2017-10-17

China Isn't Improving, It's Inflating

Global economic indicators, total social financing and rising producer price inflation all point to inflation coming out of China.
Bloomberg: Don't Panic: China's Debt Crackdown May Actually Be Good for Bonds
China’s deleveraging drive will benefit the nation’s bonds as it starts to weigh on the economy and prompts looser monetary policy, according to Fidelity International Ltd.

Bloomberg: What Debt Crackdown? China's Banks Are Bingeing on Bonds
China’s banks are still bingeing on short-term financing, defying analyst predictions that they would wean themselves off such debt as regulators intensify a crackdown on leverage.

Sales of negotiable certificates of deposit -- a key funding source for medium and smaller banks -- surged 49 percent from a year ago in the third quarter to a record 5.4 trillion yuan ($819 billion), according to data compiled by Bloomberg.

Bloomberg: Zhou's Leverage Warning Sends China Bond Yield to 2015 High
Yields on China’s 10-year sovereign notes spiked to the highest level since April 2015 on a closing basis, while a stock gauge of smaller companies slumped the most in three months, after the PBOC governor voiced his concern at the weekend that Chinese firms have taken on too much debt. The comments come amid a run of strong data, with better-than-expected producer price growth Monday underscoring the image of an economy still riding the wave of unsustainable leverage to achieve its growth targets.

“Investors, who have always been concerned with tighter financial regulations, are now especially sensitive to news that’s negative for bonds, such as improvement in the economy,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen.
China has to fund growth with credit. U.S. dollar credit has been tight since before 2008. The yuan saw devaluation pressure in 2008. It launched a massive stimulus that led to soaring home prices and a brief yuan devaluation in 2012, along with trillions of yuan in unprofitable investments. The attempt at a controlled slowdown led to the yuan devaluation in 2015 and global financial mini-panic in early 2016.

Without credit growth (or some major economic reforms), China's economy cannot grow at 6 percent. Since the developed world remains locked in slow growth with the global eurodollar system also growing slowly, a Chinese credit inflation necessitates "de-dollarization," inflating without concern for underlying foreign currency assets. If the growth is "good," value creation will outstrip credit creation. If the growth is "bad," China will be stuck with hundreds of billions, if not trillions of dollars more in debt with no dollar backing. The odds of a sudden and sharp yuan devaluation are rising.

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