There's a parasite in China sucking up money faster than the country can print it

[RV_]

Excerpt:

 

"China's shadow banking system will soon begin to suck money out of the country's economy at a mind-bending rate, according to analysts at HSBC.

 

This news couldn't be coming at a worse time. The global economy is on tenterhooks after the the UK decided to leave the European Union in mid-June. That issue prompted China to devalue its currency, the yuan, by the most since August. Generally when that happens, cash starts to flow out of the country.

 

The problem with China's shadow banking system right now is that there are a few things going on — like falling interest rates — that could make it a source of capital flight while also siphoning off much-needed cash flowing through the economy into a dark, black hole, like a parasite. A big, fat money tick.

 

WMP WMD

But first, let's clarify what we mean by shadow banking. In general, China's shadow banking system is made up of wealth management products, or WMPs, carried off balance sheet.

 

These are debt or debt-like instruments that pay out higher interest rates to investors. This is important because over the last year and half, as the Chinese economy has slowed down, the People's Bank of China has lowered interest rates in order to keep cash flowing through the economy, as can be seen in this chart from HSBC.

 

This is what makes WMPs so attractive, even though they're riskier than normal financial instruments. China is a developing market, and investment options are limited. The stock market became something of a no-go after it crashed last summer and again in February.

 

As such, the growth of WMPs has exploded as Chinese investors have looked for places to park cash.

 

In a note to clients on Thursday, HSBC estimated that the WMP market is 24% larger than China's domestic stock market, the A-share market.

 

From HSBC:

 

"If Wealth Management Products (WMPs) continue to expand at their current rate, in two years' time as much as a third of the retail funding activities in China's banking system will take place off balance sheet. That will make it even harder for regulators to estimate risk in the banking sector and to monitor linkages between the country's shadow banking activities, capital markets and the real economy."

 

Even before rates started falling, WMPs were a problem for the Chinese government. They're opaque, and as Deutsche Bank pointed out in a recent note, they allow money to be siphoned off to unproductive projects — China's infamous roads to nowhere and empty cities.

 

The parasite

 

The WMP problem is now so huge that it's starting to suck up cash lying around in the Chinese economy like a horde of locusts. Economists use "M2" to describe the part of an economy's money supply that includes cash, checking deposits, and what is known as "near money" — extremely liquid assets like savings deposits, money market mutual funds, and other time deposits.

 

HSBC points out that M2 growth has settled in around 12% to 15% a year over the last few years. It was 20% while the eco

nomy was growing faster. WMPs, HSBC analysts estimate, are growing much faster than that.

 

"What that means, quite simply, is that money is flowing into WMPs faster than the pace at which it is being created, implying that liquidity is being sucked in from the real economy," the analysts wrote. "In our opinion, the sustainability of such a situation is questionable, and this is potentially one of the key factors that could trigger a systemic risk event down the road."

 

And what that means as well as charts and link are in the rest of this in-depth article here: http://www.businessinsider.com/china-shadow-banking-sucking-cash-out-of-the-economy-2016-6

[justRich]

Wealth Management Products (WMP) are mostly liquid. Their hope is to achieve a buy-out from a larger company or to have an IPO upon which investors sell their shares. There is no public market for those products until such time.

Prior to that time investors can sell their shares but only at a fractions of their original cost - creating a huge loss.

 

The more likely event is that the WMP's will simply fail. Investors will loose everything. Then panic will set in.

This economist thinks China is headed for a 1929-style depression by Sue Chang appearing on MarketWatch tends to indicate a major financial crisis is in the near future. A crisis that will surely rock markets across the world.

 

[KandJBm]

I guess most or all of us here are not economists, so what do we know? Actually, what the he** do most economists know?!

 

It seems from the two posts above (and the link) that China and the US Fed monetary policy are in agreement: "money is good, ergo more money must be better, ergo more and more money must be heaven on earth." Well, maybe not heaven on earth, but at least heaven on Wall St? At least until another financial assets balloon(s) bust?

 

K

[Zulu]

I guess most or all of us here are not economists, so what do we know? Actually, what the he** do most economists know?

 

Just because you're not an expert doesn't mean there aren't any.

[RV_]

Rich,

I see a correlation to the Chinese situation and ours post 2007/8 wherein we had no interest being paid by banks .05% interest for savings thus leaving those with savings assets, (which were few in the US at that time in the general population because of the use of derivatives freely in the wild west no end in sight moneyfall.) frantically searching , like me, for low hanging fruit and long term good growth emerging disruptors like Tesla to invest in and actually make money again. And most of us did. People keep marveling at the long Bull market, historically unprecedented. But if they step back and think, it may last as long as the banks can borrow directly, and freely almost, from the fed, and make 7-10% on consumer debt. If interest rates climb back, the market will correct, because the banks will have no choice but to pay decent compounding rates again in order to have liquid assets to create more. Which in turn will encourage money market accounts and then traditional savings again once the wealth is distributed among all the earners again.

 

Shaken by the losses many took in the markets the few of us, spanning small investors like me and the millionaire investors, had a unique opportunity to invest in blue chips and IPOs at fire sale bottom of the charts prices with an almost certain bet of making money with recovery.

 

I think what most folks miss is that China has had their stock markets crash twice recently. I see their WMP shadow monies are avoiding banks like I did in the years following 2008 by buying more fund shares, and then investing in Tesla's IPO.

 

Were I Chinese today I would be leery of leaving my money in banks that were heading down not up. Let's remember that the billions under the control of their top businessmen and investors need a safe place to be parked. But with the recent stock exchange crashes they are driven to something like the WMPs.

 

I think we are seeing a similar alternative to traditional stock investing with the emerging ETFs in this country. And what I see driving their emergence and profits are investor's fears of this US Bull run ending in a spectacular crash rather than a gradual correction. It's a stock investment but it isn't all in on one, it is an investment but you don't actually own it, and ETFs are now thought to provide more returns from slightly to much more than traditional investment interests. I was reading about some new ETFs today and see some correlations. Like the Chinese WMPs these imply less volatility than individual stocks, but still are not tied into low rates with banks.

 

I think that both the extremes of a major China crash and the folks thinking the bubble will go on forever are quite possibly incorrect. Xie, meanwhile, says he is doubtful of the Communist’s Party’s ability to manage and grow China’s economy — but believes that, if they become more hands-off, the country could become the world’s leading economic force. At the core of Xie’s concerns about China is the contention that the government is doing more harm than good:

 

“If government takes a step back instead of dominating the economy so much, China can be twice as big as the U.S. in 20 years,” he said."

 

The communists may well take his advice. And the rural Chinese IMO are their long term ace in the hole.

 

My guerrilla economics 101 says that wealth in today's world depends on the backs of emerging nations with cheap educated labor. HP doesn't make anything, and neither does Apple. Instead they design a set of specifications desired, and an Original Design Manufacturer comes back with the hardware to meet or come close to meeting the specifications set forth by the retail vendor. The reality today is easily seen by the old adage to know your history or you are doomed to repeat it.

 

I have watched Japanese products go from worse than Chine ever delivered to today being a premium manufacturer of goods. Early on manufacturers in the US sold their name brands to the Japanese. Soon, as the Japanese products made money in their own country from manufacturing and engineering those global products within a generation their own standard of living rose and their workdays became manic "grape to raisins" being the management style.

 

The Japanese became like us, high standard of living and high wages - we needed new cheap labor and Korea looked good. Then the Korean's standard of living raised up along with wages and the Taiwanese and to a lesser extent, the Thai's, Vietnamese, and the Malaysians started to educate and demonstrate the ability to meet standards and costs. But the Chinese coast had the educated and rising middle class that worked cheaper than any and their portion of the world's production grew along with their quality as we saw in the Japanese then Koreans, Taiwanese, Thai's, Vietnamese and Malaysians. And all found they could build factories in mainland China and make these goods for much less than paying their own workers.

 

Today the US retail vendors like Apple, HP, Whirlpool, Microsoft, Automakers and heavy equipment brands are being made in whole, or in parts, by China. And with an emerging educated class it looks like India has assumed the technical support for the world's retailers, as well as the ODMs and manufacturers.

 

Each of the countries that preceded China in manufacturing cheaply enough for the retail "fronts" here, and around the world, could make even more by not being saddled with manufacturing retirement funds and labor problems.

 

All that for my personal opinion

 

So our retail manufacturers became merely marketing agencies and retailers focusing on image and customer service. Now they even outsource the customer service and support. Most folks paid little attention but most avoided L.G. in the early days before it switched to just its initials which mean Lucky Goldstar. Now Goldstar (LG) is considered by many a premium brand.

 

IBM was having its ThinkPad notebooks made in China as were all the rest in Taiwan managed Chinese mainland manufacturing became the norm. The company that made the ThinkPads for IBM are now called Lenovo. Lenovo, a relative newcomer to the retail world of computers, holds the world's number 1 market share for most computers and parts.

 

Each of China's predecessors were the top growing and most improved quality wise as long as their country had a lower standard of living as the owners of the consumer brands and manufactured products. I wrote here more than ten years ago that giving China back Hong Kong and the Hang Seng was the most brilliant piece of Trojan Horse - like invasions of capitalism into a communist country I have seen or studied. IT insured the country, and our investments in it, would not be destroyed with a sudden revolution but would allow for a gradual slide as we see today with it being more capitalist than communist.

 

I agree, with Xie, that if the government kept hands off the economy and stopped driving it down, that China would be able to transition, and unlike the other countries, their majority "Stone Age" billions of inhabitants away from the coast, are the future educated workers in the Chinese factories for decades longer than Japan, Korea, Taiwan, the countries around the China Sea, ever could.

 

The Chinese economy will provide cheap labor for me and my children's lifetimes. (If the government listens to Xie)