TO SEE CHINA’S SLOWDOWN IN REAL-TIME, JUST WATCH THEIR INTEREST RATES
By Walter Kurtz, Sober Look
PBoC, China’s central bank, is having trouble stimulating lending. The trouble now seems to be more demand driven, as the economic slowdown sets in.
Bloomberg: – Combined net lending by Industrial and Commercial Bank of China, China Construction Bank Corp., Bank of China and Agricultural Bank of China Ltd. was almost zero in the two weeks through May 13, Shanghai Securities News reported today, citing an unidentified person familiar with the matter.
The slowdown (particularly the lack of demand for loans) is driving interest rates lower. The one-year SHIBOR swap rate is registering the sharpest decline since 2008. Again, swap rates show the market “consensus” of short term-rates in the future – a rate at which someone is willing to “lock in” short term rates for a year or longer (in this case locking in the 3-month SHIBOR rate for a year).
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| 1-year SHIBOR swap rate |
When we discussed China’s inverted yield curve a couple of months back, many dismissed it as supply/demand aberration. But as has been the case in the US, an inverted curve continues to be the best predictor of economic downturns.
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| SHIBOR swap curve move |
7 Comments
thanks for publishing this, i hadn’t seen it before. inverted yield curve has been my #1 long term U.S. equity sell indicator for a couple decades. it might work differently in china, but i doubt it.
This may be a dumb, but I’m going to ask it anyways: how big a deal it will be to the western world if China has a recession or depression?
I definitely see China’s bubble beginning to pop, that seems pretty clear at this point. But what I don’t see why it will be a big deal for us.
It seems to me China’s downturn would affect Asia fairly strongly, but since our relationship is mostly as a consumer, it doesn’t seem that it would impact us that much. We would still be buying Chinese manufactured goods, if anything they would become cheaper. The same applies to Europe.
If they don’t have as much money, they may stop buying US Treasuries, or even start selling, and that would certainly have an impact on interest rates, but as the Fed wants rates low, wouldn’t they just pick up the slack, at least for a year or two…
I’m fairly ignorant on this subject, so it may be obvious to others, but it’s something I’ve been wondering about for a while now.
U R rite Asia would suffer most; but commodity producers would be hit hard, as would producers of luxury goods think DB, BMW, Maserati, Coach, etc. As well as top RE markets such as Sidney and London. I am sure there is more to add.
yep absolutely. Lets be clear that the “debtor nation” always has the upper hand and a decline in China doesn’t necessarily damage the USA much. USA doesn’t need China to “finance its debt” so don’t worry about them not buying bonds anymore. As we’ve seen, the USA has reduced demand for China exports – that’s much more of a problem to China (as the exporter) than USA as the customer.
I would think slowing of China, in addition to shrinking jobs in Asia, would hurt MNC’s bottom line. Only the middle class in the west was hurt in the 2008- recession. The wealthy in the West as well as wealthy and middle class in Asia are doing quite well. That will change.
Thanks, most useful post
yep absolutely. Lets be clear that the “debtor nation” always has the upper hand and a decline in China doesn’t necessarily damage the USA much. USA doesn’t need China to “finance its debt” so don’t worry about them not buying bonds anymore.
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After WW1, the U.S. wanted the Allies to pay back their debts. The allies went along because the U.S. held military and political power. After WW2 the U.S. was again the creditor nation and was able to call the shots, hence the Bretton Woods agreement. Going off the gold standard in 1971 was caused because the U.S. went from creditor to debtor. We deficit spent on Vietnam, and our returning “dollars” started demanding gold, thus depleting the treasury.
Nixon challenged the Europeans and others to recycle their extra dollars (deficit spend vertical money) on U.S. goods. But, to do so meant the Europeans would loose demand in their own economy. So, this started the T-Bill economy of today, where excess dollars are recycled to the U.S. as debt. In other words, the worlds first economy that issues debt instruments recycle to become new debt instruments.
This is why the “debtor” is over the creditor, because of the unique circumstances of America post Bretton Woods. The unique position of holding a measure of money power, e.g. dollar as reserve, as well as being the worlds military policeman, allow us to be a creditor and everybody else goes along.
Britain had creditor status post ww2 with its pound sterling colonies. However they rolled over when America insisted on the Gold Standard. America had the worlds gold. Britains creditor status didn’t help them.
So, the real answer is that Creditor is usually over the debtor. Only in certain circumstances is the debtor over the creditor. Force and Law are the determinator of the power relationship between creditor and debtor.
For now, China is playing a smart subservient role, where they hollow out our economy and learn our technology. The loss of some small wealth amount today means little in their long term strategic game.