SHIBOR Drops After Chinese "QE"; Downward Pressure on the Economy

SHIBOR spiked higher, so the central bank poured liquidity into the market.

On Friday, I also pasted this chart:

It shows the searches for the term "cash crunch." Now: China "Fixes" Liquidity Crisis By Banning Media Use Of Words "Cash Crunch"

As The FT reports, Chinese propaganda officials have ordered financial journalists and some media outlets to tone down their coverage of a liquidity crunch in the interbank market, in a sign of how worried Beijing is that the turmoil will continue. The censors have warned reporters not to "hype" the multiple-sigma spikes in overnight-funding rates and have forbidden the press from using the Chinese words for "cash crunch."

Story is here: China pressures media on cash crunch story

Chinese propaganda officials have ordered journalists and media outlets to tone down their coverage of a liquidity crunch in the interbank market, in a sign of how worried Beijing is that the turmoil will continue when markets reopen on Monday.

As the table on top shows, the turmoil continued.

China Money Market Rates Fall After PBOC Cash Injection

Borrowing costs in China's money market fell sharply early Monday after the country's central bank announced late Friday that it had injected over 300 billion yuan ($49.2 billion) into the financial system over a three-day period as interbank rates surged to their highest levels since June.

The seven-day repurchase agreement rate, a benchmark measure of the cost that banks charge each other for short-term loans, opened trading at 5.57%, down from 8.20% Friday, which was the highest since China suffered an unprecedented cash crunch in June.

The People's Bank of China said on its official Twitter-like Weibo account on Friday that the banking system had current excess reserves of over CNY1.5 trillion and it called that level "relatively high."

China dumped the equivalent of $100 billion U.S. (comparing GDP, by the size of the financial system, much more) into the financial system over the past three days. The Fed is buying $75 billion a month.

Here are some Chinese articles: This one is about the Chinese central bank rescuing the market Shibor持续攀升 央行向市场注水3000亿救急

This one should be familiar to Americans and Europeans: It's about how the banks were saved, but the companies suffered during the June cash crunch. “钱荒”第二季的温州表情:银行轻松 企业煎熬

This piece covers a report from CITIC Securities, about "downward pressure" on the economy: 中信证券策略周报：钱荒阴霾难散 积极布局大消费

Here's a bit of Google translated excerpts:

Investment advice: hard money shortage haze dispersed, multi-factor repression under the interim weak die hard. Although the money shortage is the main cause of last week's stock market decline, but not the only factor in the weeks before the stock market weakness. Downward pressure on the economy looming, the reforms are expected to fall after the peak, and is now hidden when the debt risk, which is also an important reason for the past two weeks the stock market decline. The second round of money shortage impact on the market less than June's first round of money shortage, but its duration will be longer, but in late December liquidity tight pattern remained significant; SLO and the central bank's reverse repo position, future market Even short-term oversold bounce is still hard to change mid-disadvantaged.

This article (岁末钱荒再袭蓉城 房贷“吃紧”购房者慌) discusses how some banks have stopped issuing mortgages (some banks stopped much earlier this month) and this has unnerved home buyers.

On the bright side of this as of yet mini-crisis, much of the general discussion is about how China will allow market forces to set interest rates. Unlike in the West, China's financial crises lead to greater economic freedom, not less. In the long-run, that's very positive. In the short-run, there's a major credit bubble. There is not a liquidity shortage anymore than there was in the United States in 2008. There is a solvency crisis in China and pain will come in great quantities in a short amount of time, or by a thousand cuts over many years.

China's Financial Crisis Began in June; PBOC Must Pump More or Deflation Will Return

Earlier I posted: SHIBOR Drops After Chinese "QE"; Downward Pressure on the Economy

I referred to the PBOC's liquidity injection as "QE" because of its massive size (and according to reports, it has already failed with rates moving higher once more). Relative to their economy, the PBOC's three-day effort exceeds the Fed's monthly asset purchases. More importantly, these interventions are now becoming a normal part of PBOC policy.

The first cash crunch came in June. In September, there wasn't a serious cash crunch, but there were fears, which I covered in Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

Now the cash crunch is back in December.

In the past three end of quarter periods, Chinese banks either experienced a cash crunch or have feared one.

June: China bond market ends up following PBOC’s net capital injection

Since June, the central bank had injected 305 billion yuan in total via open market operations.

September: PBOC makes record liquidity injection

China's central bank pumped a record 290 billion yuan (45.74 billion U.S. dollars) into the money markets via reverse repurchase agreements (repos) Tuesday in an effort to ease a cash crunch.

December: China Shares End Up; Banks Lead Following PBOC Cash Injection

Borrowing costs in China's money market soared again Monday afternoon following a brief fall earlier in the session, despite the PBOC's cash injection. The People's Bank of China said late Friday that it had injected over 300 billion yuan ($49.3 billion) into the financial system over a three-day period.

June: Inject ￥300 billion in one month; success.
September: Inject ￥290 billion in one day; success.
December: Inject ￥300 billion over three days; failure.

This is the same pattern seen with QE in the West. Central bank interventions must increase over time because the market tolerance to interventions increases.

There will be a bigger PBOC intervention before the end of the quarter, or the problems of June will reemerge and we will see global assets tumble.

June marked the beginning of China's financial crisis. It wasn't clear then, but it is clear now: the Chinese financial system will have recurring cash crunches every three months because it has a solvency crisis. These crises will expand in time, coming earlier each quarter, or expand in size (or both), requiring ever larger liquidity injections by the PBOC. Eventually, the PBOC will formalize its interventions into a policy and strenuously avoid calling it QE.

Everbright Bank and China's Cash Crunch

Everbright Bank Failed to Pay CNY6.5 Bln Interbank Loan on Eve of June Cash Crunch

China Everbright Bank Co. (601818.SH) said that two of its branches failed to repay short term loans worth 6.5 billion yuan ($1.06 billion) due on June 5 to other financial institutions in China's interbank market, although the full amount was paid the following day.

June 5 marked the start of an interbank cash crunch that sent the interest rates banks charge each other for short term loans as high as 30% as banks suddenly became reluctant to lend. At the time, market chatter had it that some banks had defaulted on interbank loans, but no bank publicly acknowledged failing to pay its debts on time.

Everbright made the statement in its prospectus issued ahead of a public share offer and a planned listing on the Hong Kong stock exchange. It said that late in the afternoon on June 5, two of its branches "failed to receive from certain counterparties the expected proceeds from such inter-bank deposit commitments."

It did not name the counterparties but it suggested they might have been smaller financial institutions.

Here is news from Friday: China Everbright Bank Shares Fall on Trading Debut

Everbright Bank raised about $3 billion last week in an initial public offering — Hong Kong’s biggest of the year — after pricing its shares at 3.98 Hong Kong dollars, or 51 cents, apiece, near the lower end of their marketed range.

The stock opened at 3.95 Hong Kong dollars on Friday morning, and later in the morning traded as low as 3.78 Hong Kong dollars, a decline of 5 percent. The shares closed down 3 percent, at 3.87 Hong Kong dollars, compared with a 0.3 percent decrease in the benchmark Hang Seng Index.

Also, Everbright Bank slides in HK debut amid China cash crunch fears

China Everbright Bank Co Ltd fell in its Hong Kong debut on Friday, as renewed cash crunch fears about China's banking system exacerbated weak sentiment towards a mid-sized lender that has taken three attempts to come to market.

Everbright, which raised $3 billion in its IPO, is the latest in a raft of banks rushing to tap investors to meet more stringent capital rules, and which have seen profits shrink and unpaid debts climb amid slower economic growth.

While other China bank IPOs have also been lacklustre, Everbright's listing has been particularly unsung, with cornerstone investors accounting for about 60 percent of the offer - more than double the normal level - as underwriters sought to lock in as much institutional demand as possible.

Everbright, which is also listed in Shanghai, also had the misfortune to debut amid a spike in interbank rates. China's benchmark money market rate climbed to a six-month high on Friday despite attempts by the central bank to calm sentiment, showing signs of a scramble for cash reminiscent of a massive crunch that occurred in June.

Misfortune?

Shares just debuted in HK. Here's a look at how Everbright (601818) has been trading against other Chinese banks listed on the Mainland.

More on Cash Crunch Risks Ahead of Spring Festival

Cash crunch signals policy dilemma for China's reformist central bank

China's central bank looks set to risk another cash crunch at the end of January, barely a month after the last market squeeze, as policymakers press ahead with a crackdown on shadow financing and other risky bank lending.

The People's Bank of China (PBOC) is attempting a delicate balancing act to keep economic growth on track while avoiding a debt-induced financial crisis.

Periodic cash squeezes as banks scramble for fresh funds highlight the policy dilemma the PBOC faces in 2014, as it pushes financial reforms to help rebalance the world's second biggest economy away from the investment- and exports-led model that powered its rapid rise.

Spikes in June and December in the interest rates at which banks lend to each other signaled the central bank's determination to reduce alarming levels of debt. But it must try to do so without hurting growth by braking too hard on credit.

(As I noted here, the PBOC intervened in September ahead of a cash crunch, which is why rates didn't spike. The situation then was the same as it was in June and December.) Yesterday, I posted Spring Festival Cash Crunch.

Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

Banks are worried about another cash crunch this month because conditions are similar to June (and in some cases worse), when overnight rates spiked into double digits.

银行拆借市场不安分 9月流动性再迎大考 (Google Translation at bottom)

My summary: the cash crunch could be back in September. It's quarter end coming up; banks may hike interest rates to attract deposits and meet reserve requirements. In June there was a 3-day holiday, the Dragon Boat Festival. Chinese people still rely heavily on cash and SHIBOR typically spikes around holidays. This month is Mid-Autumn Festival (September 19), another three day holiday and a much bigger holiday in terms of spending. Right after that is the national week-long holiday celebrating the founding of the PRC. This may lead to a "low tide" so to speak (to borrow Buffetts analogy), with the naked banks scrambling for cash.

Bank branches also have more freedom now to set interest rates, and there is even competition between the branches of the same bank. One bank branch president explained that the penalty for inadequate reserves is a ￥10 million fine. He said, why wouldn't I spend ￥8 million to buy deposits and save ￥2 million?

Off-balance sheet loans have also pushed up the loan-to-deposit ratio. One example was Ping An Bank, which made investments in financial products. These are the trust products that offer high yields, through high interest loans to people who cannot obtain bank credit. (Some may be subprime borrowers, but because China's banking system favors the SOEs, there are also credit worthy borrowers who cannot access bank credit. However, the system is clearly starved for capital because at the supermarket down the street from me, there's now a stall set up offering trust products with a minimum return of 13% interest. If the investor nets 13%, you can guess what they're charging to borrowers.) These investments are therefore technically loans, but the bank counts it as an investment. If these are counted as loans, the bank's loan-to-deposit ratio is understated and the loan reserves are overstated. In the case of Ping An Bank, the loan-to-deposit ratio may have jumped from 67% in June to 80.4% this month.

Finally, the article states that earnings are up at some banks, but down at three of the big state owned banks. A portion of the higher earnings came from cost cutting to salary and bonuses and from skirting banking regulations.

For English coverage, see this WSJ piece out last week: Investors Wary of Another China Cash Crunch

However, amid recent turmoil in some emerging markets and in light of a major Communist Party policy-setting meeting set for November, “China’s new leadership cannot afford to be hit by another unnecessary interbank liquidity squeeze,” Bank of America Merrill Lynch said.

“We should keep in mind that China’s central bank has a deep pocket to provide enough RMB liquidity if necessary,” the U.S. bank said, referring to the renminbi, the official name of China’s currency.

Since the turmoil in June, Chinese banks have also improved their own liquidity management and are much better equipped to deal with a possible crisis, it added.

As the Chinese article says indirectly, the banks are now aware of the risk and that should change behavior. A cash crunch may be less likely because of the bankers' fear, but if more people think like BoAML and expect a central bank backstop, then behavior won't improve and another crisis will come again, albeit perhaps by some "unforeseen" shock.

Here's another WSJ piece from a week earlier listing five reasons for a cash crunch. China Cash Crunch 2: Just When You Thought It Was Safe to Go Back in the Markets

The article lists 5 reasons for a cash crunch:

1. Capital Outflows
2. Quarter End Cash Demand (no mention of the holidays, solely focused on banks padding their ratios)
3. Wealth Management Products Due (this mentions maturity mismatch, but not banks themselves investing in these products)
4. Drawdown of fiscal deposits
5. Actions of the big banks

Between the Chinese and Western sources, there are a lot of reasons to be cautious over the next two weeks.

Google Translation of Chinese article below. 银行拆借市场不安分 9月流动性再迎大考

Restless interbank market liquidity and then meet in September exams

Economic Observer newspaper reporter Shi Yao Yao is holidays, went to the bank quarter assessment point.

Shanghai interbank offered rate (shibor) in 28 days varieties rate since September 6 onwards way line, rose to 5.48 percent from 4.48 percent high.

In this regard, an ICBC trader Zhao told reporters, shibor only official online transactions, currently 28 antennas under (Bank, between the various branches of interbank deposit) trading capital prices have risen to 6.27%. He believes that the September 16 ~ 18, 2011 three days before Mid-Autumn Festival, there will be inter-bank liquidity tensions.

A senior lending those funds Qianmou that "if there is once again banking institutions drive up prices, June panic situation will be staged again at the end of September."

Since July, the central bank has been through reverse repo "locked up long short", making short-term financial market liquidity and market interest rates and central bank policy to achieve "desirable" level, the stability of the financial market expectations.

However, an interview with reporters banking practitioners no one can guarantee that the end of June liquidity crisis will not occur again.

"Restless" factor

According Qianmou, as early as mid-May Industrial Bank sensed that the subsequent market liquidity may appear tight situation. "At that time the head office related departments on the one hand they began to ask for lending out money market, on the other hand began between banks with relatively higher price at grant funds, in order to test the market response."

In this regard, an Industrial Bank as counterparty banks responsible person stressed to reporters, ample liquidity in the interbank market, just bank panic caused June liquidity crisis.

The reporter has learned, resulting bank panic situation there are deeper reasons.

According to the Economic Observer reported, at present there are about inter-bank market daily 1.2 trillion to 1.4 trillion yuan of funds for commercial banks lending stock, but far more than the number of banks involved in the dismantling of market imagination. A number of traders told reporters, when the market price is shibor public based on the increase in interest rates of 1% to 2%.

ICBC head office Zhao told reporters, the official bank of Shibor group currently consists of 18 commercial banks to form, but the inter-bank trading rates far higher than their offer.

"This is because as long as the Commercial Bank agrees and authorizes its affiliates can independently participate in the interbank deposit (buy deposits) transactions which only 18 banks but all authorized commercial bank branches to the market at the same time to borrow money. "he told reporters.

This means that as long as there is a bank branch at a high price to borrow money, it will lead to another branch of the same money a higher price. But this two bank branches is available at all branches of the "crowd" competing for capital under the end, the scale of growth in other branches from their own point of view, the behavior will inevitably competing for funds.

Many an interview with reporters that the bank practitioners before commercial banks in deposit and lending rates in unison under the control of the business situation of the times no longer exists.

Qianmou told reporters, according to his understanding of the bank earlier event of default occurs, the majority appear in transactions between branches.

In this regard, there are state-owned lines branch president rather reluctantly told reporters, facing head office assets, deposit appraisal, under pressure from high interest lending or deposit it directly in the market to buy it is quite upset.

"The scale of the end of June, loan ratio assessment is not up to the branch where I want to be fined 10 million yuan or more, if you can spend eight million yuan to buy deposits, which in turn, we are not also save $ 2 million?" He told reporter explained.

There banking analyst told reporters, according to their understanding of the situation from the market and 2013 semi-annual report reactions situation, China and Bank of Communications mobility compared to other state-owned big firms are more tense.

"On one hand, compared to other interbank liabilities Interest rate (banks and other financial institutions Deposits and borrowing funds) interbank deposit rates below (Deposits and Placements) level, which two banks are upside down; the other hand, Chinese banks loan to deposit ratio was 75%, while it reached 81% of the Bank. "banking analysts believe that the two banks at the end of June to the market needs to borrow money to meet regulatory targets.

Rising Head Office

Since entering in September, although the inter-bank money market and short-term liquidity remains stable, and seven overnight repo rates have remained slight fluctuations; still ample supply of short-term funds, but the cross-quarter demand for funds is still weakened, indicating that institutions have begun advance preparations quarter liquidity position. "The end of September, the loan to deposit ratio assessment not affect market liquidity culprit. Because even bank deposits in the central bank strict credit control, the commercial banks can not significantly increase lending, we are taboo individual banks expensive absorb liquidity mobility of our own influence. "one joint-stock Bank department official said.

The lending of funds by senior Qianmou believe that the current market liquidity, size piece of "cake" will not become large, the banks management should not be thinking about how to grab the cake.

Zhao think that compared to the previous state accusing him of capital adequacy, joint-stock banks in the deposit base is weak but still have to make more profitable business dominant ideology, the use of funds mismatch model to make money on the liquidity demand is very strong.

"June's liquidity crisis on the other hand is a joint-stock banks from non-standard credit (short-term funds for long-term use of credit) under a liquidity drying up, desperate to seek matching funds resulting from market volatility." Zhao said.

According to analyst estimates Goldman Sachs Gao Hua, Ping An Bank to invest in other financial institutions, financial products in the first half year and the chain surged 335 percent, 76 percent, to 159 billion yuan, and its size is about 20% of total loans if these assets and credit-related may cause the loan to deposit ratio is underestimated and the amount of loan than to be overestimated. If these investments are regarded as a loan, then the first half of Ping An Bank in 2013 after adjusting for the amount of loan ratio will decline 30 basis points to 1.48 percent, after adjustment loan to deposit ratio will be increased by 13.5 percentage points to 80.4%. Ping An Bank semi-annual report shows that the end of June the bank loan to deposit ratio of only 67%.

A joint-stock bank trader told reporters, compared to the state accusing him of branches involved in financial transactions, is a joint-stock commercial Head Office in more involved in the transaction.

This can range from bank-reported data to be confirmed.

Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank Head Office revenues compared to the same period the proportion of total revenue has fallen sharply. CITIC Bank in this regard income rose from 17% to 22%, Ping An Bank rose from 33% to 38%, Industrial Bank rose from 9.2% to 19.6%. "Compared to the same scale and allow branches to complete the deposit growth, Head Office to do so, on the one hand save a lot of branches of artificial salary and bonus expenses; other banks to circumvent the strict central bank deposit ratio control, By increasing the size of a way to increase revenue, but for hundreds of one hundred billion yuan deal size, the need for adequate liquidity to match. "he explained.

And this is before the joint-stock Bank who head for the end of September fluidity view the reason is not optimistic.

Chinese Deposit Wars Back On; Banks Refuse To Move Deposits and Poach Depositors With Enticing Rates

Back in September, there were worries of another quarter end cash crunch. Banks were actively buying deposits from other banks to avoid fines of ￥10 million. As one banker said, why not spend ￥8 million and save ￥2 million in the process? See Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

Chinese banks are at it again.

年末钱贵：银行贴息6‰“买”资金冲量 (Year End Expensive Money: Banks Discount Bills 6% to Buy Capital)

Deposit war season is back on. Banks are refusing to move large amounts out of their banks, while other banks are offering huge discounts on very short-term deposits. Banks sell bills priced at a discount. Rates have spiked from 3% to 4.5% up to 4.5% to 6%, with time extended to about 10 days.

Banks have also told agents that they won't move large deposits after December 27, to stop their own deposits from being drained as the cash crunch accelerates into year end. Whereas banks typically move money instantly, now they are limited withdrawals and telling customers it may take 1 to 3 days to settle a transfer.

Agents need a couple of days to open accounts. They collect a minimum of ￥50,000 from individuals or small companies and group it into ￥100 million or more (bigger banks want ￥500 million to ￥2 billion), then move it into the target bank on the 29th. On the 1st of January, they move the money out.

Here's an English article from December 12, before this crunch began, that explains the deposit wars.

Deposits Race in China Raises Fears

Chinese banks currently offer an annualized interest rate of between 4% and 6% on WMPs that mature in one to six months. On traditional deposits, the rates they can offer are limited by a central-bank benchmark—which right now means they top out at 2.86% on three-month deposits and 3.08% on six-month deposits.

According to the above Chinese article, investors can now capture this annualized interest rate for very short-term deposits.

These high interest rate products aren't safe though. While there's no deposit insurance in any Chinese bank, these products lend money to distressed borrowers and those with impaired credit.

The main concern among regulators is banks' ability to make good on the principal and interest owed to investors in WMPs, whose risks are often poorly disclosed to investors. Some of the money going into these products has been used to make high-interest loans to risky private businesses shunned by the banks themselves, a phenomenon critics say could exaggerate loan and investment losses in China's financial system if an economic slowdown led to widespread defaults.

Such fears have been exacerbated by the recent collapse of a 140 million yuan WMP offered through a Shanghai branch of Huaxia Bank Co. 600015.SH +0.39% , which ranks 13th among China's commercial banks by assets. Proceeds were invested by a third-party private-equity firm in four businesses in the inland province of Henan, including a pawn shop.

Investors were promised returns of between 11% and 13%, but when the one-year product matured late last month, they weren't paid back—triggering days of protests by dozens of investors and an intervention by Shanghai authorities. The bank is now negotiating with investors to try to reach a "reasonable solution," said people with direct knowledge of the matter.

This leads to a situation where many depositors are chasing high yields:

One of the investors who bought is Zhong Tao, a 62-year-old retiree who said that after years of having savings accounts she withdrew all her money and now rolls it out of one WMP and into another.

"With deposit rates so low and inflation so high," Ms. Zhong said, "I would be stupid not to do this."

Until the music stops.

Back in June banks were taking similar actions, see Chinese bank offers 6% return up front for ￥1 million 1-Yr CD. No doubt there will be similar stories coming out in the next few days.

The central bank has also done a reverse repo worth ￥29 billion, likely no enough to make a dent. And as ZeroHedge points out, the big banks are sucking up the cash, even though the cash crunch is occurring at the small and medium sized banks. See China Folds, "Un-Tapers"; But Repo Rates Remain Elevated

The big banks have direct access to the central bank's easy money, where have we seen that before? And if you think the smaller banks have it bad, imagine what it's like for the small and medium private businesses who are borrowers at these banks.

SHIBOR Spikes Again Ahead of Spring Festival

I recently had two posts on the risk of an early cash crunch at the end of Janaury. See More on Cash Crunch Risks Ahead of Spring Festival and
Spring Festival Cash Crunch.

Based on history, I expect another cash crunch in March at the end of the quarter. However, Chinese New Year is a cash intensive holiday and banks always see an outflow of money at this time. As reported in the links above, some banks are still attracting depositors with high interest rates.

In the days ahead of Spring Festival, SHIBOR typically spikes. Here are two posts from 2012:
Inter-bank liquidity extremely tight ahead of Spring Festival
SHIBOR drops towards normal levels thanks to massive PBOC intervention

Here is SHIBOR today, followed by a chart of the 1 Week SHIBOR rate.

If you click through the links from 2012, you can see that SHIBOR started spiking about the same time in relation to Spring Festival. Chinese New Year fell on January 23 that year and rates moved about just under two weeks before. It is less than two weeks until Spring Festival this year and rates are moving up again. There's reason to expect rates will continue to drift higher ahead of the holiday unless the PBOC intervenes. With the default of a trust product looming at the end of the month as well, fireworks may start early this year.

March Cash Crunch All But Guaranteed

China PBOC Offers CNY100 Billion 14-Day Repos Tuesday -Traders

The PBOC will probably drain more liquidity this week than it did last week, when it drained only 108 billion yuan for the whole week. It offered 48 billion yuan of 14-day repos last Tuesday.

Most Asian Shares Fall as China Property Concerns Weigh

The Shanghai Composite lost another 2.1% to end at 2034.62 and Hong Kong's Hang Seng Index lost 0.3% to 22317.20 after the People's Bank of China offered 100 billion yuan ($16 billion) of 14-day repurchase agreements in Tuesday's open-market operation, which in effect drained money out of the system.

In June, September and December there were quarter end cash crunches fueled by banks rushing to window dress for the regulators. The cash crunch in September was not reported as a cash crunch because the PBOC intervened ahead of a move higher in interest rates. In June and December, they only intervened after the cash crunch raised interest rates.

Now the PBOC is draining interest rates. Trusts are coming due. Banks are tightening lending policies to developers who make up a huge proportion of trust borrowers. Banks are fighting with a surge of online money market funds winning over depositors. Meanwhile, the PBOC is depreciating the yuan in order to halt hot money flows (this is the wisdom of the crowd, we still don't know for sure), which leads to less foreign currency flowing into China, which leads to fewer renminbi created. The situation is shaping up to be much worse than in any of the prior three quarter ends.

Surging SHIBOR Signals Stress

Here's the search data for "cash crunch" in Chinese.

This chart shows the past few months. The spike in September was due to concerns that a cash crunch could emerge at the end of September. See Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

Also, the Asian currency mini-crisis in India and Indonesia ended a couple of weeks earlier at the start of September. This time, the spike in "cash crunch" searches is coming at the start of a possible trend.

Another Cash Crunch At The End Of Q1? China Allows Foreigners to Buy Up to 30% of A-Share Companies

It's about time for the cash crunch to begin. SHIBOR remains low and the PBOC is still draining liquidity, but at reduced rates, which has some predicting no cash crunch at the end of Q1.

China Rate Swaps Snap Three-Day Gain as PBOC Withdrawals Reduced

The People’s Bank of China drained 26 billion yuan ($4.2 billion) by selling 28-day repurchase agreements at 4 percent today, according to a statement posted on its website. That compared with 100 billion yuan each on March 18 and in two similar operations last week. Goldman Sachs Group Inc. cut its forecast for China’s first-quarter expansion to 5 percent from 6.7 percent today. Premier Li Keqiang said yesterday the government should “strive to keep economic growth within a reasonable range.”

......Premier Li said the government will roll out policies to expand domestic demand and stabilize growth as soon as possible, according to a statement posted on the central government’s website yesterday. Reforms in administrative procedures, fiscal and financial fields, as well as state-owned companies should be pushed forward, he said at a State Council meeting in Beijing yesterday.

季末资金面趋紧 银行理财或继续下行

The sharp rise in the price of money may be subject to the following factors: First, as February's new foreign exchange significantly reduced, while the March of foreign exchange may continue to fall. Second, the central bank repurchase effects appear. Since February 18, the central bank conducted a total of 11 times repurchase operations, although efforts have been modest, but after accumulating effect on the financial side is finally starting to show. Third quarter of factors come into play, quarter or by the assessment of liquidity point of tension that may arise.

However, the industry generally believe that although a quarter of liquidity will be tight but it does not appear excessive tensions. Sealand Securities analyst Fan Xiaoyang said that the overall funds rate at the line, but more than last year, the possibility is very small. CITIC Securities research director of fixed income Deng Haiqing said that over the next seven days if the repo rate is less than 4 percent, the central bank continued to repurchase probability is larger, but it is certain that, similar to last year, June, December funding abnormal price spikes circumstances, this quarter is not reproduced.

Tight conditions, but no crunch. Although other reports say the recent rise in SHIBOR shows pre-quarter end nervousness in the financial system.

China opens door further to foreign stock investors

On a day when the stock market plunged below 2000 again and the Chinext tumbled, China announced it will allow QFII and RQFII to buy 30% of listed companies, up from 20%. Investors looking for a crisis in China also need to keep a close eye on reforms as the leadership will not let the crisis go to waste. SOE reform is already picking up speed in some provinces. The short-term picture is worsening, but the long-term picture is improving.

Cash Crunch Hits China As SHIBOR, WMP and Discounted Bill Rates Jump; PBOC Is Boxed In

Interest rates are moving up across the board now (SHIBOR, WMPs, deposit rates...) and 21st Century Business Herald asks, is the PBOC going to pour liquidity into the market or cut the reserve ratio? Unstated is the expectation that something has to be done. (21st CBH infographic at bottom.)

The charts are as follows: SHIBOR, discount rate in Yangtze River Delta region, WMP interest rates, central bank repos, and central bank interventions (repos in orange, liquidity injections in purple and blue). It shows the PBOC stopped repos in November.

China experienced a serious cash crunch in June 2013 and the situation has only grown worse in terms of the economic fundamentals. The central bank stepped in at prior quarter ends to avoid a repeat of the cash crunch, but rising bad loans and tighter credit in the economy only make the conditions tougher on the banks.

Chinese coverage here: 年底钱紧央行降准预期加大 银行间拆放利率飙升 (cleaned up Google Translated portions below)

Banks are short of money at year-end again.

...calls grow louder for the central bank to add liquidity or drop reserve ratios

...In fact, the negative factors facing the financial side of this week's performance in several ways. First, the start of the 18th batch of the seventh IPO subscription amount is expected to freeze the funds or continue record year peak . According to Guotai Junan estimates, including Guoxin Securities , the mineral resources of 12 new shares is expected to issue 1.56 billion shares IPO is expected to freeze the funds over 2.2 trillion, the largest in history. Secondly, the recent depreciation of the RMB spot exchange rate to accelerate, or increase outflows, November new foreign exchange malaise. The central bank data show November financial institutions foreign exchange increased by only 2.2 billion yuan, down sharply from October's increase of 66.1 billion yuan.

The last point is typical of every significant yuan depreciation in the past 5 years: dollars dry up fast. The yuan is now down to 6.22 versus the USD in HK.

The PBOC is boxed in because it can't ease monetary policy with capital flowing out of the banking system and into the stock market, or overseas. A move to cut rates will boost the stock market and depreciate the yuan.

"Based on the current exchange rate to fall, the stock market fiery and hot money outflows, the central bank will not easily use an open, substantial liquidity tool. But with the gradual increase in financial pressure, the greater the probability of reverse repurchase and adjust the deposit reserve ratio. " Haitong Securities analyst told Economic Herald reporters that the introduction of a limited scale, temporary and targeted delivery tools, such as expectations continued to do more to determine the MLF.

English coverage: China money rates rise sharply as mini-crunch anniversary approaches

China's money rates surged Thursday afternoon, with the weighted average for the benchmark seven-day repo contract quoted at up to 8.5 percent, the highest level since January.

The rise follows another week of relative passivity by the People's Bank of China in the interbank market, where the bank neither drained nor injected funds. It has sat on the sidelines during biweekly open market operations for seven straight sessions.

21st CBH infographic: 年末流动性再趋紧 央行公开市场放量or全面降准？

Cash, Dollar Crunch Returns: Bankers Begging Friends for Deposits on WeChat

Another cyclical slowdown in China looks to be underway. December's FAI went negative yoy and now an anecdote pointing to another cash crunch in the banking system.

Every year ahead of Spring Festival (February 16 this year) cash gets tight, but during the prior tightening cycle from 2013-2015 the cash crunch almost became a quarterly event. There is no spike in SHIBOR as there was in 2014 yet, but there are other similarities. The yuan rose ahead of the crunch (it was in the middle of a bull market from 2010 to the start of 2014) and the first sign of the crunch came in the first quarter-end following the Taper Tantrum and U.S. interest rate spike. The yuan is rising again versus the dollar, the Fed began shrinking its balance sheet in October and U.S. interest rates have spiked.

The result: Begging for money in friend groups, Deposit war guns blazing!

People working in banks are "begging" for deposits among WeChat friend groups...
朋友圈里，“跪求”存款的呼声此起彼伏 pic.twitter.com/uBJeUOHIPm

— Simon Ting (@simonting) February 1, 2018

JRJ.com: 朋友圈里“跪求”存款 揽存大战硝烟四起！

The annual deposit war is particularly fierce this year. The last day of January in the [WeChat] friend groups, bankers "beg" for deposits one after another.

"There are more than 20 banks looking, every one is asking for deposits." a listed company's small partner told reporters that he had been too busy to reply, however. The banker's nickname is "Guixie." [a combination of beg and thanks]

"Perhaps because the New Year approached, company payments are more numerous, bank account capital is less, bank competition for deposits is even more intense." A banking source told reporters bluntly, these days are quite difficult.

"Early this year, due to the strong demand for credit, debt problems continue to simmer, more banks seek deposits, especially regulatory assessment, have the resources available." Minsheng Bank Wang, director of Center for Financial Research Fellow a peak, told reporters that the banking system liabilities is difficult, debt problem has been going on for some time, mainly due to foreign exchange increment is not enough, shadow banking is inhibited. In 2017, the banking system credit growth significantly faster than deposit growth, resulting in rising loan-deposit ratio, sounding the alarm over the assets and liabilities, liquidity management pressures.

On the one hand, the news suggests credit growth was solid in January, but is also suggests the financial system is hitting some hard limits as credit growth outpaces deposits. The highlighted portion confirms Jeffrey Snider's description of the current state of affairs as a "dollar" or eurodollar problem. The Chinese banking system is starved for dollars.

Alhambra: The Chinese Appear To Be Rushed

While the Western world was off for Christmas and New Year’s, the Chinese appeared to have taken advantage of what was a pretty clear buildup of “dollars” in Hong Kong. Going back to early November, HKD had resumed its downward trend indicative of (strained) funding moving again in that direction (if it was more normal funding, HKD wouldn’t move let alone as much as it has). China’s currency, however, was curiously restrained during that time.

No more. Since the middle of last week, CNY has been sharply higher. All those “dollar” balances that were surely sitting in Hong Kong perhaps just waiting for year-end were moved almost all at once.

Why the rush?

Maybe there were some government concerns for those end-of-year activities in eurodollar markets that were clearly pushed askew by what’s going on over there across the Pacific. I’m not aware of any official deadlines or regulatory requirements that would have condensed the “dollar” flow into such a tight calendar space. It looks instead to have been related to market conditions, particularly since CNY wasn’t the only big mover during that time.

The news at the end of January tells us whatever stress sent the Chinese rushing at year end is still pressuring the financial system.

The picture from 50,000 ft shows that despite a slowdown in M2 growth:

the Chinese financial system's growth is still outstripping the implicit reserves backing it:

The above chart doesn't matter until it does, such as in August 2015 when the PBoC threw in towel and allowed the yuan to devalue. This time around, the dollar is weakening and the yuan is rising along with the euro, further weakening the yuan's long-term position. China will be forced to devalue sooner than last time, when it took 18 months from the problem emerging in early 2014 to devaluation.

As for the rising yuan, Chinese exporters are already squealing.

SCMP: In China, yuan’s rapid gains make exporters uneasy as US dollar weakens

Its rapid gains are instead fuelling unease and fears over the negative impact on Chinese exporters, and it has even fanned theories that China is falling victim to a new type of “currency war” started by the US to cut the trade imbalance.

The yuan is a problem at USDCNY 6.3 and USDCNY 6.9 because China has a massive credit bubble. At one end, the deflationary impact of a rising yuan and at the other, the risk of a major devaluation. In the middle is the Goldilocks exchange rate, not to strong to trigger debt default, not to weak to trigger outflows. USDCNY 6.3 in the current environment is too strong. The PBoC is also pinned in this range. Loosen capital controls to let the yuan weaken, exacerbate the liquidity crunch in the banking system and risk uncontrolled depreciation/capital flight. Let the yuan strengthen and risk a credit crisis. Further reverse yuan internationalization and set the yuan price, but risk an economic response from the United States.

Takeaway

China bought two years with its 2016 reflation, aborting a global slowdown stemming from its last decision to slow credit growth. This growth cycle has completed and is turning down again.

The fallout from the prior slowdown started showing up after Spring Festival in 2014. From February 23, 2014: China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. Regarding the dip in the yuan, I wrote:

If this keeps up, we may soon hear about a dollar shortage in China, which happened last time the yuan spiked. Also, after the 2011 drop, forex reserves fell.

It will only take a small marginal change in the economic trends to create a hurricane force in the financial markets. Once the market moves the other way, the shift will be swift and brutal because everyone is on the other side of the trade. How many people out there have puts on the yuan and expect China's reserves to start falling?

If history rhymes, there's going to be some significant negative news out of China in March. If that happens, the clock will start ticking on the next global deflationary wave.

The conventional wisdom about equities, interest rates, inflation and emerging markets is wrong again, just as it was in 2011 and 2014.

Good News in the Looming CCT ICBC Trust Default, But Cash Crunch Fallout Continues

Events took a turn for the better in the "Credit Equals Gold" looming default story.

China provincial govt may bail out shadow bank to avert default

A Chinese provincial government may help bail out investors in a troubled high-yield investment product, local media reported on Thursday, in a closely watched case viewed as a potential landmark precedent for defaults in China's shadow bank sector.

Shanxi province in central China, home to the struggling coal company that received a high-interest loan through an investment trust, may provide half of the funds necessary to repay investors when the trust product matures on Jan. 31, the 21st Century Business Herald reported on its website on Friday, citing an unnamed source.

......China Credit Trust also told investors on Wednesday that the coal company, Shanxi Zhenfu Energy Group Ltd, had received a key government permit that would enable it to restart production on one of its coal mines.

Zhenfu also resolved a property-rights dispute with villagers over another mine, the trust said.

"The value of these two mines will now rise significantly. Basically these two assets have been revitalised," the official China Securities Journal quoted an unnamed trust industry executive as saying on Thursday.

The latter was one of the issues mentioned in yesterday's stories: CCT has shares in Zhenfu mines, but without mining permits, the shares are nearly worthless.

Elsewhere, China Credit Trust cites progress in avoiding shadow-bank default

China Credit Trust Co Ltd, whose product could set a landmark precedent for default in China's fast-growing shadow bank sector, said it is in discussions with new investors in an effort to raise the funds necessary to pay off current investors when the high-yielding product matures on Jan. 31.

A lot of focus was placed upon the potential default of the trust, but the bigger issue remains China's credit bubble. A bailout does not help the situation, actually it signals to investors that even this small default is such a threat that the government will step in and rescue it. The situation with "Credit Equals Gold" came about because of larger trends. China is cracking down on corruption and those crackdowns will unearth shady business dealings with government officials; combined with the corruption crackdown is greater restriction on local governments ability to borrow money, which slows the economy (slower growth is better than wasted investment, but in the short-term this puts pressure on the financial system); and overall tighter monetary policy has led to a cash crunch at the end of the past three quarters.

The effects of December's cash crunch continue to spread though: China factory contraction shows weak start for economy in 2014

Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PM) fell to 49.6 in January from December's final reading of 50.5, dropping below the 50 line which separates expansion of activity from contraction.

The data is the first indication of sentiment in the 56.9 trillion yuan ($9.4 trillion) economy, the world's second-largest, for the new year.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

More on the Cash Crunch in China's Interbank Market

Yesterday, reports of a cash crunch were reported in the Chinese media. See: Cash Crunch Returns: Trading Defaults Force PBoC to Flood Market With Liquidity

More details have emerged in the past 24 hours.

ZH: PBOC Injects Hundreds Of Billions Into Chinese Banks After Sudden Defaults In Interbank Payments

According to a brief note by Bloomberg, Tuesday’s injections followed missed interbank payments on Monday, anonymous sources said; the matter is not made public over concerns of bank deposit flight risk. The institutions that missed payments included rural commercial banks. One of Bloomberg's trader sources said a borrower failed to repay an overnight repo of less than 50 million yuan ($7.3 million). China’s smaller lenders have been squeezed by a rise in money market rates this week, with the benchmark seven-day repurchase rate jumping to the highest level since April 2015 on Tuesday.

...While the tightening of liquidity reflects factors including quarter-end regulatory checks and a wall of maturing certificates of deposit, BBVA said the People’s Bank of China may also be sending a message to over-leveraged firms to rein in borrowing.

“The PBOC wants to warn the smaller lenders not to play the leverage game excessively,” said Xia Le, chief economist at BBVA in Hong Kong. “It’s a tug of war between the central bank and the financial institutions.”

And while some smaller banks were on the verge of failure, overnight virtually everyone felt the surge in the 7-day repo fixing to the highest since 2014, driven by China's liquidity squeeze amid policy tightening and continued high leverage

As Goldman's MK Tan explains, China's 7-day repo fixing interest rate rose to 5.5% on Tuesday, the highest level since late 2014. This followed PBOC’s statement last Thursday signaling a deviation from the previous framework of regarding interbank rates as de facto “policy rates”. Reflecting the prospective quarter-end MPA (macro-prudential assessment) examination and continued tightening bias from the PBOC, interbank rates may remain fairly volatile in the coming days, although most analysts do not expect such elevated rates to be sustained, especially since the PBOC will promptly have to bail out any banks suffering a liquidity squeeze.

The Chinese bank employee quoted in the article posted yesterday said liquidity has been tight all year. The MPA is having an effect on liquidity, but conditions have been persistently tight since before the end of 2016. The defaults and spike in interest rates is a symptom of underlying deflationary (disinflationary) conditions.

Two Week SHIBOR Up 1% Since Yesterday

Chinese interest rates are becoming news again.

Here is some background.

From July: China OKs plan to liberalise rates on insurance products

China sets many restrictions on interest rates on insurance products, including a 2.5 percent upper limit on pre-determined rates for life insurance products.

August: China insurance price war looms as rate cap goes

Analysts expect policyholders to be more keen to withdraw from existing insurance policies and seek higher returns from newly issued policies, pressing insurers to cut prices and diversify products in an effort to keep existing clients.

Li said the withdrawal rate would increase significantly in the first few years after the interest rate cap was removed.

Ping An Securities estimates that prices of insurance polices will be cut by 30 per cent when the predetermined rate is set at 3.5 per cent, while the value of new business, a measure of the present value of future business, will decline by 60 to 70 per cent.

Today: Market rates insurance firms battlePredetermined interest rate of 3.5% exceeded 4% of straight (险企激战费率市场化)

October 15, Ping An Life Insurance launched the company's first market-based rates for new "flat Anfu", a product that directly across the predetermined interest rate of 3.5%, is set to 4%, higher than the same kind on the market today products.

So what is the drop off in present value at 4%?

These are just the insurance companies.

From September: China unveils new steps to free up interest rates

The central bank will expand market-oriented benchmark rates from the money market to credit markets and organize big banks to offer lending rates to their high-quality clients to set the benchmark borrowing costs for the industry.

In July, the PBOC scrapped the floor on lending rates but banks still price their loans based on the benchmark rates when they make loans. The one-year official rate stands at 6 percent.

The decision to remove the floor on bank lending rates was seen as a largely symbolic prelude to eventually removing caps on deposit rates, a much more difficult task that will take time.

The issuance of certificates of deposit on the interbank market and expansion of market-based pricing of debt products, will "create conditions for steady and orderly liberalization of deposit rates", Hu said.

The central bank, under the helm of reform-minded Zhou Xiaochuan, has been trying to promote the role of the Shanghai interbank offered rate (SHIBOR) as the benchmark for short-term borrowing costs, now that money-market rate are largely determined by market supply and demand.

Note the headline. SHIBOR can be volatile.

Last month I wrote: Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

The cash crunch didn't materialize, but rates are moving higher now and the same concerns are surfacing.

Also from September, this ZeroHedge article: China: No Leverage, No Growth

That is also the reason why in early summer, China tried to conduct a mini-taper of its own to streamline its monetary pipeline which had been so filled with bad and non-performing credit, that the PBOC effectively pulled the switch on new liquidity for over a month.

What happened almost immediately after, when rates on ultra short term funding soared to 20%+, nearly destroyed the domestic banking system and resulted in a major slowdown in the Chinese economy. "Luckily" for China, its close encounter with the taper was brief, if quite painful, and following a period of shock, the Chinese central bank had no choice but to resume injecting banks with their daily dose of monetary morphine all over again.

The spurt in growth in August and September was a result of fiscal policies in July aimed at papering over this mini crisis. Now that is over. Exports fell in September and the stimulus has faded.

Also, the renminbi continues to move higher.

Fake invoicing of exports and other arbitrage tricks sent the renminbi higher in April and May and was a contributing factor to the central bank's move to tighten monetary policy. Now the renminbi is ticking higher again after export sank in September, are firms on the verge up to their old tricks? In any event, higher interest rates and a stronger renminbi are a double dose of poison for exporters and marginal producers in the Chinese economy.

Investors should keep a close eye on China in the coming weeks. It may all amount to nothing, but if there's another cash crunch, global assets are priced for a drop.

Cash Crunch Returns: Trading Defaults Force PBoC to Flood Market With Liquidity

Some institutions and traders were begging for capital after 4:30 PM on Monday, unable to meet financing obligations. One ag trader said, "Today we borrowed from morning to night, until after 5 PM, there were a lot of small institutions that failed to meet their obligations, I thought the interbank market would delay closing."

21st Century Herald reports several large banks were borrowing in the interbank market, including Bank of China, Construction Bank and Postal Savings. "National banks didn't give much money, Postal Savings actually [lent] out some money," said the trader.

"Of course, the end of quarter MPA assessment has some bearing, but I think there is a greater relationship with the central bank deleveraging policy." A Huadong Rural Commercial Bank financial market employee told 21st Century: "late last year is also very tight money, everyone said the past year is good, but in fact into this year capital is still tight. Traders believe they can wait until four o'clock and money will naturally be released from the big banks, but today there is none."

The central bank began to inject liquidity through open market operations. Today, the central bank injected 30 billion, yesterday it injected 40 billion.

iFeng: 媒体称央行向市场注入数千亿元流动性

Is China going to be able to inject enough money at all the right moments to avoid a wave of defaults? And if they can do it, how much money are we talking about when a minor funding gap in the market triggers a 70 billion yuan release of capital? The numbers start adding up if this is a permanent fixture of "neutral" monetary policy and deleveraging.

Related: China's money rates surge on concerns about PBOC risk checks

SHANGHAI, March 21 Short-term interest rates in China surged on Tuesday as cash conditions tightened on worries the central bank's quarterly risk assessment at the end of this month would restrict lending in the interbank market.

The benchmark seven-day repo rate traded in the interbank market, considered a key indicator of general liquidity in China, opened at 2.45 percent and jumped to a high of 9.0 percent in morning trade, its highest since January 2014.

By midday, the volume-weighted average rate was standing at 2.6939 percent, around 23 basis points lower than the previous close but still near the near two-year high of 2.9298 percent hit last Friday.

Traders and analysts say liquidity tightness is driven by worries the People's Bank of China's quarterly Macro Prudential Assessment (MPA) at the end of this month could sway big banks away from lending cash to smaller ones.

"The last two weeks of March should be a period of intense volatility with both the MPA and quarter-end cash demand," Guotai Junan Securities wrote in a note.

The cash crunch is back.

Unprecedented Financing Pressure Crushing China's SMEs, Trillions in Non-Standard Debt Coming Due, PBOC Action Expected

Analysts from China Merchant's Bank lays out why the current default wave is a far greater risk than the earlier rounds because of far greater magnitude and far tighter liquidity conditions among other reasons. SMEs are under serious financing pressure, suffer liquidity mismatch, soaring financing fees, ROEs below the cost of capital and the disappearance of non-standard financing as they have to roll over their non-standard debts. Since financing remains tight for SMEs, the PBoC may be forced to ease more than it wants in order to prevent systemic risk. More yuan depreciating RRR cuts are likely on the way.

华尔街见闻： 躲不过的“违约”——民企债务依赖的刚性正在显露

The author of this article is China Merchants Securities Xie Yaxuan, Li Yuze, Wang Yuting, the original title "[Must read depth] financing dilemma, risk transmission and policy research judgment"

Using the two-point method + double-level framework to observe, private enterprises have been forced to curb by tightening leverage and making large net profit methods; debts with high interest, delayed deleveraging and “maturity mismatches” are quickly revealed, pressuring refinancing capabilities. The cash flow pattern of internal and external difficulties has caused private enterprises to suffer a shortfall in liquidity.

Can external financing slow down the pressure on private enterprises? Even if it does not constitute a "threat", it is "lucky". Unlike the previous round of tight credit, innovations in the table have led to the construction of complex endogenous co-insertion between banks and banks, banks and non-banks, non-banks and non-banks. In the reverse process of idling, the non-bank idling multiplier will exponentially decay, and it is difficult to add non-standard to offset. In addition, the debt of private enterprises is in an embarrassing situation. The ABS is too small, and the non-standard external financing outside the system is “hard to protect”. The cash flow of private enterprises is experiencing the darkest moment.

The Google translate is a mess, but basically the money multiplier is slamming into reverse.

The analysts see Q3 as the high point for liquidity risk:

Static observations, credit risk may be concentrated in the third quarter. According to our previous calculations, whether it is deduction or revision, the non-standard concentration will be in the second and third quarter of this year (the second quarter may be delayed). Even if the credit bond financing is restored, it is difficult to make up for the gap caused by the non-standard collapse after the hedging expires. Excessively intensive non-standard breaches will damage the financial system through non-interbank, non-bank-interbank chains, which will undoubtedly further weaken the broad money derivation.

This entire section is bold in the original:

In general, the transformation of the micro-structure has caused the current credit crisis to be much greater than in the past. If the policy decision simply duplicates the broad monetary policy in 2014, it is not difficult to fill the financing gap in the short-term linkage of the bank's asset side. If broad credit is used, it is difficult to avoid the "old disease" in which private enterprises suffer discrimination. At the same time, the credit volume and non-standard maturity are disparity, and it is difficult to achieve effective conversion of financing methods. Therefore, it is not excluded that the central bank will restart the orientation policy in the third quarter. Whether it is targeted reduction or targeted interest rate cut, or whether specific enterprises can obtain credit concessions, the purpose is to prevent the financing gap of the private enterprise sector from becoming a systemic risk from a structural perspective.

The PBoC may have to turn on the liquidity fire-hose if it wants to offset the collapse the non-bank lending.

Private enterprises have strong profit margins and ROE (yellow). Centrally-owned SOEs (gra). Local SOEs needed help in 2016 (steel and coal overcapacity).

On the one hand, the ROC of state-owned enterprises and private enterprises has risen and leveled, revealing the favorable targets of supply-side reform. As one of the variables that determine ROE, ROIC produces differentiation between private enterprises and state-owned enterprises. The ROIC recovery of local state-owned enterprises began in the initial stage of the supply-side reform. The growth of private enterprises' ROICs was not as obvious as that of state-owned enterprises, and the second was flat, which did not drive ROE growth. The differentiated return on investment shows two pictures:

First, the price logic and the improvement of concentration caused by the supply-side reform are actually more inclined to state-owned enterprises, especially local state-owned enterprises;

Second, the return on investment returns of private enterprises is a bit "cold", and the correlation between ROE improvement and ROIC is limited.

On the other hand, private enterprises ROIC is not bad, but why is the solvency sharply weakened? For the split of the ROE, we move further to: ROE-ROIC=(ROIC-r)* net financial leverage. The credit qualification curve on the right side of the equation shows that pure return on investment can cover debt interest rates to a large extent. Obviously:

1) The improvement of the credit qualification of state-owned enterprises is the result of the linkage of ROIC;

2) The ROIC of private enterprises has not deteriorated significantly. Why is the deviation from the credit qualifications of state-owned enterprises more and more obvious? Mapping three possible factors, one is that the level of debt is acceptable, but the cost is generally too high (r is larger); the debt structure is unbalanced; finally, the financial leverage is quite high, the financing cost is slightly lower than the investment return, and the credit qualification will be A rapid decline.

Therefore, based on the above splits, it can be found that the internal cash flow level and the increase in net profit have led to a simultaneous rebound in ROE between state-owned enterprises and private enterprises, but the driving factors are quite different. The former comes from the improvement of ROIC (real return on investment), which is related to the expansion of financial leverage or debt size. So is the guesswork about the debt structure of private enterprises appropriate? We further observe the characteristics of the debt structure level (external cash support) below.

Local SOEs have seen their return on equity climb above their return on capital, but high financing costs have left private firms underwater:

Debt-to-asset ratios of private firms have risen thanks in part to high financing costs, slowing their deleveraging efforts.

Moreover, the financing of private enterprises has been discriminated against, the high interest-bearing debts and the prevalence of “short-term borrowing and long-term use” have intensified the risk of rolling debts.

On the one hand, the ratio of interest-bearing debt to total debt symbolizes the difficulty of financing, while the average proportion of interest-bearing debt of private enterprises has been higher than 50% since 2013, and the side also reflects the pain point of discrimination in the financing stage. At the same time, compared with state-owned enterprises, the adjustment of interest-bearing debts of private enterprises is lagging behind, and the above-mentioned asset-liability ratio has suddenly increased into two sides, all indicating that external debt is “addiction”.

On the other hand, the “maturity mismatch” method of reducing debts weakens the ability of private enterprises to resist risks. In the wide-currency cycle of 2014-2015, debt costs are low, and companies continue to roll short-term debts for long-term use. However, due to the reversal of financing conditions, state-owned enterprises have not changed much in terms of profit improvement and background advantages. As for private enterprises, it is difficult to realize short-term borrowing. This is why we will see that most of the subjects that have been breached this year can be attributed to liquidity risk, and even the issuance of bonds may become the trigger for redemption pressure.

This chart shows the share of interest bearing debt versus total debt for private, local SOE and central SOEs (top to bottom lines). The gray shaded area shows the widening spread between private firms and central SOEs.

This next chart shows the ratio of short-term/long-term debt at private firms (red, left axis) and SOEs.

Private firms are seeing the fees associated with financing explode.

3, the picture of cash flow: private enterprises cash flow pressure, unprecedented

The cash flow is the most direct portrayal of “internal and external troubles” from the perspective of cash basis. Based on the above discussion, it is not difficult to find that the differences between the private enterprises and the state-owned enterprises in 1) profits have increased sharply, and 2) the former is more obvious in the debt structure. In fact, the above two major subjects have already reflected the shortcomings of corporate cash flow from the side, but it is not straightforward because of the use of accrual accounting. If we look directly at the cash flow level, private companies are experiencing the darkest moments.

On the one hand, the internal hematopoietic function of private enterprises is insufficient, reaching the lowest point since 2008. The internal hematopoietic function of the enterprise is measured by the net profit of operating and investment cash flow. Since 2016, the free cash flow gap of private enterprises has expanded significantly in the negative interval. After the financing conditions were reversed, the decline was even faster. The difference between cash flow and profit growth is essentially the result of the interaction between the downstream corporate debt rolling and the increase in accounts receivable.

Net cash flow at private firms (red bars) is in the red versus well the black at SOEs (gray).

On the other hand, net free cash flow + net cash flow from financing reflects the beginning and end of the debt cycle of private enterprises. From the wide-currency cycle of 2014-2015 to the tight credit cycle since 2017, the sum of the three net cash flows of private enterprises highlights the liquidity dilemma. Different from the above-mentioned free cash flow gap, and the net cash flow from financing, the cash flow of private enterprises has turned from negative to positive, further supporting the above conclusion that the internal cash flow of private enterprises is weak and can only be supplemented by external cash flow. However, the soaring financing costs have led to a narrowing of refinancing channels, rolling debts are unsustainable, and the sum of net cash flows is forced to face a downturn. On the contrary, the state-owned enterprises themselves have advantages in financing, coupled with the help of supply-side reforms, the cash flow is becoming more and more full.

In summary, the impact of credit crunch on private enterprises should not be underestimated. First, through the expansion of accounts receivable, the differentiation of net profit and free cash flow gap will be aggravated; secondly, the means of expanding debt and pushing up profit will be interrupted; It is to curb the debt "mismatch" and restrict the ability to renew debt.

At this stage, the pressure on private enterprises' cash flow is unprecedented. Under the pattern of internal liquidity collapse, whether external debt can effectively roll over becomes the key to judge whether the subsequent credit risk will continue to spread. Below we will discuss further the possible impact of tight credit.

Private firms have increasing relied on raising non-standard financing whereas SOEs benefited from reform efforts and higher profits:

Major defaults were avoided in 2013 because shadow banking stepped in where banks stepped out.

The same credit contraction, the magnitude is not the same

1. The past experience of deja vu: Why did the tight credit in 2013 not cause a large-scale default?

The cooperation between Yinxin and China is the main mode for the development of the first phase of the shadow banking. We have discussed in the non-standard measurement _20180626 from the perspective of “ Expiration Nightmare: “Large Asset Management” . From 2008 to 2013, the “channel-non-standard” asset expansion drive model is based on the cooperation of silver letters. , the bank's cooperation and other channels are supplemented by carriers. This type of model docking financial investment is prevalent. This is also the same as after 2010, the credit crunch, the expansion of the physical financing gap, and the need for financial support, while the city investment company and the real estate industry are the main digestive subjects.

In terms of social integration, the sudden increase in non-standard net increments from 2012 to 2013 is not unrelated to the bank-investment cooperation model. Among them, the proportion of new trust loans jumped to 10%, hitting the peak of history. However, with the beginning of the No. 8 document in early 2013, the bank's financial management investment began, and the process of non-standard returns was gradually accelerated.

Trust lending surged in the prior "deleveraging" wave and defaults surged.

Then, has there been a large-scale debt default at that time? The trust product redemption crisis has been one after another. When the credit bond and asset securitization markets have not matured, the credit financing channels are concentrated in bank loans and non-standards. The non-standard loans are concentrated in private enterprises, urban investment platforms and local enterprises with “two highs and one surplus”. The rise of the bank-trust cooperation model has made up for the bank's financial management's appeal to high-yield, and it is also a detourary supervision, and disguised lending to “forbidden investment” enterprises. In fact, before the issuance of the Notice on Regulating the Relevant Issues Concerning the Investment Operation of Commercial Banks' Wealth Management Business, in early 2012, the model of trust-taking off-balance-sheet business showed signs of stopping, and the number of new projects was scarce, which also indicated the pressure of entity refinancing. The emergence of.

Based on the data at the time, 1) the trust redemption crisis was basically concentrated in the end of 2012 and the beginning of 2013. After the issue of the 8th document, the trust products that were breached were more frequent, and 2) the capital demanders for default were private enterprises. Most of the projects invested in real estate are followed by coal projects.

Judging from the reasons for the difficulty of redemption, the focus is on 1) the tight cash flow of the enterprise, and 2) the financing party to repay the private credit, and the trust products cannot be issued in a rolling manner, so there is pressure for redemption. In fact, this is a very similar situation to the companies that defaulted this year.

Trust defaults in 2013:

Trust defaults by industry (coal 4, real estate 15).

Skipping to the punch, the surge in financing dwarfs the trust surge back in 2012 adnd 2013, therefore the risk is far larger and could pose systemic risk.

For entity financing, especially for private enterprises that rely on non-standard financing, it is not only difficult to obtain new non-standard support, but the pressure of constructing the centralized maturity will also create a high point (for the specific measurement process, see “ Expiration Nightmare:” Tube non-standard measurement _20180626》. Assume that the channel non-standard and social welfare non-standard average duration is 3-3.5 years, and the total non-standard amount due this year is about 7 trillion. Moreover, considering that non-standard products may have the inertia of redemption, the second quarter and the third quarter will be the peak of concentrated expiration.

In summary, the intricate relationship between banks and non-banks has constructed a very different feature from the previous round: 1) the inter-bank vacancy in the bank + the nested idling between non-silveres exacerbates the fragility of the system, and the new asset management The rule of the law, the reverse process of going to the "bubble" will appear in the form of a multiplier, the new non-standard sharp reduction will be the inevitable result, and 2) if the non-standard breach occurs in a large area, the bank and non-banking are hard to say "being alone", 3 The physical financing gap, especially for private enterprises that are not subject to non-standards, will not only be unable to renew their liabilities, but will also face a large number of non-standard maturities in the third quarter.

Timing of maturities, by type of debt. Left hand scale is trillions of yuan.

Net financing at private firms has collapsed:

Second, P2P, financial leasing and private lending are difficult to protect themselves. P2P and financing leases increased by more than 300 billion in the month, which seems to ease the pressure on non-standard maturity. However, this type of financing is not only short-term, high cost, but also in the strict background of laws and regulations in recent years, or will shrink, it is difficult to become a "breakthrough."

Finally, although ABS has a policy of “protecting the car”, the market is too small. Asset securitization is encouraged by the policy, but the contradiction between “far water” (a small inventory of ABS) and “near thirst” is not enough to slow down the liquidity pressure of enterprises. Coupled with the improvement of penetration criteria, not all SMEs meet the requirements.

The analysts conclusion:

Based on the above analysis, we can easily find out:

1) In the past, private enterprises have been tightened by pushing up leverage, and the means of making large net profits have been curbed by tight credit; the debts with high interest-bearing debt, sluggish delays and “mismatch mismatches” have been exposed too quickly, and the ability to refinance has been suppressed. The cash flow pattern of internal and external difficulties has caused private enterprises to become a gap in physical liquidity.

2) Can external financing slow down the pressure on private enterprises? Even if it does not constitute a "threat", it is "lucky". Unlike the previous round of tight credit, innovations in the table have led to the construction of complex endogenous co-insertion between banks and banks, banks and non-banks, and between non-bank and non-bank. In the reverse process of idling, the non-silver idling multiplier will exponentially decay, and it is difficult to add non-standard to offset. In addition, the debt of private enterprises is in an embarrassing situation, the ABS is too small, and the non-standard external financing outside the system is “hard to protect”, and the cash flow of private enterprises is experiencing the darkest moment.

3) Static observation, credit risk may be concentrated in the third quarter. According to our previous calculations, whether it is deduction or revision, the non-standard set expiration will appear in the second quarter of this year. Even if the credit bond financing is restored, it is difficult to make up for the gap caused by the non-standard collapse after the hedging expires. Excessively intensive non-standard breaches will damage the financial system through non-interbank, non-bank-interbank chains, which will undoubtedly further weaken the broad money derivation.

In general, the transformation of the micro-structure has caused the current credit crisis to be much greater than in the past. If the policy decision is to simply copy the broad monetary policy of 2014, it is difficult to fill the physical financing gap in the short-term linkage of the bank's asset side. If wide credit is used, it is difficult to avoid the "old disease" in which private enterprises suffer discrimination. At the same time, the credit volume and non-standard maturity are disparity, and it is difficult to achieve effective conversion of financing methods. Therefore, it is not excluded that the central bank will restart the orientation policy in the third quarter. Whether it is targeted reduction or targeted interest rate cut, or whether specific enterprises can obtain credit concessions, the purpose is to prevent the financing gap of the private enterprise sector from becoming a systemic risk from a structural perspective.