{"id":158367,"date":"2013-06-24T20:20:44","date_gmt":"2013-06-25T03:20:44","guid":{"rendered":"http:\/\/chinadigitaltimes.net\/?p=158367"},"modified":"2013-06-24T20:20:44","modified_gmt":"2013-06-25T03:20:44","slug":"stocks-fall-as-central-bank-defends-liquidity-position","status":"publish","type":"post","link":"https:\/\/chinadigitaltimes.net\/2013\/06\/stocks-fall-as-central-bank-defends-liquidity-position\/","title":{"rendered":"Stocks Fall as Central Bank Defends Liquidity Position"},"content":{"rendered":"

The Wall Street Journal reports that Chinese stocks “were in free fall on Monday”<\/a> after Beijing scrambled over the weekend to assure investors that its financial system had ample liquidity. After the People’s Bank of China allowed interbank borrowing costs to surge at the back-end of last week, a Xinhua News commentary argued that China was not suffering from a cash shortage<\/strong><\/a>. From The Financial Times:<\/p>\n

\u201cIs China really experiencing a \u2018cash crunch\u2019 where liquidity is being squeezed?\u201d asked Xinhua, and added that many large enterprises continued to spend heavily on wealth management products, capital was still in search of speculative investment opportunities and private lending continued to be strong.<\/p>\n

\u201cThis contrast clearly shows that this seemingly ferocious \u2018cash crunch\u2019 is in fact structural funding constraints caused by a misallocation of funds. It is not that there is no money, but that the money has not reached the right places,\u201d the commentary said. [Source<\/strong><\/a>]<\/p><\/blockquote>\n

One issue of concern, according to Reuters, is shadow lending – Chinese companies with easy access to credit are borrowing funds and\u00a0on-lending\u00a0them to smaller firms<\/a> at much higher interest rates. And while the growth in China’s shadow lending system may have slowed thus far in 2013, as David Keohane of the Financial Times points out,\u00a0one concern is the more than 1.5 trillion RMB in Wealth Management Products<\/a>\u00a0that mature and will need to be redeemed in the last ten days of June.\u00a0On Monday, China’s central bank\u00a0sent an official note to lenders urging them to strengthen liquidity management<\/a>.\u00a0Forbes’ Agustino Fontevecchia thinks that last week’s spike in interbank rates “is a self-inflicted wound,”<\/strong><\/a> a move by the Chinese government to clamp down on the shadow banking system:<\/p>\n

Credit growth is out of control in China, where it\u2019s currently twice as big as GDP and growing twice as fast.\u00a0 As\u00a0I previously reported<\/a>, overall credit has grown from $9 trillion to $23 trillion in the five years since the implosion of Lehman Brothers, with credit-to-GDP going from 75% to about 200%.\u00a0 About $5.6 trillion of that represented non-loan credit, with nearly $2 trillion extended by opaque non-bank financial institutions.\u00a0 According to Fitch, more than $2 trillion in credit is connected to informal securitization of bank assets in so-called wealth management products (WMP).<\/p>\n

\u201cChina is displaying the same three symptoms that Japan, the U.S., and parts of Europe all showed before suffering financial crises,\u201d Nomura\u2019s research team noted, \u201ca rapid build-up of leverage, elevated property prices, and a decline in potential growth.\u201d<\/p>\n

Indeed, the current administration has acknowledged this, and is therefore clamping down on the shadow banking system, understanding the trade-off between short- and longer-term objectives.\u00a0 In terms of the liquidity crunch, it was in great part a consequence of the People\u2019s\u00a0Bank of China<\/a>\u00a0(PBoC) refusing to inject liquidity in the system, which, according to Nomura, is a calculated bet. [Source<\/strong><\/a>]<\/p><\/blockquote>\n

Fontevecchia adds in a separate piece that while “the move by China\u2019s authorities is the right one, the real question is, will they be able to manage such a complex and leveraged system<\/a> without screwing up.”\u00a0Kate MacKenzie of the Financial Times writes that “the immediate facts prompt\u00a0the question about how equipped the PBOC is” to prevent financial panic<\/strong><\/a>:<\/p>\n

Central banking is a confidence game. As Anne Stevenson-Yang of J Capital Research writes, the PBoC has to maintain the confidence of not just domestic financial participants; it also has to persuade speculative overseas capital that the country, and its currency, are still stable enough to invest in.<\/p>\n

At the moment, the most likely end game of all of this is more realisation of misdirected investments that have resulted from the vast wave of credit growth over the past few years (which has in turn taken the place of export growth as China\u2019s primary key of growth). [Source<\/strong><\/a>]<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

The Wall Street Journal reports that Chinese stocks “were in free fall on Monday” after Beijing scrambled over the weekend to assure investors that its financial system had ample liquidity. After the People’s Bank of China allowed interbank borrowing costs to surge at the back-end of last week, a Xinhua News commentary argued that China […]<\/p>\n","protected":false},"author":983,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[2,14744,14745,14746],"tags":[7337,3282,3573,15245],"class_list":["post-158367","post","type-post","status-publish","format-standard","hentry","category-economy","category-level-2-article","category-level-3-article","category-level-4-article","tag-credit-crisis","tag-monetary-policy","tag-peoples-bank-of-china","tag-shadow-banking","et-doesnt-have-format-content","et_post_format-et-post-format-standard"],"yoast_head":"\nStocks Fall as Central Bank Defends Liquidity Position<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"http:\/\/chinadigitaltimes.net\/2013\/06\/stocks-fall-as-central-bank-defends-liquidity-position\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Stocks Fall as Central Bank Defends Liquidity Position\" \/>\n<meta property=\"og:description\" content=\"The Wall Street Journal reports that Chinese stocks “were in free fall on Monday” after Beijing scrambled over the weekend to assure investors that its financial system had ample liquidity. 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