Earlier today, I pointed to the plummeting real estate activities and to the spreading commodity rehypothecation financing woes. Here I mentioned:
So how will the Chinese government deal with hissing credit bubble? Well, in the same way almost every government deals with the addiction problem: give them more of the substance which they have been addicted to: credit
From CCTV.com
The Chinese government’s central bank, the PBOC officially announced ‘targeted’ easing directed at institutions lending to the rural economyChina’s central bank is easing monetary policy for lenders focused on small firms and the farming economy. The PBOC is cutting the reserve requirement ratio by 50 basis points for some lenders, effective from June 16th.The triple R cut applies to banks whose new loans to the farm sector last year exceeded 50 percent of total new lending. An additional requirement says that outstanding loans to the farming sector must be more than 30 percent of total outstanding loans.This means the targeted RRR cut covers around two thirds of city commercial banks, 80% of rural commercial banks and 90% of rural credit cooperatives. The RRR cut will also apply to financial services companies like leasing firms and auto financing firms to lift domestic consumption.
The problem with so-called targeted easing is that once money has been released into the system no one can know or control where it flows. This has been the reason why China’s shadow banking has ballooned. Government controls on local government lending produced offspring called Local government financing vehicles (LGFV) and eventually to illicit loans by State Owned Enterprises in behalf of local governments.
Shadow banks really signifies a regulatory arbitrage response to the highly regulated banking and finance system dominated by the state or State Owned Enterprises and most importantly to the credit boom initiated by the PBOC and from the Chinese government’s 2008 stimulus program ($586 billion).
The likely scenario from this rural based loans will be that credit issued by accredited banks will end up again in the shadow banking sector. Such will most likely signify attempts to prop up zombie companies.
So more resources will likely end up with non-productive activities that will persist to drain on the economy’s real savings.
Because of this China’s Shanghai index jumped 1.08% today
Oh by the way, despite tumbling property markets, China’s official inflation rates jumped in May.
From CTV.news.ca
Higher food prices have pushed China's inflation to a five-month high of 2.5 per cent.Data released Tuesday showed consumer inflation in May picked up from the previous month's 1.8 per cent. The increase was driven by a 4.1 per cent rise in food prices.Inflation still is well below the ruling Communist Party's 3.5 per cent target for the year, leaving room for interest rate cuts or other measures to stimulate the slowing economy if needed.
The above chart shows that May’s inflation increase has been a four month high.
This also reveals of the developing deadly cocktail mix of stagflation and bubble bust at work.
Today’s rescue also shows how the Chinese government will try to resist a collapse (kick the can) which exposes on the government’s priority which is that of political convenience first and social welfare last. Thus, goodbye reforms.
And this also shows how stock markets have been addicted to stimulus
Note to email subscribers. If I am not mistaken this blog’s Feed Burner services delivers only a maximum 3 blog post per day. Since I made six posting for today you are likely to receive only the latest three. Anyway here are the links for today’s post
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