Will Shadow Banks Offset the Chinese Stock Market Margin Debt Crackdown?; China's GDP for 2014: 7.4%

During yesterday’s stock market meltdown, I pointed to the seeming clash of government policies between the central bank, the PBoC and the Regulatory Commission.

The Chinese central bank, the PBoC wants more credit into the system--yet  part of these funds finds its way to the stock markets--while the Regulatory Commission desires to curtail speculative credit flows into the stock markets.

So which agency will prevail, the PBoC or the Regulatory Commission?

Today’s Bloomberg report provides a clue to the possible resolution of this conundrum: Shadow banks will most likely step in or fill in the void from the formal banking. (bold mine)

China’s clampdown on margin lending by brokerages risks fueling an upswing in shadow banking as investors look for new ways to leverage their stock bets.

Wealth-management products, known as WMPs, have been used to channel 300 billion yuan ($48 billion) to 500 billion yuan into shares, Goldman Sachs Group Inc. estimated in a Jan. 19 note. Sinolink Securities Co. put the figure at 1.5 trillion yuan, up from 800 billion yuan at the end of June. Outstanding margin loans totaled a record 1.1 trillion yuan at the end of last week, China Securities Finance Corp. data show.

Chinese equities plunged the most in six years yesterday, derailing a world-beating rally, after three of the nation’s biggest brokerages were suspended from loaning money to new equity-trading clients. The amount invested in WMPs surged 24 percent in the first half of 2014 to 12.7 trillion yuan and Bank of Communications Co. said last week that the total may climb through 20 trillion yuan this year.

“The tightening of margin finance by brokerages will cause more funds to flow into stocks through banks’ WMPs,” Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities, said yesterday by phone. “Money can always find its way into stocks one way or another.”

For as long as the PBoC promotes financial repression (zero bound) policies via expansionary credit into the system, yield chasing via asset speculation will be funded via different channels whether it is the formal or the informal system. There will always be novel ways to go around the curbs.

Yet here is another Bloomberg report validating my thesis that stocks and speculative assets are driven by credit and liquidity from which confidence functions as an offspring--applied to the Chinese financial markets. (bold mine)

For China’s central bank, the 36 percent stock market rally through Jan. 16 spurred in part by a surprise November interest-rate cut is the latest reminder that it’s easier to unleash money than to guide it to the right places.

Since Zhou Xiaochuan became People’s Bank of China governor in late 2002, the broad money supply base has expanded almost seven times to 122.8 trillion yuan ($20 trillion) while the economy has grown about five times. That translates to a M2/GDP ratio of about 200 percent versus about 70 percent in the U.S., according to data compiled by Bloomberg.

That liquidity springs up like a jack-in-the-box, driving property prices, then shifting to stocks, before moving on to whatever may be next. Such sprees help explain the PBOC’s reluctance to cut banks’ required reserve ratios even as the economy slows. Instead, it’s trying targeted tools to guide money to preferred areas such as farming and small business.

Nice line… “That liquidity springs up like a jack-in-the-box, driving property prices, then shifting to stocks, before moving on to whatever may be next.”

So the Chinese real economy has morphed into one gigantic speculative bubble whose economic activities have become too dependent on credit, liquidity and its offspring: confidence.

As of this writing, Chinese stocks have recovered about a quarter of yesterday’s losses.

The official figures of the Chinese economy had been released: in 2014 China’s statistical economy grew by 7.4%.

Yet here is a caustic take by the Wall Street Journal Real Times Economic Blog on the official figures: (bold mine)

Economists say it is daft to get hung up on changes of a few tenths of a percentage point in the official growth rate. The statistics bureau’s methodology is “not so scientific,” as Harry Wu, a skeptic at Hitotsubashi University in Japan, puts it. And even if statisticians at the central government level are immune to political pressure, few doubt that the local bureaus underneath them are capable of fudging the numbers to produce a more flattering picture.

Still, the general trend seems to be clear. If the government says the economy is slowing down, you can bet the slowdown is real.

Yeah, believe those government massaged statistics.