OT: China's overnight and one week intrabank lending
Anyone following how quickly intrabank lending in China is going into a credit freeze? The Overnight SHIBOR (their equilivant of LIBOR) has shot up from 4% to over 11% within days and the 7 day SHIBOR is almost 9%. Apparently, inflation is showing up as they are expected to report 5.5% CPI for May (Y over Y), and that the PBoC will have no choice but to increase interest rates.
I don't think yesterday's and today's market sell-off entirely due to our Fed's tapering. A major slowdown in China could have a big impact across the globe. The last thing we need in this country is similar infaltion (5.5%) which would force the Fed to increase interest rates; small wonder that the Fed wants to back off its monetary stimulus. Nevertheless, we now have some major triggers that could cause a full-blown correction.
The problem in China appears to be a debt crisis. Their economic growth was fueled by debt that local governments are now struggling to repay, especially as the economy slows down. Now it's harder to sustain growth because it's dependent on creating new debt -- which has less and less effect. Further, the "shadow banking" system is getting way out of control. In a large part, this "shadow banking" system is why intra-bank lending is freezing.
Leaders in China (now beginning their 10-year tenure) are fully aware of the problem. The growth in shadow banking is scary: In 2008, there was an estimated $163 billion; at the end of last year this has ballooned to $1.16 trillion. (By "shadow banking," I mean their wealth management products that are largely unregulated; people are putting money into these because they offer higher interest than traditional savings deposits.) Xiao Gang, the chairman of the board of Bank of China, called the products “a Ponzi scheme.”
Unlike banks here, banks in China are state owned. I'm confident that leaders in China will do whatever it takes to avoid major bank collapses. Short-term, they do have reserves in US dollars that can be used to shore up their financial system. So for now, it's something to keep an eye on.
Add in that China labor costs are rising rapidly, the one child per family bit is causing strains, the population is aging, and the shift of rural inhabitants to urban centers continues. And after a bunch of business trips there can say that a lot of construction is not being done on a great quality basis,,,,,
Zerohedge has been posting a lot of info about the intrabank lending deep freeze lately. It is most definitely something to keep track of. I gotta say, this past month or so has really been keeping me on my toes!