Many want to believe the FED is the responsible party for causing the massive unwinding in all variety of markets. The deleveraging of all assets classes in a zero interest rate environment can and will cause massive pain for those who utilized ultra cheap money to attain assets that looked so good riding the momentum wave, but the undertow from deleveraging can drowned many swimmers. But is the source of deleveraging Chairman Bernanke? Maybe. But the more important impact may be from the Chinese. The SHIBOR, or overnight lending rate similar to LIBOR in the western capitalist countries, has skyrocketed during the past week, rising to double-digit levels–almost 25% at some point. The impact on the Chinese markets has been devastating but more importantly it has caused fears of a major crisis in the Chinese financial system and a negative impact on the entire fragile global financial system.
One of my Australian readers (CARL) has been sending me regular e-mails about the SHIBOR spike for the last week and I have been watching to see how it plays. Yet it forced me to think why the Chinese authorities would allow the massive imbalance to take place for I believe that China remains a very controlled, top-down system. If the People’s Bank of China wanted to affect the short-term rates it could have poured massive amounts of liquidity into the banking system or cut the reserve ratio to minimize the upward pressure on SHIBOR. Readers of Notes From Underground are aware that I have always been leery of economic data releases from the Chinese. As I have always noted, the Chinese leadership hits its predictive targets almost consistently as Jack Welch when he ran GE.
Recently, the Chinese releases have been consistently below market predictions and that raises a question: WHY DOES THE CHINESE LEADERSHIP ALL OF A SUDDEN WANT TO PAINT A PICTURE OF A WEAKENING CHINESE ECONOMY? I theorize that the Chinese have been unhappy about the policy shift by the G-7 and IMF to promote a weakening YEN. The political dialogue over ABENOMICS is that anything that promotes domestic growth in Japan is ultimately good for the entire global village. So if Japanese exports displace German and Chinese products, it will be for the good of the world … eventually. Developed world support for the Japanese program is an affront to China and the ultimate stick in the eye of China is not being part of the G-8.
The Chinese may be tired of carrying the global growth agenda as its huge growth has supported the world’s consumers and enriched the globe’s natural resource producers and farmers. A slowing China is causing disruptions to the world’s growth story and which nation will fill the void. China has recently told the Europeans that they were not a major global player and the old colonial order was over. A “manufactured” slowdown in China will have negative implications for global growth and heavily levered investments will come under increasing pressure. No room at the G-8’s table for you, where even Italy, Canada, the U.K. have a seat. Well maybe the Italian economy can fill the void left by a slowing China. There is much to ponder in this assessment but nothing is as it seems in the world of Notes From Underground, where 2+2=5 is the order of the day.