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China's Moves 'Are Acts of Desperate, Stupid Madness'

China's Moves 'Are Acts of Desperate, Stupid Madness'
(Dollar Photo Club)

By    |   Tuesday, 25 August 2015 09:45 PM

Wee! This is becoming a weird form of time travel.

Twenty-five trading days ago the S&P 500 was just 0.1% below its all-time high of 2131 recorded on May 21. Since then we have traveled backwards about 415 days!

That’s right. Monday’s 1893 close was down 11.2% from the all-time high, and marked the chart point first crossed way back on May 22, 2014.

Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the PBOC.

In standard central bank fashion, the latter injected (even) more credit into the Chinese economy via a 25 bps rate cut, reduction of bank reserve requirements by 50 bps and mainlining about $25 billion directly into the banks via reverse repos. Under the latter procedure, the PBOC takes collateral and gives banks cash for a few weeks and then rinses and repeats—over and over, for as long as it takes.

Of course, in recent weeks China’s officialdom has also been feverishly trying to prop-up its currency in order to forestall a tsunami of capital flight. In the last six quarters more than $800 billion of private capital outflows had Beijing scared silly. They were actually sending the paddy wagons out to arrest people for attempting to sneak their capital out of the land of red capitalist miracles.

In fact, according to Soc Gen today’s PBOC actions will inject about $106 billion of fresh cash into the banking system, including bank reserves freed up by the RRR cut. Apparently, however, during recent weeks China had drawn down its FX reserves in attempting to prop-up the yuan by an even great amount. That means they drained the banking system first, and have now flushed the same liquidity back in.

Push, pull. Tighten, ease.

These are acts of desperate, stupid madness, and here’s why.

Twenty-five years ago, Mr. Deng discovered the printing press in the basement at the PBOC and let it rip——including a 60% devaluation of the RMB in one fell swoop. Soon the world was flooded with cheap Chinese goods.

As its subsequent giant trade surpluses materialized, however, rather than letting the exchange rate rise in a clean float as Nixon and his guru, Milton Friedman, had prescribed when they trashed Bretton Woods back in August 1971, the communist bosses in Beijing ran the dirtiest float ever conceived.

During the last two decades the PBOC and its sovereign wealth management affiliates accumulated dollar, euro and other major currency reserves like there was no tomorrow. But as they stuffed the PBOC’s vaults with $4.2 trillion of US treasury notes, Fannie Mae paper and other so-called FX reserves in the conduct of their currency pegging operation, they perforce expanded their domestic banking and credit system by an equivalent amount of RMB.

At length, the suzerains of Beijing turned China into a credit-fueled house of cards. In the short time of two decades, they morphed a debt-free, quasi-subsistence federation of communes, collectives and state factories into a $28 trillion mountain of IOUs that funded the greatest spree of economically mindless land grabs, construction spending, economic gambling and state corruption in recorded history.

In other words, China is a tottering freak of economic nature. But never mind the deformed foundation upon which the miracle of red capitalism was erected. The Wall Street brokers nearly without exception view it as just one more big economy that can be continuously inflated by deft central bank intervention and other state actions designed to insure stability and growth.

As Nixon might have said, they are all Keynesians now. The job of central banks everywhere and always is to goose trouble-prone economies with printing press money so that households and business will spend more, the GDP will rise more and the stock bourses will be worth more.

Under this regime, there is no reason why economies should ever falter or stock markets should tumble; the state and its central banking branch can purportedly cure any deviations.

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China is a tottering freak of economic nature. But never mind the deformed foundation upon which the miracle of red capitalism was erected.
china, stocks, pboc, rates
Tuesday, 25 August 2015 09:45 PM
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