China's Red Flags

UPDATE: China 7-day repo +374bps to 12%!

China Flash PMI 48.2 (49.1 exp) – lowest in 9 months; worst 3-month plunge since Feb 2011.


Via Market News International:

HSBC chief China economist Qu Hongbin on June flash PMI (48.3 vs 49.2): “The HSBC China Flash Manufacturing PMI dropped to a nine-month low of 48.3 in June, following on the sequential reduction in both production and demand.
Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures. Beijing prefers to use reforms rather than stimulus to sustain growth. While reforms can boost long-term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth in 2Q.”


All these major liquidiaty problems do make us think a little about the end of CCFDs and as we warned “The Bronze Swan” as financing via copper collateral is under pressure and the bank that ‘own; the warehoused copper have no need to hold (and in fact are willing sellers as the carry costs rise)…


Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse – with 1Y IRS now at all-time record highs.


Many are now questioning whether the dramatic elevation in short-term financing rates is “here to stay,” and with the Chinese yield curve now inverted…


…in a similar fashion as the US Treasury market prior to the US recession in 2007…


and for a similar period before the US recession…


the clarion call for government stimulus is loud from the addicts.

However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The markets, even though the Shangahi Composite is trading at near-seven-month lows…


…will be disappointed; and we suspect, as the FT notes, that “the central bank wants to send a warning signal to commercial banks and other credit issuers that unchecked credit expansion, particularly through the shadow banking system, will not be accommodated.”

As the PBoC itself noted (via its state-owned newspaper) and we confirmed yesterday, “we cannot use fast money supply growth as in the past, or even faster, to promote economic growth, and must control the pace of money supply growth.”

But macro data is almost as bad as it has ever been…


Simply put, as Stan Druckenmiller noted here previously,

In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments.

Despite all efforts to slow inflation (and rein in the credit bubble), the hot money imported from the Fed and the BOJ continues to push home prices ever higher which continues to be the key marginal variable for the PBOC – as long as the hot “carry” money is exported by the Fed and the BOJ, the Chinese economy will continue to suffer.


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