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Financial "Collateral Damage" Highlights China's And Fed's Impossible Task

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Authored by Mike Shedlock via MishTalk.com,

 

Variant Perception notes China Broad Credit Growth Slows to Zero. The side effect is a huge amount of collateral damage.

 

The recent tightening of credit we have seen in China is primarily aimed at
clamping down on shadow financing
. Wealth management products have rapidly grown in size, from only 8% of total banking deposits in 2012 to over 20% today.

 

 

 

china-shadow-banking.png?w=529&h=328

 

 

 

 

 

The top chart shows China’s banks’ claims on non-banks,
which is where a lot of shadow financing shows up. As we can see,
growth in this category has fallen precipitously from 70% YoY to 20% today.

 

 

 

However,
there is collateral damage from this tightening.
For one, bank-lending rates are starting to rise as their
cost of funding rises (bottom-left chart).
Policymakers in China want to confine the rise in rates in to the interbank market, but this a next-to-impossible task. Too great a rise in lending rates would feed negatively into the real economy.

 

 

 

Moreover,
as the bottom-right chart shows, tightening has led to broad credit growth falling to near to 0%
on a 3-month basis.
A negative second derivative in credit must be watched for any inhibitive effects it may have on economic growth
– especially in a country so heavily credit-dependent such as China. A negative first derivative in credit, as we are on the cusp of today, leaves economic growth even more fragile.

Impossible Task

 

 

I don’t agree with VP analysis on everything, but I do agree on most things. I find this report spot-on.

 

China has an impossible task of slowing its shadow banking sector running rampant and maintaining growth.

 

China’s Dilemma

 

 

I do not know what China will ultimately choose, but something has to give one way or another.

 

China’s unpleasant choice is a bubble bust now or a bigger bubble and a bigger bust later.

 

By the way, the Fed faces a similar unpleasant choice, as do central banks in general. Asset bubbles are everywhere.

 

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