25 Jun 2013
China's credit fears go global
FXstreet.com (Barcelona) - Global markets are starting to take very seriously the credit crunch story developing in China, which now see the Middle Kingdom as even a bigger threat than any imminent Fed's QE taper strategy .
The set of tighter monetary policies the Central Bank of China (PBoC) has chosen to ease the speculation in shadow finances, has led to a cyclone of unrest by investors, anticipating that the disturbance by having lesser liquidity may shut the easy access of hot money, which subsequently may cause China's growth this year to face well-founded downside risks.
While there has been continues warning over the malpractices in the abusive Chinese shadow banking system, somehow, the snow ball did not really set into full motion rolling down the Big Panda's hill until the realization that China's hot market was getting out of control as evidence mounted over businesses having trouble paying back short-term debts.
Charlene Chu, the Fitch senior director in Beijing, was one of the first to come to the fore recently - on June 16 - to raise a red flag about the country's credit-driven growth falling apart, suggesting that the hardship to generate similar levels of growth enjoyed in the past is now largely undermined. Chu also mentioned massive problems of transparency, systemic risk rising and hidden second balance sheers for banks as other underlying problems China faces.
The PBoC has found itself into a rock and a hard place. On one hand, they may have opted to simply keep pumping further provision of funds into the interbank market to calm down rates; or on the other hand, opt to deal with the underlying speculative issue. The latter is the challenging yet more responsible approach taken.
As read in an article by Bloomberg's editor Dexter Roberts, regarding China’s credit crunch: "The whole episode is a positive sign for some as it shows China’s top leaders are still serious about broader economic restructuring and that they mean business when it comes to cleaning up some of the frothiness in the banking sector."
While thinking on an over-reaction by the markets is up to one's judgement, - never forget all the credit-driven rally seen in the past - the fact that China is not being put off by the scary moves in the Shangai Stock Exchange Composite, which has had its worst 2 days in almost 4 years, shows that an important shift in priorities is taking shape.
Further confirming this change, in a recent statement, the PBoC stated that 'overall bank liquidity conditions are at a reasonable level' and asked banks to 'prudently manage liquidity risks that have resulted from rapid credit expansion', 'appropriately contain the pace of loans and bill financing' and 'utilize the stock of money and credit to support the economy'."
One key takeaway from the new Chinese leadership to put its house in order and redesign its growth model, is, as recently explained by Greg Gibbs, Strategist at RBS, that we are entering a phase in which the market no longer ignores the Chinese shadow banking system, saying that "while the Taper and Abenomics smokescreens have distracted the market from developments in China somewhat, China has certainly entered the main-stream market analysis."
According to Gibbs, "the big risk factor for global markets now is China and how it deals with its financial bubble, with all the evidence is that the new government is now working on this problem." For Gibbs, the real question is "can they let the air out without too much damage?"
The set of tighter monetary policies the Central Bank of China (PBoC) has chosen to ease the speculation in shadow finances, has led to a cyclone of unrest by investors, anticipating that the disturbance by having lesser liquidity may shut the easy access of hot money, which subsequently may cause China's growth this year to face well-founded downside risks.
While there has been continues warning over the malpractices in the abusive Chinese shadow banking system, somehow, the snow ball did not really set into full motion rolling down the Big Panda's hill until the realization that China's hot market was getting out of control as evidence mounted over businesses having trouble paying back short-term debts.
Charlene Chu, the Fitch senior director in Beijing, was one of the first to come to the fore recently - on June 16 - to raise a red flag about the country's credit-driven growth falling apart, suggesting that the hardship to generate similar levels of growth enjoyed in the past is now largely undermined. Chu also mentioned massive problems of transparency, systemic risk rising and hidden second balance sheers for banks as other underlying problems China faces.
The PBoC has found itself into a rock and a hard place. On one hand, they may have opted to simply keep pumping further provision of funds into the interbank market to calm down rates; or on the other hand, opt to deal with the underlying speculative issue. The latter is the challenging yet more responsible approach taken.
As read in an article by Bloomberg's editor Dexter Roberts, regarding China’s credit crunch: "The whole episode is a positive sign for some as it shows China’s top leaders are still serious about broader economic restructuring and that they mean business when it comes to cleaning up some of the frothiness in the banking sector."
While thinking on an over-reaction by the markets is up to one's judgement, - never forget all the credit-driven rally seen in the past - the fact that China is not being put off by the scary moves in the Shangai Stock Exchange Composite, which has had its worst 2 days in almost 4 years, shows that an important shift in priorities is taking shape.
Further confirming this change, in a recent statement, the PBoC stated that 'overall bank liquidity conditions are at a reasonable level' and asked banks to 'prudently manage liquidity risks that have resulted from rapid credit expansion', 'appropriately contain the pace of loans and bill financing' and 'utilize the stock of money and credit to support the economy'."
One key takeaway from the new Chinese leadership to put its house in order and redesign its growth model, is, as recently explained by Greg Gibbs, Strategist at RBS, that we are entering a phase in which the market no longer ignores the Chinese shadow banking system, saying that "while the Taper and Abenomics smokescreens have distracted the market from developments in China somewhat, China has certainly entered the main-stream market analysis."
According to Gibbs, "the big risk factor for global markets now is China and how it deals with its financial bubble, with all the evidence is that the new government is now working on this problem." For Gibbs, the real question is "can they let the air out without too much damage?"