Variant Perception notes China Broad Credit Growth Slows to Zero. The side effect is a huge amount of collateral damage.
The recent tightening of credit we have seen in China is primarily aimed at clamping down
on shadow financing. Wealth management products have rapidly grown in size, from only
8% of total banking deposits in 2012 to over 20% today.
The top chart shows China’s banks’ claims on non-banks, which is where a lot of shadow financing shows up. As we can see, growth in this category has fallen precipitously from 70% YoY to 20% today.
However, there is collateral damage from this tightening. For one, bank-lending rates are starting to rise as their cost of funding rises (bottom-left chart). Policymakers in China want to confine the rise in rates in to the interbank market, but this a next-to-impossible task. Too great a rise in lending rates would feed negatively into the real economy.
Moreover, as the bottom-right chart shows, tightening has led to broad credit growth falling to near to 0% on a 3-month basis. A negative second derivative in credit must be watched for any inhibitive effects it may have on economic growth – especially in a country so heavily credit-dependent such as China. A negative first derivative in credit, as we are on the cusp of today, leaves economic growth even more fragile.
Impossible Task
I don’t agree with VP analysis on everything, but I do agree on most things. I find this report spot-on.
China has an impossible task of slowing its shadow banking sector running rampant and maintaining growth.
China’s Dilemma
I do not know what China will ultimately choose, but something has to give one way or another.
China’s unpleasant choice is a bubble bust now or a bigger bubble and a bigger bust later.
By the way, the Fed faces a similar unpleasant choice, as do central banks in general. Asset bubbles are everywhere.
Mike “Mish” Shedlock
It going to be bigger bubble later. Invest accordingly.
Yep, the prices of assets will continue to rise until the dollar is worthless. That’s just how fiat currency systems work.
“Paper money eventually returns to its intrinsic value-zero”
-Voltaire
Good Luck!
Bigger bubble later is October.
G20 == the 20 most over-indebted countries in the world, run by socialists with no foggy idea how to run a lemonade stand much less a large economy.
China may be re-thinking its decision to join this “club”
Did it ever occur to you that the “primary” job of these “leaders” isn’t to “run” their respective country’s economies, but to take orders from the rich and powerful who got them elected ?
But don’t worry….Armstrong forecasts the full blown GLOBAL sovereign debt default around 2032. Just hang on long enough and ALL will become CRYSTAL CLEAR.
Did it ever occur to you that some of these mysterious rich and powerful puppeteers may have figured out that when they smash a hole in the bottom of the ship, the 3rd class passengers might die first, but the first class passengers will as well?
Did it ever occur to you that this is not the first time in history when the “rich and powerful” have inherited their wealth (or had it handed to them by central bankers)? And people who don’t earn their wealth tend not to know what they are doing with it?
And its slowly dawning on people like Putin and Xi that most of the people in western leadership (except for Trump and May) are the political equivalent of trust fund babies. Spoiled, entitled, whiny, and unable to effect much of anything.
That is why Putin didn’t give a sh!t what Obama thought about Syria. Putin knew Obama is useless. People who talk about “raising awareness” are really saying they can’t make the change happen themselves. Putin earned his leadership position (even if you don’t agree with how he uses it); Obama got his title by affirmative action.
Only when you test the limits do you realise that we live under a state of permanent siege. Fortunately for now it is mostly a background reality, and there is space to act out life mostly unnoticed if chosen. Previously, historically, the nation was the freedom and the siege was at the border, nowadays the borders are open and the control is down to being on the individual. There is little by way of escape available should it come to that, where people are both responsible to what their nation demands, where it fails, and what might be demanded of it by circumstance, failure or official collusion. It all seems smoother, better managed, more secure this way, maybe it is, but don’t let that fool anyone as to what the existing structure is, how it is really composed.
Implementing a siege, as you claim, still requires competent leadership to succeed.
Western “democracies” are being run by the equivalent of trust fund babies (Trump and May being the exceptions). They are a spoiled, entitled bunch that didn’t earn their place. Butlers and family lawyers obey the trust fund babies because the butlers respect the parents. When the parents die, so does the respect.
@Sleekster implied that there were greater powers behind the scenes, manipulating the trust fund babies. I am sure George Soros did 100% of Obama’s thinking and policy making — including Soros’ decision to stage a CIA coup in Ukraine. Its just another sign of weakness in Obama. The same can be said (though different puppeteers) of Merkel, Hollande/Macron, Abe, Tony Blair, and pretty much every PM in Canada/Australia. Its why they don’t get respect.
Last G20 conference, Obama was the belle of the ball. Putin was given a scarlet letter and shunned. Obama was controlled, and no threat. Putin made his own decisions (even if you don’t like all of them). Let the record show that Putin, a real leader, wiped Syria with Obama’s face. And there was nothing Obama could do about it (save an impotent “sanctions” temper tantrum that had no impact). Obama was even caught on a hot mic subjugating himself to Putin (while talking to Medlev).
The G20 is irrelevant because the “leaders” are not relevant. Consider this G20 meetings’ host Angela Merkel. Merkel is unable to protect her own citizenry. Whole neighborhoods and some small cities in Germany are now run by crime gangs from the middle east. The gangs obey their tribal leaders and shoot police. Merkel is too weak to even protect the polizei.
Getting back to China (the subject of the blog post) — Xi clearly has no respect for EU leadership, nor did he treat Obama as an equal. I am sure the media losers will claim some sort or racism excuse as they always do, but the fact is Obama the man is a weak leader no matter the color of his skin. So is Merkel, Hollande/Macron.
Xi faces other strong leaders in China who are challenging the neo-keynesian debt-till-you-drop model. Trust fund babies charge every mistake to daddy’s credit card — people who earn leadership positions pay their bills.
The sort of siege I note includes for example :
Legislation run amok.
Increased financial control of the existence of whole populations, dependency on.
Increased dependency offered on government.
Greater control of individual activity and identity…
I could go on and on, these are just the obvious changes of the last 20 or 30 yrs….
….immigration law, your local society is partly obliged and you have no recourse, in fact may end up ‘on the wrong side’ for no reason… you have policemen in Europe seeking asylum from govt. persecution over a facepalm post as a smallest example…. social authorities that are vile in many countries…
So you go about doing ‘your own thing’ like any free person should be able to, and sooner or later you get tangled in attention, or caught in crossfire, or persecuted, or any number of other events product of modern western ‘progress’ . I am no activist, but I stand my ground and speak my truth when I feel it needs to be heard, and I witness as reaction what is going on, what the mindset is. People are free to do little, or follow, but the rest, the main course of it all, is in the hands of others already, and their nature is changing along with the part they expect you to play, as well as the face of the society created by this shift.
It isn’t to say there is ‘one entity’ behind this, it is the combined product of prevalent attitudes in power that are self reinforcing in their expansion, in and as their means of expansion. I don’t owe any more respect to that reality than recognizing that some are willing and able to cause me or those I care for more damage than I am willing to accept, even if were to succeed in a challenge.
And so it continues until enough people have had enough.
and yet…
the criminal gangs are far more able (and willing) to enforce their norms on the populace than the alleged governments that retain only nominal (and declining) control.
Locals (some of which have the best of intentions, and some of which are crime syndicates) are gaining effective power, even as the national “leaders” write endless regulatory policy and dribble.
Warren Buffett thinks YOU should pay more taxes, he is going to pay less and give his money to Bill Gates (not the government). The US Congress thinks YOU should pay for Obamacare, but they exempt themselves and their staff. Angela Merkel thinks German citizens must obey all her laws, but illegal immigrants are free to rape, rob and pillage as they please.
This is not a leadership group with a long term future…
Data suggests when a nations total private debt reaches 150% of GDP and total debt grows much faster than GDP by 5% or more for five years there will be a banking crisis. China is at 300% private debt to GDP and debt has grown 20% per year for last five years. China is at the top of Steve Keen’s list of countries primed for a financial crisis. Richard Vague also wrote a nice book about this.
@peterbogdanovich – good stuff, thanks for sharing!
“Data suggests when a nations total private debt reaches 150% of GDP and total debt grows much faster than GDP by 5% or more for five years there will be a banking crisis.”
I’d like to read about this data – any chance of a link? Thanks in advance.
Several years ago I met with the CIO of the Chinese version of the SEC to talk about their risk management software. Before he arrived seven or eight U.S. educated and very smart VPs chatted to me about HFT, etc. and the impact on markets – the usual talk of the time – was it front running?, etc.
Then the CIO came in and started to harangue me about U.S. manufacturing, or lack of it “How can you have an economy if you don’t make things. We make things!”. He was obviously the Party hack and the VPs were all looking sheepish at his boorish stupidity. I was trying to close an 8 figure deal so just agreed and moved on (I wanted to ask him if he thought China could feed all of its people from their own ag, or if he had actually heard of services, but I wanted their money more).
If the people at the top in China are basically appointed by nepotism and loyalty, don’t overestimate their ability to control their economy.
We went thru this in the 1980’s with Japan and the “smart MITI guys” who were steering their economy instead of letting the market dictate investment. Always remember how that turned out and don’t bet against America so long as we can keep our best people rising to the top and not the idiot son-in-laws of some clown in the White House.
Agree completely. Most of the fail America crowd are simply extrapolating out their own personal position. No shortage of extremely talented people busting their asses 20 hours a day. There is a reason the U.S. leads at innovation in almost everything in the world.
I agree with both “the monosynaptic” and “wrldtrst” regarding America. It is still the most innovative country in the world, though many other countries are closing in fast. To maintain your lead and to keep moving forward will require:
1. A greater willingness to accept and embrace change. From what I see from many posts, some of you are not willing. I hope that this is a small (though vocal) minority.
2. More workers with the necessary skills to fill the high skilled jobs that sit empty. You need more and better training or education. I’m not sure why you aren’t training enough skilled workers, but if you can’t train them, the jobs will move offshore. Alternatively, you will need more immigration of highly skilled people. The home grown solution is the preferred method, but it takes time.
I also believe that people overstate the doom and gloom. From where I sit, (outside America) things seem to be moving along at a slow but fairly steady pace. Yes, you have problems (doesn’t everyone); too much debt, a ridiculous and expensive health care system (hint: look at other countries), apparently a lot of horribly underfunded pensions (hint: look at other countries). But these things can all be fixed over time. I see no reason why America can’t continue to grow at 1-2%.
No.1 Might mean anything
http://1000awesomethings.com/wp-content/uploads/2008/11/empty-those-pockets1.jpg
Maybe you have never had ‘change’ legislated on your own steady endeavour, and it seems like many progressives your endeavour is concerning yourself with other people’s , because if they actually wanted a given ‘change’ they would seek it and not have to be singled out and ostracised for their free choice, or presuaded into acceptance.
Sorry Crysangle. Thanks for pointing that out. I was referring to embracing technological change. That’s where most of the economic growth is coming from these days. I believe that if you fight these changes then your economic growth will suffer and you will be giving other countries the chance to pass you by in creating the jobs of the future.
And yes, I have seen a lot of change in my lifetime, legislated, or otherwise. Very few people accept change readily, including me. However, I have learned that it’s usually better to adapt to it, not just to survive, but to thrive.
I know that is not what you meant, and was taking the opportunity to apply a little cynicism. The trouble with technological change may just be the benefit you suggest, that is to say economic direction becomes reliant on constant innovation to finance/support itself. Base human necessity does not change much, and certainly I have nothing against anyone improving their lot, but when you actually measure real improvement in people’s lives, when you look at the inability to address simple issues, say quality of construction, when you look at the turnover of waste needed to make a small advance, when you look at how society becomes concentrated in a dependence on an ideal even, say newer and better so replace, at a certain point onlookers will consider that direction has become disconnected from reality, that it is not based in necessity but simply its own existence. Embrace it or reject it means little to me, I just consider it first and then only take from it where I think it is of genuine use, but what I find laudable is much more limited than any combined direction, simply because you do not leave behind a reality that serves without first knowing that the destination is as good or better. You know how long it takes to discover if any new implementation fits properly in any real world scheme, how constant change removes or confuses the metrics; and so evolution will continue at its own slow pace, we can imagine it otherwise or try to speed it up, but all that is useless will fail leaving only the memory of its celebration. People like me simply set a high/different bar on what we consider of eventual use or value, and are not so easily drawn in by emotional appeal. After all that though, people just do as they want to, as they choose to.
I don’t mean to be rude, Realist, but the whole basis of your (relative) optimism appears to rest on vague, candy-floss notions like “hope” and the way things look around you i.e. fairly normal.
If you understood the nuts and bolts of the situation, you would appreciate that we are close to the edge of a steep precipice. Life is going to change quite dramatically for the vast majority and people will be taken unawares. The majority, wealthy middle class down to the poor just cannot imagine life any different to the way it is now which is why they refuse to give credence to some of the more apocalyptic scenarios being bandied.
Personally, I am not guided by what other people write as I have a long career in financial markets to draw on, but vast over-indebtedness, the 1st world demographic time-bomb, private pension under-funding along with a mountain of other unfunded public-sector liabilities (welfare/pensions/healthcare) will likely extract a heavy toll in the not-too-distant future (both social and financial).
“If the people at the top in China are basically appointed by nepotism and loyalty, don’t overestimate their ability to control their economy.”
…
King Dollar heartily agrees.
The $US will take its turn in the woodshed, but not before the coming financial crisis plays out.
“Asset bubbles are everywhere”
This week O’reilly Autoparts Stores reported earnings and anticipated slowing business going forward. The stock tanked 20% and took the rest of the sector down ~10%. Curiously, I looked at its chart for Elliott wave patterns to see if I should buy the dip.
What surprised me the most was the sector had been in a bubble since 2008 and the media never reported those companies as investment darlings. O’Reilly went from $20 to $290 in that timeframe. Now that the autoparts sector is bursting, the price will retrace to levels seen in 2008, a collapse of more than 90% from July 2016.
I use to have 1 auto parts store within a mile of my house that I frequented. In the last year 2 more have been built, all within 1/2 a mile of each other. One of them is an O’Reilly’s.
Since they all have to maintain an enormous inventory, I can only assume the markups have to equally enormous. Interestingly, the added competition doesn’t appear to have influenced prices. So I assume they are all owned by PE firms and are up to their necks in debt, so they lack pricing flexibility.
Interesting that auto parts stores are flourishing in brick and mortar when many other non-virtual retailers are struggling or closing down. I guess if you need a car part for a repair, you can’t wait a couple of days for Amazon Prime.
There was a segment on NBR about commercial REITs that had Whole Foods as a tenant strengthening after the Amazon announcement while others continued to weaken.
I guess that if you need a part and you are not going to pay full price for an original, and you need to discuss what part of a part of a part needs replacing, as well as having someone take responsibility for it being the correct part, you want someone to talk to in person and order for you. Some parts are very standard, some are very specific.
Subjectively, have found some parts stores no more expensive than online, obviously there is a limit to how many can successfully serve any area.
So it is a combination of latency and expertise that distinguish auto parts stores’ advantage over e.g. Amazon. Interesting.
Just my opinion/experience.
“China’s unpleasant choice is a bubble bust now or a bigger bubble and a bigger bust later.
By the way, the Fed faces a similar unpleasant choice, as do central banks in general. Asset bubbles are everywhere.”
…
Absolutely.
From Day 1 central banks could only delay / defer, not deny reality. And the longer the delay / defer the bigger the splash.
At this point the splash will take out the snack bar … maybe even the lifeguard’s car …