by John Galt
June 1, 2014 16:05 ET
Just when the world doesn’t need any more hints of bank insanity, Ambrose Evans-Pritchard of the UK Telegraph reports the following this afternoon:
Insanity? Yes. This is a nation with an annualized rate of change in GDP growth of 7.7%, allegedly huge foreign capital reserves, and a centralized dictatorship structure for a government that is the envy of the Western world’s banksters and political elites. From the article:
China’s central bank is exploring direct purchases of bonds and other assets to support key sectors of the economy in case the slowdown deepens, according to a leading Chinese business publication.
A front-page article in the China Securities Journal – regulated by the central bank – reported growing concerns about the weakness of the money supply and bad debts accumulating in the financial system.
The authorities may have to widen the range of possible options for “targeted monetary loosening”. These include surgical stimulus for the West and Central regions, as well as “direct asset purchases by the central bank”, mostly government bonds, financial and railroad debt, as well as state-backed housing bonds.
It is the first hint of quantitative easing in China, and has left analysts scratching their heads. The central bank has many other tools available that would normally be used first to combat incipient deflation. The Reserve Requirement Ratio (RRR) is still 20pc. This could be slashed to low single-digits if need be, generating up to $2 trillion of stimulus through higher lending.
This first hint is not only puzzling, it is insane. If one looks at the current graph of GDP growth since 2001 it is not exactly pathetic like Eurozone or US growth rates recently:
(chart courtesy of CountryEconomy.com)
Thus the question has to be asked with China tightening credit and the reported property crash allegedly controlled via central bank policies:
What would be the purpose of flooding the markets with easy credit if growth is still well above any hint of recessionary levels?
Perhaps this excerpt from the article provides a hint:
All kinds of skeletons are coming out of the cupboard as the credit bubble deflates. Caixin Magazine reported this week that the state-backed shipping group Nanjing Tanker had been forced to delist from the stock exchange after hiding “a massive amount of debt off its balance sheets”.
Soho China, one of the country’s biggest property groups, caused consternation last week by comparing the Chinese housing market to the Titanic. “After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector,” said the group’s chief executive Pan Shiyi.
The collapse will infect the shadow banking system, causing havoc for trusts and wealth products. “When housing prices fall 20pc to 30pc, these problems will be all exposed,” he said.
In other words, perhaps the foreign capital reserves are not as great as perceived and worse, there is anticipation of a Western economic disruption which will crater not only the export economy of the Communist government’s plan, but also cause a domestic disruption including unrest and a total implosion of the construction industry inside of China where ghost cities still exist unoccupied and untouched.
If there is a collapse approaching the other concern has to be whether or not it will be due to a problem generated within the shadow banking system or externalized perhaps due to a major military conflict with China’s neighbors. Either way, this development is concerning to say the least.