China Launches CNY500 Billion In ‘Stealth QE’

Related info:

Goldman’s Take On China’s “Stealth QE”:

“Domestic media (Sina) reported that the PBOC conducted RMB 500bn of Standing Lending Facility operations with the big 5 commercial banks (ICBC, BOC, BoCOM, CCB, ABC). The reports note that the duration is 3 months and the RMB 500 bn is evenly split among the banks. This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis. There is no official confirmation from the PBOC yet. Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus.”

What Happened After China’s Last “Stealth QE”?:

In a worrying sense of deja-vu all over again, today’s rip higher reflects perfectly the US equity market’s knee-jerk reaction to the last ‘Stealth QE’ from China on July 28th. That did not end well as hot money flowed out to the instantaneously “easiest” central bank in the world…

–  Markets React Violently To China’s Stealth QE:

From copper to high-yield credit and from stocks to bonds and gold, markets are reacting violently to the headlines from China that they are unleashing another 500bn Yuan “stealth QE”everything is rallying.. except the USD (biggest drop since May).


– China Launches CNY500 Billion In “Stealth QE” (ZeroHedge, Sep 16, 2014):

It has been a while since the PBOC engaged in some “targeted” QE. So clearly following the biggest drop in the Shanghai Composite in 6 months after some abysmal Chinese economic and flow data in the past several days, it’s time for some more. From Bloomberg:

  • CHINA’S PBOC STARTS 500B YUAN SLF TODAY, SINA.COM SAYS
  • PBOC PROVIDES 500B YUAN LIQUIDITY TO CHINA’S TOP 5 BANKS: SINA
  • PBOC PROVIDES 100B YUAN TO EACH BANK TODAY, TOMORROW WITH DURATION OF 3 MONTHS: SINA

Just as expected, the Chinese “derivative” currency, the AUD, goes vertical on the news, and the S&P 500 goes vertical alongside:

20140916_AUDJPY

For those confused what the SLF is, here is a reminder, from our February coverage of this “stealth QE” instrument.

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The topic of China’s inevitable financial crisis, and the open question of how it will subsequently bail out its banks is quite pertinent in a world in which Moral Hazard is the only play left. Conveniently, in his latest letter to clients, 13D’s Kiril Sokoloff has this to say:

Will the PBOC’s Short-term Lending Facility (SLF) evolve into China’s version of QE? While investor attention has been fixated on China’s deteriorating PMI reports and fears of a widening credit crisis, China’s central bank is operating behind the scenes to prevent a wide-scale financial panic. On Monday, January 20th, 2014, when the Shanghai Composite Index (SHCOMP, CNY 2,033) fell below 2,000 on its way to a six-month low and interest rates jumped, the central bank intervened by adding over 255 billion yuan ($42 billion) to the financial system. In addition to a regular 75 billion yuan of 7-day reverse repos, the central bank  provided supplemental liquidity amounting to 180 billion yuan of 21-day reverse repos, which was seen as an obvious attempt to alleviate liquidity shortages during the Chinese New Year. However, it is worth noting that this was the PBOC’s first use of 21-day contracts since 2005, according to Bloomberg. Small and medium-sized banks were major beneficiaries of this SLF, as the PBOC allowed such institutions in ten provinces to tap its SLF for the first time on a trial basis. A 120 billion yuan quota has been set aside for the trial SLF, according to two local traders.

The central bank also said it will inject further cash into the banking system at regularly-scheduled open market operations. This is a very rare occurrence, as it is almost unprecedented for the central bank to openly declare its intention to inject or withdraw funds at regularly-scheduled open market operations. Usually, these operations only come to light after the fact.

The SLF was created as a brand new monetary tool for the central bank in early 2013 and was designed to enable commercial banks to borrow from the central bank for one to three months. Since its creation, however, the SLF program has been used with increasing frequency by the central bank.

The latest SLF is remarkable for two reasons: First, as mentioned earlier, this SLF was expanded to allow provincial-level small- and medium-sized banks, for the first time, to tap liquidity from the central bank.  As local financial institutions are usually both the major issuers and holders of local government debt, the expansion of the SLF to include local financial institutions opens a new channel for liquidity to flow from the central bank to local governments. This may suggest that the central bank, which is now on high alert for systemic risk, is willing to share some of the burden of local government, though on a very selective and non-regular basis.

The second key reason is embodied in the following central bank announcement: “[we will] explore the function of the SLF in setting the upper band of the market interest rates.” In other words, in the event that interest rates spike higher due to a systemic crisis, the central bank can intervene, via the SLF, to bring rates back down if it so desires. In addition, the PBOC did not disclose any set cap on the SLF, implying that unlimited liquidity could be provided as long as the market’s rate spike exceeds the bands set by the PBOC.

Most important, the SLF appears to represent the PBOC’s strategy to avert China’s widely-publicized local government debt and banking-system problems. It is  worth noting that even though local government debt amounts to 30% of GDP and is growing at an alarming rate, China’s central government is relatively underleveraged, with a debt-to-GDP ratio of only 23%, which is significantly lower than the emerging-market average. Therefore, Beijing has considerable unused borrowing capacity to share some of the debt burden taken on by local governments, which would have the additional positive impact of lowering borrowing costs for those governments.

3 thoughts on “China Launches CNY500 Billion In ‘Stealth QE’

  1. I don’t know who wrote this article, but if the Chinese are admitting to 30% of debt to GDP, it is more likely 300% to GDP. Other analysts have put China’s real debt level to 5-12X GDP.
    China does not calculate GDP as we do. It bases it on what they build, not what they sell. Their inflated claims of sales to other countries have been caught and denied by many countries around the world…..China just keeps lying.
    If China is doing this for the banks, not the people, they are in deeper trouble than they admit.
    China’s lies are well known. If they are feeding banks, they are in trouble.
    Look at all their ghost towns. They built these wonderful towns that none of their people can afford. They built the largest building in the world, beautiful, it is AWESOME. It even has an indoor seashore, totally exquisite. Downstairs, where the seashore is located are also places for shops and coffee bars, upstairs, room for offices and residences for people to live. Amazing place, over 100 miles away from any ocean.
    Only one problem, the place is nearly empty. Few can afford it.
    Also, the pollution problem has gotten so bad that greedy gut corporations are leaving en masse to Vietnam and Taiwan. The workers are cheaper, and the air is much cleaner.
    So, China has lost many of its corporate investors. They have all their product secrets, however, so in the long run, they will benefit selling vehicles, computers, phones, etc. to Russia and other BRICS members.
    But, it will take a while. The area has to be cleaned up, the nation is filthy. Unemployment is growing, and their problems from short term thinking will take a long time to resolve.
    I don’t know what they will do with the ghost towns……they need to enrich their people, not just the few on top.

  2. To Friend, Squodgy: Great article, thanks. It describes the problems China has developed very clearly. They squandered their one time expansion……it is a good article.

    China has to clean up their mess, and I think they will because they have a future. I think their connection with Putin and BRICS will help greatly. They need to clean up their environment, and in time, fix or replace the apartments and ghost towns they built. It is a crime they are not maintaining them……if they were smart, they would make it a business opportunity for enterprising people to clean up, repair and fill the apartments.

    However, they have all the technology blueprints and MFG skills from the greedy corporations. BRICS needs the vehicles, computers, ETC., so I think they will work their way out of the mess serving the needs of the BRICS members.

    Remember, BRICS is the alternative economy to the west, and it is destroying it. Only 33% of world nations even use the dollar in international trade. That means 67% does not.

    The US has skated on world reserve currency status for years, but, BRICS has adopted electronic currencies, making the need for any world reserve currency obsolete.

    China is dreaming if they think they will get it, it has been rendered worthless…..and that has destroyed the US.

    Even more frightening to me is the fact the FED has been carrying the national debt, keeping it current by buying US treasuries.

    In November, all such purchases will stop.

    Very scary.

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