Courtesy of Interest.co.nz, which is a far more intelligent operation than the entire Australian business press which is asleep at the wheel on the Chinese credit crunch:
Bloomberg reports the People’s Bank of China injected liquidity overnight, but the spike in borrowing costs yesterday to a decade high of over 12% freaked a whole lot of people, not to mention the Australian stock market.
But it’s clear now that the new leadership in Beijing are determined to take some of the heat out of China’s shadow banking sector and some of the usual infrastucture-driven stimulus.
Beijing wants to make growth more sustainable, which means slower.
We’ll see what that does to China’s banking system and their shadows, which have expanded credit in China by more in the last 5 years than was built up by the US economy in decades of operation.
The pressure is on. The chart below shows the parallels between short term interest rate spikes ahead of the Lehman crisis and China’s interbank rates in recent days.
Here’s the Washington Post with its assessment of the Chinese Credit Crunch:
Thursday was a very bad day for China’s economy, the world’s second-largest and a crucial pillar of the global economy, with credit markets freezing up in an unnerving parallel to the first days of the U.S. financial collapse. The question of how bad depends on whom you talk to, how much faith you have in Chinese leaders and, unfortunately, several factors that are largely unknowable. But we do know two things. First, Chinese leaders appear to be causing this problem deliberately, likely to try to avert a much worse problem. And, second, if this continues and even it works, it could see China’s economy finally cool after years of breakneck growth, with serious repercussions for the rest of us.
Things got so bad that the Bank of China has been fighting rumors all day that it defaulted on its loans; if true, this would risk bank runs and more defaults, not unlike the first days of the U.S. financial collapse. There’s no indication that the rumors are true, and no one is running on China’s banks. But the fact that the trouble has even gotten to this point is a sign of how potentially serious this could be.
2. Has the PBOC really relented? – It seems the Bloomberg report that the PBOC had eased the pressure may not be true, the Washington Post reported.
Here’s where things get a little confusing. Bloomberg News reported Thursday evening Beijing time that, as panic moved through the Chinese financial system, the country’s central bank stepped in and offered $8.2 billion in “relief” to the Industrial and Commercial Bank of China, which just happens to be both state-owned and the largest bank in the world. What does this mean? Maybe that Chinese leaders got cold feet and are trying to walk back the self-imposed crunch, maybe that China’s largest bank managed to negotiate some preferential treatment, maybe that leaders are worried their most important bank might actually be less healthy than they thought and want to protect it from default. Or maybe this is just part of the process of easing down the markets. But then the Chinese Web portal Sina announced that the reports were false(thanks to Bill Bishop for this link), adding some unnecessary confusion and uncertainty to an already volatile situation.
So what happens next? There are four categories of outcome. The first is that Chinese leaders back off on the credit crunch and nothing happens, in which case they’ll probably just try the strategy again later. The second is that they press on and it works miraculously, cleaning out the financial system without causing too much pain. The third is that this spirals out of control, maybe because Beijing underestimated the risk or acted too late, potentially sending the global economy lurching once more. The fourth, and probably most likely, is that this works but is painful, averting catastrophe but slowing the Chinese economy after 20 years of miraculous growth.
