Chinese Credit Gets Crunchy

ZH: Chinese Interbank Funding Freezes Again As Overnight Repo Hits 33%
And while some of the liquidity squeeze was certainly calendar driven, what is more concerning for Chinese markets, where as we reported recently the local authorities, regulators and even press are confirming that the government crackdown on the credit and housing bubble may be serious for once due to fears about "rising social tensions", much of the overnight repo rate spike was driven by the PBOC which pulled a net 150 billion yuan of funds in open-market operations today, the most since December 7.

The result was another brief, but painful, freeze of the interbank lending market.

Should the PBOC continue to not only not inject liquidity among banks, but aggressively withdraw it, it is possible that a repeat of the 2013 bank crisis
Prior coverage of the 2013 "crunch".

Nothing has changed since 2008 in terms of the ultimate end game for China. Allow deflation or devalue the currency. Credit growth can stave off deflation for a time, with housing market, stock market, bond market and housing market bubbles. A never-ending parade of bubbles until inflation kicks in and destroys the value of the currency. Or it can slow credit growth and try to keep all the plates spinning in an environment where one broken plate can freeze the financial system. History and experience says even if they seriously try to tighten credit, eventually they'll blink and ease one big plate, or a few small ones, break.

Meanwhile, the choice isn't even fully China's to make. The U.S. dollar is in a bull market and forcing the yuan higher against most currencies, not lower. Deflation is coming via the global financial system (the contracting dollar system) unless China allows the yuan to depreciate or domestic credit inflates, which is a roundabout way of weakening the yuan. The final blow comes if the U.S. Dollar Index hits the upper targets around 120. At current rates of depreciation, the yuan will slide past the old 8.28 peg. China has to increase its defense of the currency, and when USDCNY climbs through 7 towards 8, depreciation expectations will ramp up.

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