainable economic future. The result of this government induced “crisis” could well be some seriously bruised financial interests along with a slower rate of growth necessary for the long-term.
GEI contributor Michael Pettis has suggested that China needs to get down to a 3% GDP growth rate to have a sustainable economy and expects that to happen over the next few years. The Economist disagrees with Pettis and they have made a public bet on whether China’s GDP will slow as much as Pettis suggests. See GEI Opinion.
Macro Business has offered a nice summary of possible outcomes for the current liquidity squeeze in China:
So what happens next? There are four categories of outcome. The first is that Chinese leaders back off on the credit crunch and nothing happens, in which case they’ll probably just try the strategy again later. The second is that they press on and it works miraculously, cleaning out the financial system without causing too much pain. The third is that this spirals out of control, maybe because Beijing underestimated the risk or acted too late, potentially sending the global economy lurching once more. The fourth, and probably most likely, is that this works but is painful, averting catastrophe but slowing the Chinese economy after 20 years of miraculous growth.
Another factor that may be influencing the PBIC action is the build-up of a carry trade which has increased the flow into China of lower interest currencies such as the U.S. dollar and euro. This has been surging in recent months and could create a big “unwinding problem” for China if the flows were to be reversed. A significant source of these flows through international banking flows has come from the Fed’s QE. If that does start to taper, the flows into China could slow and then reverse if foreign interest rates began to rise.
China may simply be trying to get ahead of the curve and slow down the inflows now to reduce the size of flow reversals later.
See a detailed discussion of the carry trade situation at Macro Business.
Note added at 2:00am EST: Bloomberg reports that rates were falling in the early morning in Shanghai as the PBOC was said to have made funds available to ease the liquidity squeeze.
Sources:
- China Credit Crunch (GEI News, 19 June 2013)
- Blame it on China (Lee Adler, GEI Investing, 20 June 2013)
- China moves to save its banks, or does it? (Houses and Holes, Macro Business, 21 June 2013)
- Shibor in Recent 10 Business Days (shibor.org, 11:25pm EST, 20 June 2013)
- The Economist Puts Up (and Raises) (Michael Pettis, GEI Opinion, 03 April 2012)
- Explaining China’s credit crunch (Houses and Holes, Macro Business, 21 June 2013)
China Money-Market Turmoil Poses Test for New Leaders: Economy (Bloomberg, 21 June 2013
