Cash Squeeze in China, Interest Rate Swaps Rise Most in 22 Months; China's Credit Bubble About to Pop; Shadow Banking Crackdown

Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale.

China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.

“The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.”

“The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”

Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.

Capital Flight

The statement by Chen Qi “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows” is interesting.

Qi's statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens.

A front-page editorial on Friday in China Securities Journal - an arm of the regulatory authorities - warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” it wrote.

The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade.

It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output,” it said.

There have been signs of serious stress in China’s interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default.

“Liquidity conditions have tightened severely due to the crackdown on shadow banking activities,” said Zhiwei Zhang from Nomura.

China's Credit Bubble About to Pop

In a followup post, Ambrose Evans-Pritchard writes Fitch says China credit bubble unprecedented in modern world history

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. 

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.

The China Securities Journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.

Shadow Banking Crackdown

This shadow banking crackdown is a good thing. The longer it is put off the more violent the reaction when it does happen.

Yet, the crackdown was put off so long already, severe ramifications on growth are already baked in the cake.

In turn, the slowdown in China will hit the commodity exporting countries (Australia, Brazil, Canada) quite hard.

For my recent take on Brazil, please see Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

For more on the huge impending slowdown in China please see

• Pettis on China, Europe, Japan: Bad News for Those Looking for Growth
• Epic Glut of Graduates Depresses Wages; Fake Job Offers Taint Hiring Statistics

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

Bloomberg reports Brazilian Currency Touches Four-Year Low, Prompting Intervention

Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.

“If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.”

Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday.
The currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.”

Real Monthly Chart Shows Intervention Madness



click on chart for sharper image

Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe.

The Financial Times reports Brazil declares new ‘currency war’

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

Check out all these recent reports of Brazilian Real Intervention.

Is this madness or what?

By the way, with the huge slowdown in China (and Chinese demand for commodities plunging), Brazil is going to have a damn tough time stopping the slide in the Real and an equally hard time controlling inflation.

What happened to the alleged nirvana "When the real appreciates, it reduces our competitiveness"?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Epic Glut of Graduates Depresses Wages; Fake Job Offers Taint Hiring Statistics

In response to Pettis on China, Europe, Japan: Bad News for Those Looking for Growth reader "BC" passed on a series of articles about jobs and wages, and matching up graduates with the skills companies seek.

The articles are all in regards to China. Change the names and faces, and the stories sound to me like things you could easily read here.

The problems are universal: too many graduates, trained in fields where there are no jobs or few openings.

Job Prospects for China's Grads Bleak

Business Times says Job Prospects for China's Grads Bleak.

A record seven million students will graduate from universities and colleges across China in the coming weeks, but their job prospects appear bleak - the latest sign of a troubled Chinese economy.

Businesses say they are swamped with job applications but have few positions to offer as economic growth has begun to falter.

The Chinese government is worried, saying the problem could affect social stability, and it has ordered schools, government agencies and state-owned enterprises to hire more graduates at least temporarily to help relieve joblessness.

"The only thing that worries them more than an unemployed, low-skilled person is an unemployed, educated person," said Wei Shang-Jin, a Columbia Business School economist.

Lu Mai, secretary- general of the elite, government- backed China Development Research Foundation, acknowledged in a speech this month that fewer than half of this year's graduates had found jobs so far.

China quadrupled the number of students enrolled in universities and colleges over the last decade. But its economy is still driven by manufacturing, with a preponderance of blue-collar jobs.

Premier Li Keqiang himself led the Cabinet meeting on May 16 that produced the directive for schools, government agencies and state-owned enterprises to hire more graduates, a strategy that has been used with increasing frequency in recent years to absorb jobless but educated youths.

"Any country with an expanding middle class and a rising number of unemployed graduates is in for trouble," said Gerard Postiglione, director of the Wah Ching Center of Research on Education in China at Hong Kong University.

Mish Comment: Well, at least China's middle class is expanding, for now. That's not something we can say here in the US.

Fake Job Offers Taint Statistics

Forbes writes College Grads Are Jobless In China's "High-Growth" Economy

The semi-official Global Times reports that one of China’s hottest businesses at the moment is the forging of employment contracts for students.  Some universities, concerned about the withdrawal of funding due to high unemployment of their grads, will not hand out diplomas before students supply evidence of imminent employment.  The fake contracts, of course, inflate the statistics reported to—and eventually the figures issued by—central educational authorities.

“I just can’t figure out why it’s so hard to get a job this year,” wonders Miranda Zhang, who will graduate from a university in Beijing this spring.

The misery is spread over many fields.  English majors are having a hard time finding work, but so are those receiving degrees in law, computer science and technology, accounting, international trade, and industrial and commercial administration.  In short, Ms. Zhang and her classmates face a tight employment situation partly because the Chinese economy is in fact not moving fast in the much-discussed up-the-value-chain transformation.

Mish Comments: Are fake job offers in China that much different than the University of Phoenix placing someone with a culinary art degree in a job at McDonalds, while padding statistics as a graduate with a job in their field of study?

As for growth in China, forget about it. See the top link if you need convincing.

Chinese College Graduates Play It Safe and Lose Out

The Wall Street Journal reports Chinese College Graduates Play It Safe and Lose Out.

Xie Chaobo figures he has the credentials to land a job at one of China's big state-owned firms. He is a graduate student at Tsinghua University, one of China's best. His field of study is environmental engineering, one of China's priorities. And he is experimenting with new techniques for identifying water pollutants, which should make him a valuable catch.

But he has applied to 30 companies so far and scored just four interviews, none of which has led to a job.

Over the past decade, the number of new graduates from Chinese universities has increased sixfold to more than six million a year, creating an epic glut that is depressing wages, leaving many recent college graduates without jobs and making students fearful about their future. Two-thirds of Chinese graduates say they want to work either in the government or big state-owned firms, which are seen as recession-proof, rather than at the private companies that have powered China's remarkable economic climb, surveys indicate.

Mish Comment: Graduates want to work for State-Owned-Enterprises (SOEs), but SOEs in China are totally out of control, racking up debts that cannot and will not be paid back. SOE need to be dismantled, and they will be (with much pain).

The US equivalent would be hoping to get in on the public union pension-for-life gravy train just as the US public pension system is about to crash.

Employers and Graduates Mismatched

Marketplace.Org has Tales from a Shanghai job fair: Why China's college grads, employers mismatched.

Hundreds of HR managers carefully eye prospective employees who, resumes in hand, crowd the floor at a Shanghai job fair.

Here’s the problem: neither group is interested in each other.

Nicole Li is looking to hire college graduates for her property management company. “We need technicians to fix software problems, but college grads don’t have these skills," says Li, frowning. "We need people for exhibitions who can do presentations in English, but they can’t do that, either.”

Li needs to hire people for 60 high-skilled jobs. She says among the thousands of candidates here today, she’ll be lucky if she finds one.

Tong Huiqin comes to this job fair every Friday. He graduated from the Shanghai Finance University six years ago. Since then, he’s jumped from one job to the next. “It isn’t hard to find a job," says Tong.  "It’s hard to find the right job.”

Tong blames Chinese universities. He says they need to do a better job at preparing people for the country’s rapidly changing labor market.

I turn around and ask 22-year-old Wang Qianmin, who’s about to graduate from Shanghai Normal University with a teaching degree, what she’s looking for at the job fair. "I don’t know," she says with a pout. "Most of the jobs here aren’t really interesting. I’m looking for a company that’ll give me a high salary, money for meals and that’ll pay my rent -- a place where the working hours aren’t too long."

Wang says she wants to be a teacher. Or maybe a wedding planner. She can’t decide.

Mish Comments: These kids have no idea what they want to do, and they blame it on the school for not teaching them.

How is this different than the average liberal arts major in the US expecting the world at their doorstep just because they have a useless degree that prepares them to do nothing more than work as a part-time retail clerk, 25 hours a week, dumped into the Obamacare system?

Yet, we are told education is the answer, without ever addressing the questions "for who? at what cost? in what field?"

These articles were purportedly about China. Change the names and faces and the stories are not much different than you can find right here in the US, in Italy, in France, or anywhere else in a slow-grow global economy.

After growing at an astronomical rate for years, the cost of education is going to plunge. Job statistics will force that outcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com