China’s Premier Slams Central Bank For Gargantuan Credit Injection

Last week many traders were dumbfounded when, just as speculation was building that China was preparing to unleash a massive credit expansion a la Shanghai Accord, Beijing confirmed that it had indeed decided to massively reflate its (and the global) economy, in what may soon be dubbed the Shanghai Accord 2.0, when the PBOC announced it had flooded the economy with a gargantuan 4.64 trillion yuan in various new forms of debt which comprise China’s Total Social Financing in January, including notably, the “shadow” credit which Beijing had been aggressively cracking down on: an aggressive credit expansion which many took as a tacit confirmation that China was losing the fight with deleveraging.

As the following chart from BofA’s Michael Hartnett shows, which puts China’s latest credit expansion in historical context, January’s debt tsunami was vastly greater than China’s credit expansion during both the global financial crisis and the Shanghai Accord.

And while analysts, economists and markets cheered this unprecedented credit generosity by Beijing, which appeared to once again throw in the towel on deleveraging after a similar attempt sent overnight rates soaring five years ago and nearly blew up the local banking system, expecting that China will henceforth inject even more debt which in turn will spark an inflationary impulse across the globe and prop up both economies and markets (it’s hardly a surprise that Chinese stocks have soared in the past few weeks), it appears that January’s gargantuan credit boost may end up being a one off event, because while China’s credit injection amounting to over 5% of GDP was welcome by global market, it also resulted in a rare public spat between Chinese premier Li Keqiang and the central bank, after he expressed concern about record credit expansion in January, a result of monetary stimulus intended to support flagging economic growth.

As the FT notes, since assuming the premiership in 2013 alongside President Xi Jinping, Li has been “a consistent critic of the large-scale stimulus that their predecessors launched in response to the 2008 financial crisis, which economists said led to wasteful investment and a dangerous increase in debt.”

The spat, according to analysts, is the result of Li’s concerns that his credibility will suffer if the government was seen as backsliding on its commitment to avoid heavy-handed stimulus. And there is no better way to feed such speculation than by injecting nearly $700 billion in credit in one month, more than the GDP of Saudi Arabia.

Speaking to the FT, Jianguang Shen, chief economist at JD Digits, a Chinese fintech group, said: “Li has always tried to emphasize that he will never do flood-style stimulus. He is expressing the concern of many commentators that if you have such huge lending, some part of it will not go to the real economy.”

True, but a large part will go to the economy, and the problem is that in China, some 300% in debt/GDP notwithstanding…

… absent massive new credit creation, the economy tends to grind to a halt.

Indeed, following a crackdown on excessive debt and financial risk in 2017 which led to a sharp slowdown in credit growth last year, GDP growth tumbled to a historic low. In response, Beijing politicians and local bankers enacted a series of monetary and fiscal stimulus measures since last summer, with a particular focus on boosting lending to small, privately owned companies, which suffered disproportionately in the debt crackdown

There was just one problem: these stimuli were too feeble to move the needle on the local economy, which until recently was enjoying the tailwinds of trillions in shadow banking, and which has for the past two years been aggressively curtailed.

Indeed, as the FT notes, for months, policy loosening failed to boost credit flows, as banks remained cautious on lending into a slowing economy, while the US trade war battered business confidence, reducing companies’ appetite for capital expenditure.

But all that changed in January, when the latest data showed last Friday that banks and bond investors unleashed a record monthly volume of new credit. This, in turn, prompted Li to speak up, and in a statement released last on Wednesday, the Prime Minister warned of risks from January’s credit deluge:

“The increase in total social financing appears rather large on the surface, but if one analyses in detail, a large part of this rise was bill financing and short-term lending. Not only does this potentially create ‘arbitrage’ and ‘empty cycling’ of funds, but it may also bring new potential risks.”

He is referring to what we said last Friday, when we noted that a big part of the TSF surge was the result of a fresh shadow banking expansion. The chart below indicates that Beijing may have thrown in the towel on its crackdown in Shadow Banking, which after contracting for almost all of 2018, not only rose for the first time in 11 months, but soared the most in nearly two years as Chinese regulators now appear focused on providing credit using the very same channels they spent the past two years desperately trying to block.

As for Li’s references to “arbitrage” and “empty cycling”, these refer to concerns that investors are obtaining low-interest, short-term loans and re-investing the proceeds in high-yielding wealth management products, earning virtually risk-free profits on the spread, according to the FT. The angry prime minister also added that the “fundamental path to solving China’s long-term development problems” was structural reform and a focus on high-quality growth, however as China has observed for the past two years, structural reform takes a very long time, and neither Beijing, nor the world has the patience to wait.

But what may be the worst news for an army of analysts and traders who are confident that China has unleashed another credit creation tsunami, is that just hours after Li’s statement, the People’s Bank of China appeared to respond directly to Li’s criticism in an interview with an unnamed PBoC official published in Financial News, the central bank’s official newspaper, under the headline “Accurately regarding the January financial data”.

As quoted by the FT, the official argued that China was not embarking on “flood irrigation-style” stimulus, saying that January is traditionally the biggest month of the year for bank loans due to seasonal factors.

The official added that small businesses were the main beneficiaries of bill financing and other short-term loans. While acknowledging the possibility for arbitrage, he said such transactions were only “minority behaviour”.

“Premier Li is right. We’re now in a grey area where deleveraging is done, but it’s too early for policymakers to leverage up again,” said Larry Hu, China economist at Macquarie Securities in Hong Kong. “But the PBoC is also right that the pick-up of credit growth in January, partly driven by short-term lending, is helpful on the margin.”

The question now is whether after January’s massive credit injection, the PBOC will take heed from Li’s warning and ease back on the gas, or do what it has always done before on the verge of a recession, and despite its soothing words to the contrary, unleash a flood of credit which while kicking the can for another quarter or two, will only result in even greater pain when China’s credit house of cards finally comes crashing down.

There’s one more thing: while China’s reckless credit flood will only result in even more tears in the end, for now it may well be the only thing that keep the global economy from foundering because as we showed last week, the only chart that truly matters for the global economy is the size of China’s credit impulse, and whether Beijing can do it again. As shown below, already the world economy is set for a steep drop just to catch down to where China’s credit creation has been recently.

Which means that while listening to Li would be the most prudent thing for China’s economy in the long run, it also means that if Beijing reverses on its massive January credit expansion in February and onward, another global recession would seem virtually inevitable.

Bernanke Killed The World Economy, New Academic Study Confirms

Authored by Martin Hutchinson via,

This column has contended for several years, based on empirical data observations from several countries, that low interest rates worldwide were killing productivity growth. A University of Chicago paper finally provides some academic back-up for this contention and suggests a mechanism through which it takes place. There are other mechanisms also, and I would suggest that the Ben Bernanke-inspired wild monetary experimentation from 2008 on has done more damage to the world economy than any other initiative in the history of mankind.

The paper,“Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.

The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.

Only after President Donald Trump was inaugurated in the United States did U.S. productivity growth begin recovering towards its healthy historical levels. Undoubtedly part of this recovery was due to the Trump administration’s de-regulation policies – just ceasing to pile regulation upon regulation appears to have had some positive effect, especially in industries sensitive to environmental-regulatory harassment. However, the positive productivity signs became clearer during 2018, as interest rates climbed towards the U.S. inflation rate, albeit still below their healthy historic levels.

It has also been noted in the United States that small business formation, a key driver of productivity growth, in 2010-2016 ran about a third below its historic levels, and half the levels of the late 1970s, when figures were first compiled, even though the economy itself had moved towards recovery. This aligns with the theory postulated in the University of Chicago paper, that small businesses become discouraged by very low interest rates, and simply cease investing, or even cease being formed.

From Austrian economic principles, there is a clear explanation for the decline in productivity growth in low-interest-rate environments. Economies work best when interest rates are at or close to their natural level, that would be set in a free market. In a Gold Standard system with free banking, interest rates naturally stay close to that level. However, if as in modern economies governments have taken over the money creation and interest-rate-setting functions from the market and move rates a substantial distance from their natural level, then investment decisions become distorted and suboptimal. In such a situation, productivity growth will naturally decline; if the distortion of the interest rate curve is prolonged, productivity growth may even disappear as investments are made into entirely the wrong assets.

This is what happened worldwide after 2008 (arguably, in Japan from 1998 with a short remission in the mid-2000s). As the University of Chicago paper points out, ultra-low interest rates discouraged small businesses (that effect appears to have been especially strong in Japan, where almost no major new companies have emerged since 1990). However, there are other sources of distortion.

In the United States, vast sums have been poured by companies into buying back their stock, because the earnings cost of doing so is small at low interest rates and companies believe that if their cash flow is solid, they can survive ad infinitum without significant equity capital. They are wrong, but only the next recession will teach them so, at great cost to their employees and the U.S. economy as a whole (doubtless their foolish and greedy top management will emerge with substantial payoffs, as usual).

In London, San Francisco, New York and elsewhere, the prices of high-end real estate have soared without limit. Low interest rates reward those with borrowing capacity, and for more than 20 years now, it has been profitable for the rich to borrow gigantic amounts of money at low interest rates and invest it in high-end real estate. This bubble is now in the process of bursting, much to the benefit of Millennials, for whom the price of modest real estate has been over-elevated by the shenanigans at the high end.

Debt of all kinds has proliferated, whether in auto loans at the consumer end (less so in home mortgage loans since 2008) or in corporate leveraged loans used by the innumerable buyout artists at the high end. Default rates on all these debts are beginning to rise; they will cause massive losses before we are much older.

In Britain, Switzerland and the EU, interest rates have sunk so low that even investments without any profit at all have been attractive, provided money can be borrowed against them. I have written in the past about the possibility of a flood of Babylonian ziggurats in the major financial centers – technically religious buildings, thus exempt from local property taxes, but serving a religion with no current believers, thus making them a pure speculative asset suitable for the ultra-Keynesian New Age.

Not content with the damage they have already done, some extreme aficionados of low interest rates are devising schemes to drive them even lower, confiscating ordinary people’s cash holdings so that there was no longer any alternative to their diabolical financial schemes. Truly Ben Bernanke’s inspiration of 2002 to drop money from helicopters, uttered at a meeting of the National Economists Club at which I was present, has been among the most economically damaging ideas in all of history.

One competitor for that prize, I suppose, is Karl Marx’s Communism, so banally celebrated by the functionaries of the of the EU at last year’s bicentenary. However, that great fallacy never affected more than about a quarter of the world’s population, and eventually exploded under its own weight. Bernanke’s folly, on the other hand, shows no sign of correcting itself. Although a few more years of U.S. success with President Trump and higher rates might do the job of correcting it worldwide, our chances of getting this necessary combination are currently less than 50-50, I would say.

Another such competitor for Worst Idea was the invention of agriculture. Yes, it enabled the planet to support more people, but at what a cost! Instead of devoting only a modest portion of their time to finding and killing woolly mammoths, humanity was now forced to devote itself night and day to back-breaking manual labor in the fields. In the short term, this was truly an unspeakably bad trade-off. In the long term, of course, it led to civilization and industrialization, but it took several thousand miserable years to do so. We can however be sure that Bernanke’s brainwave will lead to no such economic breakthrough, however many millennia we wait.

Perhaps the most likely competitor to Bernanke’s contribution as a destroyer of economic value is Maynard Keynes’ “General Theory.” It unmoored us from the established truths such as the Gold Standard and balanced budgets and enabled greedy and unscrupulous politicians to waste ever more of our money in the name of “stimulus.” The California High Speed Rail scheme was just one $77 billion example of such folly; to misquote Oscar Wilde, a man would need a heart of stone not to laugh at its demise this week.

We do not yet know whether negative real interest rates or trillion-dollar budget deficits will be more ultimately destructive of our civilization, and Keynes, not Bernanke, is responsible for the latter. Unlike Marxism and like Bernankeism, Keynesianism has affected the entire planet; indeed, it seems irrefutable, the fallacy that will not die. However, Keynesianism’s effect on productivity is indirect; it merely grows government, a low-productivity activity, rather than destroying productivity directly. If I had to bet, therefore, I would bet that Bernanke, even more than Keynes, Marx or the inventor of agriculture, will be the chief destroyer of economic value in our long-term future.

By promoting ever-lower interest rates, set completely artificially by meddling bureaucrats, Bernankeism’s proponents have gone far to killing the engine of prosperity that is capitalism itself. Contrary to Keynes’ belief, the level of interest rates is the central variable in a well-functioning capitalist system. By meddling with it, politicians and bureaucrats are attempting to act as Gosplan, the central planning agency of the Soviet Union. It doesn’t work, and the attempt to meddle in this way is morally wrong as was Communism.

It is good to have some respectable academic backing for this column’s battle against the monetary folly of Bernankeism. The struggle continues!

Watch China Cut BBC Live Feed When Correspondent Mentions Muslim Internment Camps 

China suddenly cut a BBC broadcast as the network’s China correspondent began to discuss Beijing’s detention of more than a million Uighur Muslims in “re-education” camps. 

The BBC‘s Stephen McDonell filmed the moment it happened as he began to discuss the infamously poor treatment of the Turkic ethnic minority living in China’s northwestern Xinjiang province. 

After going on air at 7am to file his account of the trip, he decided to record the 8am replay.

The video shows his TV in China going blank as he says: “One thing he might be expected by some in Muslim countries to raise would be the question of the camps in the far west of China. There’s up to…” –Independent

Here’s the moment #China’s censors pull the @BBCWorld TV feed this morning as I’m speaking about the visiting crown prince of #SaudiArabia and the possibility of him raising the mass extra-judicial detention camps holding many 100s of thousands of ethnic Uighurs in the west…

— Stephen McDonell (@StephenMcDonell) February 22, 2019

McDonell said that the same thing happened the previous day. 

“We can pretty much predict the subjects when they will cut the feed and recently coverage of Xinjiang’s mass “re-education” camps has been just such a subject,” he said. 

McDonell’s tweets sparked quite a few replies, including one from author and political historian Brian Dooley, whose interview on Chinese state television was cut short when he began to discuss the killings in Tiananmen Square. 

I was interviewed in 2014 on Chinese state CCTV about American civil rights history. Interview swiftly ended when I started talking about killings in Tiananmen Square. @stephenmcdonell @bbcworld

— Brian Dooley (@dooley_dooley) February 22, 2019 

Winnie the Pooh isn’t happy with you!

— Scary Monsters, Super Creeps (@daveparke) February 22, 2019

— gregor lewis (@suepesas) February 22, 2019

Might’ve just been a glitch inside China. Who woulda thunk? 😉

— Stephen McDonell (@StephenMcDonell) February 22, 2019

China has gone to great lengths to pretend that their Uighur “re-education” camps are the happiest places on earth – going on a narrative-shifting campaign to spin the cities as positive

According to a report in The TimesBeijing is parading groups of Muslims around on state TV to extol the virtues of the system.

One restaurant owner, for example, said he became more tolerant after his time in a re-education camp, stating: “If I had let the religious extremism develop, I might have beaten non-Muslims who entered my restaurant,” the man identified as Abudu Saimaiti said. “In the worst case, I would not walk on public roads, take city buses or use the official currency, because they are provided by non-Muslims, who run this country.”

Speaking into the camera, the Chinese Muslim business owner added, “Through learning the law and the national policy, I have come to realize it’s a dead end for me, for my family and for my offspring, and my hometown will for ever be chaotic.”

Any reports to the contrary will get yanked off TV without so much as a transition. 

Saturday Satire – Smollett Offered CNN Job After Making Up Story Out Of Thin Air

Satire or not? You decide…

While Empire actor Jussie Smollett has been having a tough week so far, there appears to be a silver lining: cable news channel CNN has offered Smollett a job as an investigative reporter and on-air anchor after witnessing his skills at fabricating a story entirely out of thin air.

CNN producers were reportedly impressed throughout the ongoing saga of Smollett’s apparent hoax attack on himself. They realized early on the facts didn’t add up but were fascinated with how well the actor kept the narrative going. An HR rep quickly reached out to Smollett to see if he’d be interested in taking on a position at the news organization after news broke that the entire thing was probably fabricated.

“Smollett has exactly the kind of skills we look for at our fine organization,” said CNN correspondent Brian Stelter. “He picked a narrative, made up all the relevant facts and details, and stuck with his story in spite of glaring holes in the plot. It’s hard to find people who understand our core values here at CNN, but Smollett seems to be just the guy for us.”

The actor has accepted the offer and is now undergoing training to learn how to weave even more intricate narratives ex nihilo, according to insiders.

via Babylon Bee.

And having entirely lost any sense of satirical humor, Snopes decided to fact-check Babylon Bee’s story…

Although we wonder if it wouldn’t be more honest to say – he hasn’t been offered a job…yet.

Virgin Galactic Makes History With Second Commercial Spaceflight

Sorry, Elon. The title of market leader of the commercial spaceflight industry officially belongs to Sir Richard Branson. Because on Friday, Virgin Galactic’s spaceplane, the VSS Unity, made its second trip into sub-orbital space, proving to the world that the company’s historic December launch wasn’t just a fluke, and earning Beth Moses, the company’s chief astronaut instructor, the distinction of being the first woman to ever reach space on a commercial flight.


The test flight, which took off from a launchpad in California’s Mojave Desert, was manned by the same two pilots who earned their astronaut wings from the FAA after the company’s December flight.

Here’s a description of the flight, courtesy of the Verge:

As usual, VSS Unity was lofted to an initial altitude of around 45,000 feet by its huge carrier aircraft, WhiteKnight Two, where it was then released into the air. The two pilots of this morning’s flight, Dave Mackay and Mike “Sooch” Masucci, ignited the spaceplane’s engine and climbed to an altitude of 55.85 miles (89.9 kilometers), the highest the vehicle has gone yet. During the test, the vehicle reached a top speed of three times the speed of sound — the fastest ever for Virgin Galactic — before shifting its wings and gliding back to Earth to land on a runway.

While the December flight was manned solely by the two pilots, Moses tagged along in the cabin to get a better understanding of the “customer cabin and spaceflight environment from the perspective of people in the back,” according to a statement from the company. Once the company starts flying commercial passengers – at an estimated price of $250,000 a pop – Moses will be responsible for preparing future passengers about what to expect during the flights.

The three people aboard the flight become the 569th, 570th and 571st people to ever reach space.

According to RT, Chief pilot Dave Mackay said the stunning view of Earth surpassed all of their expectations.

“For the three of us today, this was the fulfillment of lifelong ambitions, but paradoxically is also just the beginning of an adventure which we can’t wait to share with thousands of others,” he said.

The company released video of the flight…

SpaceShipTwo, welcome back to space 🚀 🌎

— Virgin Galactic (@virgingalactic) February 23, 2019

…as well as a brief video depicting what Earth looked like from the passengers’ vantage point:

Hello, Earth 🌎. Footage from the boom of SpaceShipTwo

— Virgin Galactic (@virgingalactic) February 22, 2019

Several other companies, including Elon Musk’s SpaceX and Jeff Bezos Blue Origin are still testing unmanned rockets. But both executives are no doubt aware of the fact that, after Friday’s launch, the competition to “own” commercial space travel is heating up.

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