June 24, 2013
Those who have been holding their breath until China joins the overnight market fireworks can finally exhale.
Following yesterday’s unprecedented formal announcement of epic capital misallocation, the PBOCtried to continue the damage control when a few hours ago it announced that Chinese banking system liquidity “is at a reasonable level“, but that banks must control liquidity risks from fast capital expansion, especially credit expansion, according to a statement on management of banks’ liquidity on website. The implication: no easing any time soon, and sure enough no repo or reverse repo activity was logged in the overnight session meaning Chinese banks, for the time being, continue to be on their own, without any hope of the central bank stepping in to bail them out.
The PBOC announcement appears to have restored some stability in the interbank market if only for a very brief amount of time: the 1 Month SHIBOR drops 234 bps, most since Oct. 2007, 7.3550%, with the one-day repo rate falling 204 bps to 6.6540%. Longer-term liquidity also improved modestly, with the seven-day repo rate drops 159 bps after sliding 237 bps on June 21. However, as Market News reported , the PBOC won’t cut reserve ratio, interest rates in near term, and if anything will just use more open-market operations. The problem with this kind of opaque intervention is that it once again raises the specter tha behind the scenes one or more banks are getting direct bailouts. In other words, look for real interbank liquidity to be abysmal at best.
Not helping the PBOC’s credibility was the news that China Development Bank canceled a bond sale up to CNY20 billion planned for tomorrow for “reasons.”
Certainly not helping China was that late on Sunday Goldman cut its China growth forecasts for 2013 and 2014, “on the account of soft cyclical signals and recent tightening of financial conditions. We now expect real GDP growth to be at 7.5% yoy in Q2 2013 (from 7.8% previously), and 7.4% and 7.7% for 2013 and 2014 respectively (from 7.8% and 8.4% previously).”
End result: the Shanghai Composite, which had largely been able to weather the recent dramatic shocks to both liquidity and the economy, finally threw in the towel and crashed. Moments ago the Shanghai Composite fell 5.5%, the biggest intraday slide since August 2009, and dropping below 2,000 for first time since December.
The brodest China index is now down 14% year to date, with the Property Index leads slump with 7.7% drop to lowest since November.
Needless to say the world’s second largest economy imploding, and its stock market crashing were enough to send all of Asia lower, with the Nikkei225 unable to sustain gains on a weaker Yen, and swining from up over 1% to down 1.3%. As for that China derivative, Australia and specifically its currency the AUD, it just hit a fresh 52 week low against the USD at 0.9155.
Of course, if the BIS’s warning about what is coming to the “developed markets” is accurate, this is nothing but a pleasant rehearsal of what one can expect in the US and in other G-7 places.
As for China, if Goldman is correct, look for much more pain below. Here is the summary of the firm’s downgrade of the Chinese economy:
We are cutting our China growth forecasts for 2013 and 2014, on the account of soft cyclical signals and recent tightening of financial conditions. We now expect real GDP growth to be at 7.5% yoy in Q2 2013 (from 7.8% previously), and 7.4% and 7.7% for 2013 and 2014 respectively (from 7.8% and 8.4% previously).
The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue. We estimate this to tighten the FCI by another 30-40 basis points (bp) in the coming months, in addition to the FCI tightening of 100 bp so far this year driven by the rapid CNY appreciation on a trade-weighted basis.
The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems. These policies help to foster more sustainable medium-term growth, but will test the government’s tolerance for a cyclical downturn. A reversal of the recent tightening is the main upside risk to our new forecast. Continued DM stagnation or spreading overcapacity problems will imply downside risks.
This article was posted: Monday, June 24, 2013 at 4:26 am