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China bond yields down from 3-year high after PBoC cash injection
China: Shadow Bank Inflows Are Critical To Sustain The Ponzi... But They're Falling
The WSJ explains that the reduction in flows into the shadow banks has led to redemptions and something had to be sold quickly...
But with less funds coming into banks now, less can go out. That has led to trouble for the nonbanks, which, after years of only ever-higher inflows, have started facing redemptions.
Banks’ claims on nonbanks have dropped 2% since peaking in June, according to Wind Info, equivalent to a $90 billion withdrawal of funds.
In addition to these redemptions, the cost for nonbanks of juicing returns on their investments by leveraging up has also risen because of the higher interest rates mentioned above.
That brings us to the bond market. Faced with redemptions, nonbanks have needed to sell something, and quickly. Offloading highly liquid government bonds has proven the easiest option.
Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.
China’s shadow banks are, in part, engaged in Ponzi schemes, for example in the $4 trillion Wealth Management Products (WMP) sector. In May 2017, Forsea Insurance, one of China’s largest insurers, warned that there would be “mass defaults and social unrest” if it was prevented from selling new WMPs to meet payouts. See “Chinese Insurer Warns Of ‘Mass Defaults, Social Unrest’ Due To ‘Mass Redemption’ Run”.
A month earlier, Minsheng Bank, China’s largest private bank, was found to have committed a RMB 3.0bn fraud by selling non-existent WMPs. See “Investors Rage After 3 Billion Yuan Vanish From China's Largest Private Bank”.
The sell-off in Chinese government bonds implies that the deleverage in shadow banking we identified in September in beginning to bite.
We are in the last lap of the Chinese Ponzi as, piece by piece, the whole decrepit system is being exposed. In the end, it will boil down to how many trillions of RMB the PBoC needs to print to make the banks and their shadow banking relatives whole.
China: Shadow Bank Inflows Are Critical To Sustain The Ponzi... But They're Falling
The WSJ explains that the reduction in flows into the shadow banks has led to redemptions and something had to be sold quickly...
But with less funds coming into banks now, less can go out. That has led to trouble for the nonbanks, which, after years of only ever-higher inflows, have started facing redemptions.
Banks’ claims on nonbanks have dropped 2% since peaking in June, according to Wind Info, equivalent to a $90 billion withdrawal of funds.
In addition to these redemptions, the cost for nonbanks of juicing returns on their investments by leveraging up has also risen because of the higher interest rates mentioned above.
That brings us to the bond market. Faced with redemptions, nonbanks have needed to sell something, and quickly. Offloading highly liquid government bonds has proven the easiest option.
Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.
China’s shadow banks are, in part, engaged in Ponzi schemes, for example in the $4 trillion Wealth Management Products (WMP) sector. In May 2017, Forsea Insurance, one of China’s largest insurers, warned that there would be “mass defaults and social unrest” if it was prevented from selling new WMPs to meet payouts. See “Chinese Insurer Warns Of ‘Mass Defaults, Social Unrest’ Due To ‘Mass Redemption’ Run”.
A month earlier, Minsheng Bank, China’s largest private bank, was found to have committed a RMB 3.0bn fraud by selling non-existent WMPs. See “Investors Rage After 3 Billion Yuan Vanish From China's Largest Private Bank”.
The sell-off in Chinese government bonds implies that the deleverage in shadow banking we identified in September in beginning to bite.
We are in the last lap of the Chinese Ponzi as, piece by piece, the whole decrepit system is being exposed. In the end, it will boil down to how many trillions of RMB the PBoC needs to print to make the banks and their shadow banking relatives whole.
