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March 20, 2015

Liquidity Crunch in China While Home Prices Plunge

By Jeffrey P. Snider, Alhambra Investment Partners
It had been relatively quiet in China apart from the continued downtrend in economic activity and especially expectations for economic activity. Earlier, as industrial production and a slew of other economic accounts fell to multi-year (and multi-decade in some cases) lows, talk of the Chinese bubbles receded as it was viewed almost a surety that the PBOC would now be forced to go back on its reform policies. Money supply figures (which, in my estimation are, at best, misleading, and, at worst, useless) and total social financing in February diverged, meaning that most observers didn’t know what to make of it all.
That may have all been made moot by the latest national home price estimates, where prices all across China seriously declined.
Average new home prices in China’s 70 major cities dropped 5.7 percent last month from a year ago, the sixth consecutive fall, following January’s 5.1 percent decline. It was the biggest annual decline in the nationwide survey since it began in 2011.  
The monthly fall in February from January was 0.4 percent, the same as in the previous month, and pointing to sustained risks to the government’s new 7 percent economic growth target for the year. The property sector accounts for some 15 percent of China’s gross domestic product (GDP).
Of course, the article goes on from there to reassure how this is only temporary and seasonal buying is already coming in for March. In the context of monetary policy and economic “steering” under PBOC “reform”, however, the housing data should not be viewed standalone. Liquidity indications last week, already in March, were not good at all.
The seven-day repurchase rate was 4.41 percent on average so far in 2015, up from 4.16 percent a year earlier and the highest for the period since the fixing began in 2004… Two benchmark interest-rate reductions and one lowering of banks’ reserve ratio in four months failed to bring borrowing costs down, as the world’s second-largest economy faces capital outflows that drain cash.
The 1-year swap rate is also at the highest quote since the “dollar” problem returned to China in October. That indicates continued tightened conditions in broad liquidity, but that doesn’t tell us much about targeted liquidity as it pertains to “reform.”
In other words, if you put all these seemingly disparate indications together, from repo and swap rates to the yuan and “outflows” with home prices as viewed by PBOC bubble repudiation of late, it’s almost as if that was the intent all along. The proper context for the reform agenda is one of, again, anti-bubbles but not blatantly and nakedly so. The PBOC would like to squeeze these bubbles via shrinking liquidity balances but not all at once; they are, after all, trying to slowly let the air out of all their imbalances.
At issue was never about intent, it has and will be about whether anyone can actively manage both the decline in the bubble (without it snowballing too big and too fast) while at the same time “pleasing” the master of the economy. So far, the PBOC has shown its willingness to take GDP down at least to 7% (officially) if not seriously below that (in fact), making only minor adjustments along the way as to preserving pieces of the financial system not encumbered by the bubbles. That includes the yuan itself, which I have no doubt that the PBOC views “dollars” as one of the primary facets of China’s bubble-building past.  
ABOOK March 2015 China Yuan
It’s a very dangerous game, which I believe only goes to show just how much desperation there is in just the attempt.
Courtesy Jeffrey P. Snider at Alhambra Investment Partners (Author Archive Here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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