Friday, April 28, 2017

China Still Adding Liquidity To System At Record Pace

In a world where money flows across borders at the press of a button, it doesn't matter which major central bank is adding money to the system the effect is the same. Today money printed and injected into the economy of any country drives markets higher across the world by distorting demand and prices. The fact is China has continued to add liquidity to their economy at a record pace and the liquidity China injects into its system spills out into the global economy, the money leaking out of China bolsters and lends credence to the illusion all is well both in China and across the world reinforcing the narrative economies are beginning to gain traction.

The figures and economic data China reported for March and Q1 showed the first back to back GDP acceleration in seven years. "The rebound in retail sales growth was particularly important as it indicates that consumer spending remains strong," said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore. The data fractionally beat expectations across the board as investment picked up, retail sales rebounded and factory output strengthened, following record credit growth and a fresh rebound in China's property markets. It should be noted an increase in Chinese housing prices which many people see as a housing bubble is a double edged sword and not necessarily something the government is glad to see. Not only do these increases make housing unaffordable but they also tend to cause leveraged speculators to enter the market.

China's Credit Growth Far Outpaces Growth In GDP
Returning to the issue of cross-border money flows it must be noted newly printed money and liquidity printed and released into the Chinese economy quickly affects distant markets. This reinforces what other central banks across the globe have been doing for years. Taking turns one after another countries have added fuel to the global economy in an extended rolling process determined to deflate the effects of their previous credit excesses.

This means when Japan announces a new stimulus package or easing, markets across the world rejoice and move higher in unison. Those who doubt the power of cross-border money flows need only look to Vancouver Canada which has been forced to implement a foreign buyer tax in an effort to halt the rise in housing prices inflated by "hot money" from China. Toronto's housing market has also gone crazy with prices soaring 33% from the prior year. Recently CBC reported Ontario's Liberal government will slap a 15 percent tax on home purchases by non-resident foreigners and will expand the province's existing rent control system to cover all tenants. The wave of speculation has caused landlords to raise rates and distorted expectations of future prices this has broad implications for the housing market going forward.

China's Money Supply Soared From $10 To $24 Trillion
According to Bloomberg the better numbers coming out of China make the problem of excess leverage look a little more manageable, at least as long as factory reflation stays strong. Stronger consumer consumption contributed 77.2% to growth in the first quarter, this points to progress in further rebalancing the economy away from exports and the old industrial growth drivers. The data was of course followed by a bit of optimism and spin as Bloomberg noted, the chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong said, "for the first time in the recent years, China starts a year with a strong headline GDP. Thanks to strong investment and property, the economy is performing well."

Because of China's Q1 expansion we have seen producer prices soar, this validates in the minds of some market watchers the ongoing global "reflation" trade. As industrial output picked up courtesy of soaring credit many people continue to brush aside the fact this additional liquidity temporarily mask huge problems within the country. Over the years the credit growth in China has far outpaced growth in the GDP and with each wave of new money into the system less growth has been created. It seems much of the new money has been used to pay interest on past debt that has already formed or in speculating on which existing assets will rise in price and when the government creates policies to end speculation it fuels the desire for wealth to flee the country in search of better investment opportunities.  

While the economic data out of China was welcomed by many investors we must recognize China's relentless credit pump continues set on high. It was reported the broadest measure of new credit rose more than estimated last month amid strong growth in shadow banking. Aggregate financing grew 2.12 trillion yuan ($308 billion). This means for the first quarter, total social financing reached a new record high 6.93 trillion yuan. At current exchange rates, China's credit creation in Q1 totaled to just over 1 trillion US dollars. This is equal to the size of Mexico's economy and well above last year's first quarter total. With this in mind, concerns continue to mount that China's growth is merely the result of relentless credit expansion and at some point, this debt-fueled model will break and the system collapse under its own weight.


  1. And just about the time China starts to break (and it will) QE*π?
    China will continue to sell down treasuries and use proceeds to buy out gold holders about to depart?
    RNB converts into gold and little else except treasuries?

  2. Hi Bruce
    Enjoyed the post. I'm no expert. I do agree that from what I've read that China continues to develop vast quantities of bad debt. China also appears to have a very industrious, risk-seeking populace. Doesn't that industrious quality of their populace enable the country to drive through some of the downside that is headed their way?

    1. Unfortunately, it does not matter if you are hard working and risk adverse if the ground collapses under your feet you will most likely go with it.
      I do, however, concede the strong tend to do better in situations of adversity.