Streetwise Professor

July 18, 2015

Nothing Says Panic Quite Like Three TARPs

Filed under: China,Economics,Energy,Politics,Regulation — The Professor @ 3:41 pm

The invaluable Christopher Balding has been tracking closely the massive financial support the Chinese government has been injecting into the banking system, the shadow banking system, local governments, and the stock market. In a blog post earlier this week, he estimated that this support totaled at least $692 billion, rising to $933 billion if the Reserve Ratio cut is counted as a subsidy to the banking system.

These funds went to the local government bond program I wrote about in June, an  investment in pension funds, PBOC 6 month loans to banks, and PBOC loans to the Chinese Securities Financing Corporation, which in turn will lend these funds to buy stock on margin.

But it’s hard to keep up! Christopher kindly shared with me his most recent calculation, which shows that the Chinese government keeps pumping in the money, most notably an additional $200 billion in loans to intermediaries who will use these funds for margin lending, and a rumored (but not yet confirmed) $160 billion in additional support for provincial municipal bonds. This brings the total to $1.3 trillion.

In RMB, that totals over 8 trillion (with a “t”, boys and girls). To Sinofy Evertt Dirksen: A trillion here and a trillion there, and pretty soon you are talking real money.

Another metric: $1.3 trillion is approximately three TARPs. Maybe we should start using that as a new unit of measurement, as in, “Chinese authorities intervened in the market and banking system today, providing an additional .5 TARPs in state funding.”

Yet another metric: $1.3 trillion is almost exactly $1000 per Chinese citizen. TARP was about $1500 per American. But China’s per capita GDP is (depending on whether you use exchange rates or PPP) about 1/5th or 1/7th of US GDP per capita. Thus, a low middle income country is spending roughly 3 to 5 times more per person as a percentage of per capita income than the high income US did. (Given that Chinese GDP is likely overstated-another issue that Christopher has analyzed in detail-the true multiples are even higher.)

Such massive spending-arguably the most gargantuan stimulus package ever-is not the sign of a confident leadership. It is a clear sign of panic.

Remember the extreme panic in DC and Wall Street in the post-Lehman period that culminated with TARP? Even in that hysterical environment, people questioned the need for and advisability of TARP. But in the end panic won out. That is the only reason TARP passed: people were scared stiff at what would happen if it didn’t.

Now think of how panicked the Chinese must be to implement measures that dwarf TARP. That’s what economists call revealed preference. Or, in this instance, revealed panic.

This gives the lie to official statistics, which showed a (patently unbelievable even absent this massive stimulus) .1 percentage point decline in the growth rate. Also giving the lie to the official statistics is the collapse in China-driven commodity prices, notably iron ore and coal, and oil as well. The slowdown in commodity economies further discredits the official Chinese data.

The Chinese stock market is getting most of the attention. This is the drunk-looking-under-the-streetlamp-for-his-keys phenomenon. The stock market is visible, and people can relate to it: this is why the government is using massive carrots (notably the support for margin lending) and even bigger sticks to try to arrest the decline. This would suppress the most visible manifestation of crisis. But the real dangers are lurking out of sight, in the leveraged sector (most notably the rats’ nest of non-bank lenders, but the banks are concealing a lot too), SOEs, and a real economy whose performance is masked by dodgy official statistics.

I’ve long referred to China as the Michael Jackson Economy, kept going by intense dosages of economic/financial drugs, cosmetic surgeries, and stimulants. The Chinese authorities are now administering the biggest dosages ever. This is an indication that the patient is doing quite badly. Further, although such actions may delay the inevitable, they make the end all the more horrific.

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  1. SWP:

    When will they start to sell their gold?

    VVP wants to know.


    Comment by Vlad — July 19, 2015 @ 7:41 am

  2. So how is it that some people characterize China as “Russia’s loan shark”?

    And how the heck does Russia’ “pivot East” have a chance of amounting to anything?

    It’s like the old Abbott and Costello routine about the guy who lends you $5 ends up owing you $20.

    Comment by elmer — July 19, 2015 @ 10:58 am

  3. @elmer-China has fooled a lot of people, and Russian desperation blinds them to China’s fragility.

    I have always been a “pivot East” skeptic, and would be even if China’s economy was going swimmingly. The Chinese are only willing to deal with Russia as a supplicant, and are more than happy with exploiting Russia’s lack of alternatives. China bargains hard on energy in particular, and what else does Russia have to offer it?

    So, if China is economically strong, it will exploit that strength and Russia’s weakness: if China lurches to economic crisis, it will be in no position to provide any succor to Russia.

    I have said that China has three possible fates: (1) “soft landing” transition from resource intensive, fixed capital driven growth to a more consumer oriented economy; (2) hard landing crash; or (3) perpetuating the existing resource intensive, fixed capital driven growth model through continued credit creation. In my view (3) is not sustainable: it just defers and worsens the choice between (1) and (2). All of these scenarios are bad for natural resource producers, Russia most prominent among them because it has virtually nothing else.

    I don’t know whether Russia and Putin are deluding themselves about these realities, or are putting on a bold front to avoid giving any hint to the West that sanctions are indeed hurting them.

    The ProfessorComment by The Professor — July 19, 2015 @ 11:52 am

  4. […] As to what is happening in China the Streetwise Professor (otherwise, Craig Pirrong, something on an expert in these matters), as I’ve already pointed out, is less than ecstatic about the prospects: […]

    Pingback by China's Commodities Crash Will Not Make Australia The Next Greece - — July 20, 2015 @ 9:20 am

  5. Thanks, SWP

    And, boy, did I ever blow the Abbott and Costello routine – it’s about you lending $5 to a guy and you end up owing him $20.

    Here’s a guy who thinks the Saudis are in the whole mix with investment of anywhere from $10 to up to $100 billion in Russia.

    The article is quite confusing, but there it is:

    Comment by elmer — July 20, 2015 @ 9:28 am

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