Will a Mises Moment Occur in China?

Here is a bizarro comment/report of the day.

From Bloomberg: (original)

Record new credit in China in January may help Asia’s largest economy maintain momentum amid government efforts to rein in risky lending

From same article but updated to look complete

China’s aggregate financing, the broadest measure of credit, climbed to 2.58 trillion yuan ($425 billion), the central bank said Feb. 15, spurring optimism the economy will maintain momentum amid government efforts to rein in risky lending.

Push credit to NEW record levels will “rein in risky lending”? Give more alcohol to alcoholics will remove alcoholism?  

A more sensible report from Reuters…

First the stock market rally…

China's stock market began January heading in the same direction it went in 2013, when it posted one of the world's worst performances, but on Monday it ended with a year-to-date gain for the first time in 2014.

The turnaround comes as investors see signs of support from the central bank and take advantage of a lighter month of new listings. Other emerging markets have recovered as well, though some continue to lag behind.

Next inundating the system with steroids…

Banks are finding it easier to obtain the short-term loans that are critical to their operations, a shift that has improved sentiment among investors over the past month. A benchmark for the cost of short-term loans among banks, the weighted average of the seven-day repurchase agreement rate, stands at 3.86%, down from 4.36% Friday and 6.59% on Jan. 20, the height of a brief wave of panic that swept China's banking system at the start of the year.

The lower rates came after the Chinese central bank channelled a large amount of cash into the financial system to prevent a repeat of a severe crunch seen in June.

Further evidence of looser monetary conditions emerged on Saturday, when official data showed Chinese financial institutions lent far more than expected in January. Banks issued 1.32 trillion yuan ($217.6 billion) of new loans, compared with 482.5 billion yuan in December, according to the People's Bank of China. The country's banks typically lend more aggressively at the start of the year than at the end, so increases are common, but the January total was also well above the 1.07 trillion yuan in new loans recorded a year earlier.

Chinese stock markets has been celebrating the RECORD steroids as shown by the recent spike in the Shanghai Composite. Will more steroids be coming so as to fuel the SSEC higher?

We learn too that Chinese resident investors have become more discriminate, picky or selective and cautious with regards to fixed income placements as bond spreads between investment grade and lower grade issues widen

From another Reuters report: (bold mine)

Unlike in mature markets, where a AA rating is considered strong, investors deem anything below AAA in China to be weak.

The spread between high- and low-risk borrowers , according to Thomson Reuters benchmark curves, has widened to a 21-month high of 105 basis points now, from around 70 bps in mid-2013, when China's money markets suffered a short lived liquidity squeeze that sent tremors well beyond its borders.

"Short lived" in the face of growing credit tremors? "Short lived" when government uses bigger and bigger intensity of liquidity injections? I doubt it.

As I raised last Sunday, 

So prior to the New Year, the Chinese government conducted a bailout. After the New Year, the Chinese government extends a subsidy (another bailout?) to a politically privileged sector.

Yet will the two interventions be enough to stabilize China’s markets? Or will the Chinese government have to employ serial bailouts in increasing frequency in order to keep the China’s highly fragile financial markets and economic system from falling apart?

Reports indicate that the second delinquent shadow bank trust, the Jilin Province Trust, is in the process of also being bailed out. The said Trust have financed the same beleaguered company that prompted for the first “trust” or shadow bank bail out of 2014.

Negotiations are ongoing over the return of funds to investors in the product created by Jilin Province Trust Co Ltd and backed by a loan to a coal company, Shanxi Liansheng Energy Co Ltd.

Interesting no? Will bailouts become a weekly affair?

Record credit infusion has substantially brought down rates of 7 day repo. Yet how long will the effects of the steroids last? A month or a week or two before new credit issues emerge? 

You see the problem isn't liquidity, the problem is the sustainability of the heavy debt yoke which has not only brought about rising rates that increases the burden of debt servicing but also credit quality issues. Liquidity signifies only a symptom of the disease. So in effect, the actions by the Chinese government to inject liquidity has been meant to buy time.

Record cash injection seem hardly to impact yields of China’s 10 year sovereign.

Curiously even the Chinese currency (against the USD) the yuan has been weakening from the start of the year. Are these signs of capital flight?

And record cash injections seem to have only INCREASED the probability of default as measured by 5 year CDS.

So will the Chinese government continue to inject RECORD after RECORD of credit to produce short term “stability” in the hope the debt nightmare might go away? Or has the Chinese government been playing a financial Russian Roulette?

The Chinese government should heed the wisdom of the great Austrian economist Ludwig von Mises whose warnings have become resonantly valid in the case of China. (bold mine)

Because the effects which the inflationists seek by inflation are of a temporary nature only, there can never be enough inflation from the inflationist point of view. Once the quantity of money ceases to increase, the groups who were reaping gains during the inflation lose their privileged position. They may keep the gains they realized during the inflation but they cannot make any further gains. The gradual rise of the prices of goods which they previously were buying at comparatively low prices now impairs their position because as sellers they cannot expect prices to rise further. The clamor for inflation will therefore persist.

But if the Chinese government will continue gamble with with sustained record injections of credit and liquidity then we might see a “Mises moment” in China.

Again the great Mises.

But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.

If the Chinese government continues to inject record after record liquidity this may prompt for a "crack up boom" as described above, yet if they decide to withhold liquidity then there will be a massive deflationary (property and stock market and eventually economic) bust. The Mises Moment. The effect from the current trend of political actions, of trying to buy time from markets to clear, looks headed in such direction

Has the falling yuan been a sign? Have recovering gold prices been indicative of such buildup of stress behind the scenes in China?

Oh by the way, ASEAN currencies staged a very remarkable rally yesterday in the face of severely oversold conditions. The question will the rally be sustained?  Or how long with this last?

We live in very interesting times.