There’s a good article today in the FT about how the Chinese central bank is tightening the loop holes that have allowed China’s banks to lend and borrow off balance sheet.
“Tao Wang, an economist with UBS, said the significance lay not in the additional tightening, but rather in the central bank’s determination to stop lenders from finding loopholes to evade credit controls.”
This is exactly what I wrote about what was really going on in Chinese banking and about Hong Kong in particular back in May (See Making the New Sub Prime – Backdoor to China part one , part two).
“Ms Wang added that it was ‘a signal that the government intends to deal with the recent rapid growth in off-balance sheet activity, which has complicated and compromised the liquidity management of the central bank’.”
The Central bank of China has been trying to control lending by Chinese banks by setting quotas and by reducing the amount of Yuan/Renminbi in the economy. But it’s efforts have been severely undercut by the massive amounts banks have been borrowing via off-shore, off-balance sheet activities in Hong Kong. It seems the central bank has finally woken up.
For the better part of a year the central bank has NOT been in control of the amount of lending. Money has been flowing out of the mainland, to Hong Kong where it has returned as unregulated lending. There are, I think several points worth repeating and expanding upon what I wrote in May.
First I think this has ramifications for both inflation in China and how out of control the lending and bank debt bubble really is. Second, and this is a side issue for those thinking about MMT – I think this is the counter-balance to the assumption that because a sovereign nation issues its own currency it is therefore in control of its currency. It is not. In every nation in the West and now in China too the banks are issuing their own currency. This has been my argument from the start – that the bank have created and been ‘printing’ their own debt-backed ‘securitized’ currency. The FT article essentially admits this is the case and admits that this means China’s central bank has not been in control of liquidity. I would say it has not been in control of the over all money and credit/debt supply.
Third, is what happens when the global banks start to convince Western Money to buy Chinese securities. So far a lot of Hong Kong securitization is taking Chinese money and helping it ‘escape’ central control by feeding it in to an off-shore, Hong Kong securitization machine. The central bank’s limits on lending mean there are ‘lenders’ in China who want to cash in on the land speculation and speculators who want to borrow. Hong Kong is allowing the money and the borrowers to do their deals just beyond the reach of the central bank. The ‘borrower’ goes to Hong Kong to issue securities based on the land speculation deal, the ‘lender’ goes there to buy securities. The central bank cannot stop them.
But the next, and from our perspective more dangerous step, is when the Global banks in their quest for a high return and growth, start to convince western clients to buy these high yield ‘China securities’ and then begin to retain the ‘risk free’ senior tranche for themselves, exactly as they did with American sub-prime securities.
Swiss banks such as Lombard Odier Darier Hentsche are already there as are the ‘Wealth Management’ branches of many of the Global Banks.
As the West slows I think the banks will increasingly try to create and sell China backed securities to Western clients.
Perhaps it is time for China to have an anschluss with Hong Kong and solve their problem by bringing those HK banks fully under their control.Nobody important has guaranteed the "Freedom" of HK ,have they ? Also is China regarded as a solid investment now by those in the know ? Are the mortgages on empty real estate that we have all seen in the media being securitised for western suckers ? Surely anyone with an ounce of nous would not touch these investments unless they are heavily disquised but that is verging on criminal isnt it . I am sorry that I only ask questions as I cannot shine any light on what is going on but I am as fearful as you if not more so . This cannot be allowed to happen and so the only solution I can see is as above .
I think Nick Shaxon has written about how the Chinese elite have allowed HK to develop as their own version of the off-shore bolt-holes he describes in Treasure Islands – and which allow them to avoid all sorts of oversight and regulation. Given that the CCP are all in the game of getting filthy rich surely there is some fundamental conflict of interest in them reigning in their version of the Cayman Islands?
Hello Erictheking I thought that we were talking about HK being a problem for CCP but it now appears that you believe that it may be an asset to CCP . However the central bank obviously sees a problem and would like to deal with this excess credit sloshing about. Unless those pesky HK banks are quelled the Central bank will be unhappy and eventually the fat cats in the CCP will also be unhappy as a bust and inflationary economy will promote extremism and they do not want Tienamin square all over again . Is it possible to just flog the toxic chinese CDO etc to the round eyes and therefore stop it polluting greater China . If they could do that then anschluss could be avoided.
reneecharles,
Hong Kong is both a problem for the Chinese Central authorities, but one they are willing to put up with because it also offers them the chance to play in the global financial market in ways they can't do from the mainlnad. That is what teh articles from May were all about.
Hong Kong is causing huge debt and lending problems but it is also their door to the securitization and off-shore world.
Deeper thoughts from China:
http://mpettis.com/2011/08/some-predictions-for-the-rest-of-the-decade/
Some predictions for the rest of the decad
AUG 28TH, 2011 BY MICHAEL PETTIS
Contradictions abound eh?!
I thought this was interesting from auskalo's link: re chinese rebalancing "It depends in part on how resistant the elites are to the process of rebalancing, which almost by definition means eliminating the distortions that had benefitted them for so long. As Jeffrey Frieden pointsout in his brilliant Debt, Development and Democracy (1992), the elites that benefit from economic distortions are traditionally the ones most likely to prevent necessary adjustments, and if they actually run the whole show, adjustment can be incredibly painful and disruptive."
the elites that benefit from economic distortions are traditionally the ones most likely to prevent necessary adjustments… who does that remind me of?
http://www.alternet.org/story/152173/how_the_surveillance_state_protects_the_interests_of_the_ultra-rich/?page=1
Sorry to go off topic there.
The subject of China has reminded me of something I was thinking about last week: we hear often that the 2008 crash and the US debt downgrade shifted the balance of power in the world from West to East. Golem and others however outline the many problems facing China, the continuing Japanese stagnation, the burgeoning social protest movements in India (amongst other things they have a serious Maoist insurgency!) AND the fact that we may or may not have passed peak oil (which will be costly for all but especially for developing nations) – is it too soon to speak of this momentous shift?
Since reading Shaxon's book I have become fascinated with the 'secret' unseen off-shore world and its interaction with our very 'real' world. As Golem writes that 'our' banks are now trying to flog their crap in the East and the Chinese likewise want to move into offshore – are we not witnessing something other than a shift from West to East but a shift by global elites into pure unaccountability?
I await your corrections! : )
Exactly why Rothschild set up a centre of contagion in Shangers.
MAKING MONEY SEEMS TO BE EASY!!!!
Since the system is going to collapse anyway, there is little apparently immoral about a few opportunistic gwailo helping the Heavenly few to ensure that an extra zero appears on a report that will be lodged half way through the resulting DEPRESSION?
That some want to restrain this is also normal, having allowed it to happen for long enough to get scared by the possibility that there will be a few salutary executions soon……
@ Golem
Bear in mind that I'm not a fully conversant academic proponent of MMT, but your assertion that MMT confers some inherent 'control' over a sovereign currency I think is way off the mark. I do hope I haven't given that impression in my posts here?
Let's be clear about this, I'm only suggesting China's recent monetary/fiscal policy illustrates but one element of MMT – nothing more.
An essentially fraudulent shadow banking system, capable of various kinds of off balance sheet transactions, requires proper banking regulation. MMT is a monetary system that also enables a 'functional finance' approach to fiscal policy. It needs responsible management just like any other system.
The point I made about China in an earlier post relate to the lack of significant inflation from China's own Central Bank policy & what I deemed its 'de facto' financing, thru' broadly state controlled 'commercial' banks, of various, typically infrastructure construction, schemes. In theory this financing is via loans, but it appeared to me that the central authorities are not too concerned if these 'loans' fail to perform. If they are doing this knowlingly, it is similar to government spending into the economy, debt free. And in this way similar to how fiscal policy might work under MMT in conditions of recession or high unemployment. It looks to me that China did this very directly to mitigate employment loss thru' fall in its exports following the '08 'crash'.
The key point is that, with substantial spending in this way, little general inflation occurred. For the simple reason, as MMT states, that there were real resources to be bought. With a large supply of available (unemployed) workers, wage inflation did not occur. There was adequate capacity in other resources too. China very rapidly returned to growth & retained or increased employment. Contrast this with our governments' insistence on pro cyclical austerity.
As regards a property bubble, or any other 'bubble' in an individual sector of an economy, this should be dealt with under fiscal/taxation policy to redress the balance & avoid knock on effects in other parts. This needs doing whether under an MMT framework or some other – no difference. However, MMT's 'functional finance' approach probably provides a more straightforward & capable ways of doing this than the contortions under the flawed thinking of (& often corrupt) neo liberalism.
From someone who was at a conference in Reykjavik recently: "In his opening address, the president of the Republic of Iceland Olafur Ragnar Grimsson proudly announced that, after the crash of 2008, contacts are now more intense with China than with all European heads of government and the US combined; leaving us puzzled what the deals might be about. Read here the FT’s guessing:
http://www.ft.com/cms/s/0/f8b36ed2-d25d-11e0-9137-00144feab49a.html#axzz1WUBfhbp2
Headline: "Chinese tycoon seeks to buy tract of Iceland"