Chart Of The Day: How China's Stunning $15 Trillion In New Liquidity Blew Bernanke's QE Out Of The Water
Much has been said about the Fed's attempt to stimulate inflation
(instead of just the stock market) by injecting a record $2.5 trillion
in reserves into the US banking system since the collapse of Lehman (the
same goes for the ECB, BOE, BOJ, etc). Even more has been said about
why this money has not been able to make its way into the broader
economy, and instead of forcing inflation - at least as calculated by
the BLS' CPI calculation - to rise above 2% has, by monetizing a
record amount of US debt issuance,
merely succeeded in pushing capital markets to unseen risk levels as
every single dollar of reserves has instead ended up as assets (and
excess deposits as a matched liability) on bank balance sheets.
Much less has been said that of the roughly $2 trillion increase in US bank assets,
$2.5 trillion of this has come from the Fed's reserve injections as
absent the Fed, US banks have delevered by just under half a trillion
dollars in the past 5 years. Because after all, all QE really is, is an
attempt to inject money into a deleveraging system and to offset the
resulting deflationary effects. Naturally, the Fed would be delighted if
instead of banks being addicted to its zero-cost liquidity, they would
instead obtain the capital in the old-fashioned way: through private
loans. However, since there is essentially no risk when chasing yield
and return and allocating reserves to various markets (see JPM CIO and
our prior explanation on this topic),
whereas there is substantial risk of loss in issuing loans to consumers
in an economy that is in a depressionary state when one peels away the
propaganda and the curtain of the stock market, banks will always pick
the former option when deciding how to allocated the Fed's reserves,
even if merely as initial margin on marginable securities.
However, what virtually nothing has been said about, is how China
stacks up to the US banking system when one looks at the growth of total
Chinese bank assets (
on Bloomberg: CNAABTV Index) since the collapse of Lehman.
The answer, shown on the chart below, is nothing short of stunning.
Here is just the change in the past five years:
You read that right: in the past five years the total assets
on US bank books have risen by a paltry $2.1 trillion while over the
same period, Chinese bank assets have exploded by an unprecedented $15.4
trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion -
some two and a half times the GDP of China!
Putting the rate of change in perspective, while
the Fed was actively pumping $85 billion per month into US banks for a
total of $1 trillion each year,
in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!
Here is how Diapason's Sean Corrigan observed this epic imbalance in liquidity creation:
Total Chinese banking assets currently stand at some CNY147 trillion,
around 2 ½ times GDP. As such, they have doubled in the past four years
of increasingly misplaced investment and frantic real estate
speculation, adding the equivalent of 140% of average GDP – or, in
dollars, $12.5 trillion - to the books. For comparison, over the same
period, US banks have added just less than $700 billion, 4.4% of average
GDP, 18 times less than their Chinese counterparts – and this in a
period when the predominant trend has been for the latter to do whatever
it takes to keep commitments off their balance sheets and lurking in
the ‘shadows’!
Indeed, the increase in Chinese bank assets during that breakneck
quadrennium is equal to no less than seven-eighths of the total
outstanding assets of all FDIC-insured institutions! It also compares to 30% of Eurozone bank assets.
Truly epic
flow numbers, and just as unsustainable in the longer-run.
But what does this mean for the bigger picture? Well, a few things.
For a start, prepare for many more headlines like these: "
Chinese buying up California housing", "
Hot Money’s Hurried Exit from China", "
Following the herd of foreign money into US real estate markets"
and many more like these. Because while the world focuses and frets
about the Fed's great reflation experiment (which is only set to become
bigger not smaller, now that the Fed has thrown all caution about
collateral shortage to the wind and will openly pursue NGDP targeting
next), China has been quietly injecting
nearly three times in
liquidity into its own economy (and markets, and foreign economies and
markets) as the Fed and the Bank of Japan combined!
To be sure, due to China's still firm control over the exchange of
renminbi into USD, the capital flight out of China has not been as
dramatic as it would be in a freely CNY-convertible world, although in
recent months many stories have emerged showing that enterprising locals
from the mainland have found effective ways to circumvent the PBOC's
capital controls. And all it would take is for less than 10% of China's
new credit creation to "escape" aboard from the Chinese banking system,
the bulk of which is quasi nationalized and thus any distinction between
prive and public loan creation is immaterial, for the liquidity effect
to be as large as one entire year of QE. Needless to say, the more
effectively China becomes at depositing all this newly created
liquidity, the faster prices of US real estate, the US stock market, and
US goods and services in general will rise (something the Fed would be
delighted with).
However, while the Fed certainly welcomes this breakneck credit
creation in China, the reality is that the bulk of these "assets" are of
increasingly lower quality and generate ever lass cash flows, something
we covered recently in "
Big Trouble In Massive China: "The Nation Might Face Credit Losses Of As Much As $3 Trillion."
It is also the reason why China attempted one, promptly aborted,
tapering in the summer of 2013, and why the entire third plenum was
geared toward economic reform particularly focusing on the country's
unsustainable credit (and liquidity) creation machine.
The implications of the above are staggering. If the US stock, and
especially bond, market nearly blew a gasket in the summer over tapering
fears when just a $10-20 billion reduction in the amount of flow was
being thrown about, and the Chinese interbank system almost froze when
overnight repo rates exploded to 25% on even more vague speculation of a
CNY1 trillion in PBOC tightening,
then the world is now fully addicted to about $5 trillion in annual liquidity creation between just the US, Japan and China alone!
Throw in the ECB and BOE as many speculate will happen eventually, and it gets downright surreal.
But more importantly, as with all communicating vessels, global
liquidity is now in a constant state of laminar flow - out of central
banks: either unadulterated as in the US, Japan, Europe and the UK, or
implicit, when Chinese government-backstopped banks create nearly $4
trillion in loans every year. If one issuer of liquidity "tapers",
others have to step in. Indeed, as we suggested a few weeks ago, any
possibility of a Fed taper would likely involve incremental QE by the
Bank of Japan, and vice versa.
However, the biggest workhorse behind the scenes, is neither:
it is China.
And if something happens to the great Chinese credit-creation dynamo,
then we see no way that the rest of the world's central banks will be
able to step in with low-powered money creation, to offset the loss of
China's liquidity momentum.
Finally, when you lose out on that purchase of a home to a Chinese
buyer who bid 50% over asking sight unseen, with no intentions to ever
move in, you will finally know why this is happening.
http://www.zerohedge.com/news/2013-11-25/chart-day-how-chinas-stunning-15-trillion-new-liquidity-blew-bernankes-qe-out-water
