'Returning back to China: The “marginal source of global Credit and liquidity” is short-term supportive of global risk markets. Yet its Credit system is self-destructing – and doing so rather conspicuously. If any other country employed a similar policy mix the world would be sprinting from that currency .. Global markets are in the midst of a destabilizing adjustment to China’s resurgent booms in Credit and speculation. This ensures real havoc when global markets are confronted with a Chinese Credit and/or currency dislocation.'<blockquote>'The world has changed profoundly since 2007. For one, total Chinese bank assets have inflated from about $7.0 TN to over $30 TN. Annual growth in Chinese system Credit growth (“total social financing”) expanded from about $900 billion in 2007 to 2015’s $2.35 TN. Momentous changes have rewritten central banking doctrine. Not even seriously contemplated in 2007, QE (ECB and BOJ) will add close to another $2.0 TN to global liquidity in 2016. Central banks will also push short-term rates (and bond yields!) further into negative territory this year, a policy course that would have seemed totally absurd in 2007. Prior to 2008, no one would have dared imagine today’s “whatever it takes” monetary management.
It’s an incredible confluence. Building on it’s historic $1.0 TN Q1, China could surpass $3.0 TN of 2016 system Credit growth. For perspective, Chinese Credit growth will likely expand at least 50% more than in the U.S. this year. Such unprecedented Credit growth in the face of a stock market collapse, sinking corporate profits and rapidly intensifying Credit deterioration is simply astounding. It’s definitely a testament to the brute power of “whatever it takes” Chinese state-directed finance and investment. Combining Chinese communist leadership with “whatever it takes” global central bankers (with no constraints on their “money” printing operations) creates a backdrop for financial folly unrivaled in history.
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We need to deepen our discussion of China as “marginal source of Credit and liquidity.” A three Trillion (in U.S. dollars) Chinese Credit onslaught would bolster a vulnerable Chinese economy, in the process providing a much needed boost to EM economies and the global economy in general. Resurgent Chinese housing and commodities Bubble would be expected to stoke the real economy and finance more generally – if unpredictably.
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The problem is that China’s newfound commodities speculation is underpinned by historic Credit growth – say, more than $3.0 TN annualized. Meanwhile, global short-squeeze dynamics are bolstered by $2.0 TN of annualized QE (ECB and BOJ). Moreover, there’s the massive pool of speculative finance – including a $3.0 TN hedge fund industry – with large leverage positions throughout global markets. In an extraordinary development, as scores of trades continue to unwind, a destabilizing global dynamic feeds on itself and gathers momentum. It’s monetary disorder on steroids.
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..From my perspective, things continue to unfold in the worst-case scenario. Beijing has lost control of what has evolved into complex Credit, market and economic systems. Global central bankers have lost control of speculative market dynamics – not to mention inflation dynamics. And it’s not as if current predicaments are inconspicuous. So investors, speculators and investment managers around the world are forced to plug their noses and play the game.
Returning back to China: The “marginal source of global Credit and liquidity” is short-term supportive of global risk markets. Yet its Credit system is self-destructing – and doing so rather conspicuously. If any other country employed a similar policy mix the world would be sprinting from that currency.
Thus far, Chinese officials have been determined to carefully manage China’s pegged currency regime. Yet current Credit and market dynamics are inconsistent with a stable currency. I would furthermore argue that breakneck Credit growth in the face of rapidly deteriorating underlying fundamentals is a proven recipe for a crisis of confidence. Global markets are in the midst of a destabilizing adjustment to China’s resurgent booms in Credit and speculation. This ensures real havoc when global markets are confronted with a Chinese Credit and/or currency dislocation.'
- Doug Noland,
More on China, April 23, 2016</blockquote>
Context<blockquote>
'..sold as temporary extraordinary measures is increasingly recognized as desperate “whatever it takes” indefinitely.'</blockquote>