Submitted by�Tyler Durden�on 03/07/2016

Back in November 2013, when few had an idea just how massive China's debt bubble truly was, we explained "How In Five Short Years, China Humiliated The World's Central Banks" and said the following:

In order to offset the lack of loan creation by commercial banks, the "Big 4" central banks - Fed, ECB, BOJ and BOE - have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world "Big 4" central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.

How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!

And that is how - in a global centrally-planned regime which is where everyone now is, DM or EM - your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it's really done.

To give a sense of perspective of the numbers involved, we showed the following chart:

To be sure, since November 2013, all those numbers have grown substantially, especially at the ECB and BOJ but nowhere more so than in China, where a little over a year later, a famous study by McKinsey showed that not only has the world not delevered, but that the global "debt creation dynamo" was none other than China...

... whose debt/GDP has since grown to an even more�astronomical 350% (and rising exponentially).

China's - and the entire world's - debt load was very much the highlight of the latest BIS quarterly report (profiled yesterday) in which we learned that the "BIS calls time on world credit binge" and that "China’s Leaders Put the Economy on Bubble Watch" even as these same leaders just raised their budget deficit forecast to its highest ever and previewed an even faster increase in its monetary aggregates or M2, which is now supposed to pick up to 13% per year, or roughly double China's GDP growth rate.�

So yes, China debt�is growing�well over 100% faster than its GDP, a condition which is�precisely the opposite�of Ray Dalio's "beautiful deleveraging", and the outcome is clear to all.

And yes, while two years ago few had a sense of the true proportion of China's debt load, now virtually everyone does, which is why its credit creation will be put under a microscope.

But what does that mean in practical terms?

Simple: recall that it was China's (and the entire EM sector) furious debt issuance spree in 2008 and onward that together with central bank QE, prevented the world from collapsing into an all out depression. But since China's exponential credit growth delayed the inevitable, it also means that any slowdown in China's credit growth (or outright debt destruction if and when the massive debt defaults and NPLs are finally recognized) will put the world right back into the deferred depression.

And here, courtesy of Macquarie's Viktor Shvets, is the best encapsulation of the predicament the world finds itself in. From volume 52 of "What Caught My Eye"

Rising leverage levels (whilst positive initially) eventually turn to “poison”, as incremental benefit diminishes and in order to maintain growth rates, economies require an ever increasing infusion of credit and ever declining cost of capital.

Although not perfect there is a well-defined relationship between the overall level of debt and velocity of money. Each economy is different (both in term of structure and efficiency) and therefore the degree of tolerance to rising debt levels and associated volatility also differs; nevertheless, as a�generalization, the higher debt levels and the faster pace of debt accumulation tends to coincide with lower (and declining) velocity of money.

Then, after showing the declining�velocity of money�in all developed markets as leverage exploded higher, Shvets focuses on China:

The massive rise in China’s financial leverage is in a class of its own. As China embarked on a highly capital intensive growth strategy, its debt levels accelerated, driving velocity of money down. As can be seen below, China’s estimated debt burden has increased from US$1.5 trillion in 2000 to US$5.8 trillion in 2007 and exploded to over US$28 trillion by 2014 (and should have reached US$30-31 trillion in 2015).

The punchline:�China's velocity of money is now the lowest in the entire world, a world in which China provided 40% of the entire credit impulse since 2008!

In the last seven years,�China has accounted for around ~40% of entire global incremental debt creation.�Such a rapid accumulation of debt in less than a decade, when combined with the capital-intensive nature of the economy and a less sophisticated financial sector, drove China’s velocity of money to one of the lowest levels globally (~0.5x, i.e. below that of Japan).

And while we agree with the BIS and all those others who suddenly had an epiphany and confirmed what we have been saying for years about China's debt load, the question remains: just who will propel the global debt-creation growth dynamo if China is taken out of the picture, and if 25% of the world is covered in debt-demand destroying NIRP?

We hope to get some answers just as soon as the massive short squeeze acorss global markets, the biggest in history, is over

Submitted by�Tyler Durden�on 03/07/2016 13:52 -0500

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

China never had an actual economic model or growth model.�It simply printed an obscene amount of money, especially after 2008, and used it to build factories, 30-story see-through apartment blocks and highways into nowhere cities, without giving much if any thought to where this would lead when their formerly rich western customers had less to spend on its ever increasing amount of ever more useless products, or when its workers would stop spending ever more on apartments as investments, or when no more roads and bridges were needed because nowhere was already in plain sight. Or all of the above.�It was ‘to infinity and beyond’ from the start, but that’s a line from a kids’ fantasy story, not a 5-year plan or an economic model.

Going into its 10-day, 3,000 delegates National People’s Congress opening on Friday, China was facing -and very much still is- two major and interconnected problems.�Both are problems that the country has never faced before -not a minor point to make. The first is a giant debt load, one that could easily be as high as $40 trillion, or 350% of GDP, once one includes the shadow banking system (watch the shadows!). The second is the Communist Party’s -economic- credibility.

The debt problem is impossible to solve without very far-reaching restructurings of both the debt itself and of the entire Chinese economy. There appears to be a problem within the problem, however:�the Party neither looks prepared to truly tackle the debt nor does it seem to know how.

As for the credibility issue, the very fact that a 5-year plan will be unveiled is the perfect in-a-nutshell illustration of what’s ailing Beijing.�Not only does it hark back to communist days of old, not exactly a confidence booster, but trying to look 5 years ahead in today’s global economy is in itself not credible. It forces the Party to make statements nobody in their right mind will believe. And to compound the issue, that is something the leadership doesn’t really seem to take seriously. President Xi Jinping, more than anything else,�looks like a man in the tradition of ‘what I say is true because I say so”.

That may have worked for a long time inside the country, but the desire to be part of the global economy means�the ‘because I say so’ attitude is now being questioned by people Xi can neither bully nor bend into submission.�Something he doesn’t seem to have clued into yet. Surrounded as he will be over these ten days by people who’ll say Yes at any appropriate and inappropriate instance, and laugh at anything he says that might be construed as a joke, Xi won’t come out any the wiser. He’d probably be better off spending those days with someone like Kyle Bass, but he’s not doing that.

Everybody, including most NPC delegates, knows that China’s grossly overleveraged, overproducing and overcapacitated economy needs another round of mass layoffs. Some initial numbers relating to job losses have been ‘leaked’ prior to the Congress.�First, it was 1.8 million jobs cut in the coal and steel sectors, and a few days later that became 6 million. But that can only possibly be just a start.

It’s all in the numbers.�China has something in the order of a billion workers, give or take 100 million or so.�Even with the largest mass migration in human history, in which 100s of millions moved from the countryside to the cities, there are still an estimated 300 million people working in agriculture. That’s the entire US population. It’s also 30% of the Chinese workforce. In the US just 2 or 3% work in farming.

But that still leaves 700 million Chinese in other jobs.�Many of these jobs were ‘invented’ in the past 20 years, as China’s ‘miracle growth’ transformed it first into the world’s no. 1 trinket producer, then into a kind of powerhouse that built highways to nowhere cities, and today a powerhouse with a fast plummeting global consumer base.

Many millions of Chinese workers produce things that can’t be sold. This is by no means confined to just coal and steel. The sharply dropping Chinese import and export numbers, as well as the purchasing indices, tell a bleak story. It’s evident that China must re-invent itself. And while that may be exactly what it claims it’s doing, the -alleged- transition to a service- and/or consumer economy may sound good, but its practical success is far from guaranteed.

Transforming a factory worker into a service sector employee is not a matter of flicking a switch. Repeating this 10 million times over, or 20 or 30 million, is a nightmare in an economy that is seeing its growth rates plummet while at the same time needing to deleverage its debt levels.

What are all these people going to do that produces actual economic value?�And what will be the character of the companies they produce this value at? China is still dominated by state-owned enterprises, with workers relying on the faith that Beijing will always make everything right that goes wrong.

Losing that faith may have far-reaching consequences.�At the same time, China cannot get the international economic status it so desperately seeks if so many de facto work for the government.

Though most tend to forget this, China was in a similar situation�not so long ago:

In the late 1990s, China drastically restructured its state-owned enterprises, privatizing some and shutting down others. The result: from 1995 to 2002, over 40 million jobs in the state sector were cut, along with nearly 30 million jobs lost in the manufacturing, mining, and utilities sectors.

Although many of these workers were able to pick up jobs in the newly-growing private sector, the societal and cultural shift entailed in the restricting should not be underestimated. Prior to that wave of reforms, state sector employees (the vast majority of China’s workforce) enjoyed the benefits of an “iron rice bowl,” absolute job security along with social benefits (such as healthcare and pensions) provided by the state.

70 million – unproductive- jobs cut in 7 years. An average 10 million per year. A problem the country ‘solved’ by throwing tens of trillions (in US dollars) into overleveraged overproduction at exports-driven manufacturing enterprises.�And by moving hundreds of millions of people into the cities that housed the enterprises.

15 years later, many of these newly created jobs have in their turn become unproductive.�And the country may have to start the same process all over again. With probably tens of millions more jobs to replace. Question is, how will it fare this time around? Will people accept it as obediently as 15 years ago?

The reforms of the 1990s resulted in massive lay-offs. Overnight, tens of millions of workers lost their “iron rice bowls.” There were people who didn’t want to accept it, even those who actively resisted, but the government ruled with an iron fist and eventually the reforms went through. Even today, some of these people have grown old on the edge of poverty. On a certain level, we sacrificed them in exchange for huge reforms to the economic system.

But before wondering about civil obedience, let’s ask again:�what are all these people going to do that produces actual economic value?�Service economy? Consumer economy? There is no move available this time into another giant and overleveraged export industry. They’re at the end of the -debt- line.

Those people that had some money have lost a lot -and will lose much more- in equities and housing markets.�Moreover, the government’s attempts to make them feel more secure about their old age would take decades to convince the people. So those who have something to save will do just that. So.. what consumer economy?

Service economy? Much of that in China is in financial services. Which has no future.�So what else is there? How about the US model of burger flippers? That looks like a winner…

See, here’s a depiction of Chinese debt:

And here’s�what they plan to do about it:

It looks like�subprime derivatives on steroids: China hopes to bundle together billions of dollars worth of non-performing loans and eventually sell them to global investors Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy -a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system.

According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher. Chinese media has reported that the regulator has granted a total of Rmb50bn for the first wave of products. Demand for the scheme, however, is expected to be significantly more modest than supply. “How many global investors have been interested in the traditional [bad debt in China]?” asked one Hong Kong-based investor with experience buying distressed debt in Asia. “Not many.. is a more complicated version of this going to change that soon? No.”

This’ll be great, as great as the western approach to drowning in debt.�Mind you, the Chinese haven’t even started talking about ‘recovery’ like we have, they’re still thinking -or propagandizing- that they’re on an ever upward trail. Well, they’re not. One of the early notes coming out of the People’s Congress was this: “China Says Will Keep Yuan Basically Stable Against Basket Of Currencies ..”

That’s not happening. They know it, we know it, and Kyle Bass knows it.�Perhaps once the Congress is over, they’ll come clean? Hard to say. What’s certain is that global markets WILL force a substantial re-adjustment of the yuan, and there’s nothing Xi or the entire Communist Party can do to prevent it. And then, after a 30% readjustment, take another look at that dollar-denominated debt!

And they’ll have to cut many millions of jobs,�and try to ‘pacify’ the newly unemployed, and deleverage the insane debt levels they’ve created, and find a way to explain to their people where it all went so wrong.

China no longer lives in a kids’ fantasy Toy Story.

Submitted by�Tyler Durden�on 03/06/2016

The BIS’ Claudio Borio was vindicated in January - and it was a long time coming.

When last we checked in with Claudio, it was December and the bank’s Head of the Monetary and Economic Department was busy explaining what may befall $3.2 trillion in EM USD debt in the persistently strong dollar environment. “The stock of dollar-denominated debt, which has roughly doubled since early 2009 to over $3 trillion, is still there [and] in fact, its value in domestic currency terms has grown in line with the US dollar's appreciation,�weighing on financial conditions and weakening balance sheets,” he warned.

We also laid out the progression of Borio’s most recent warnings as delineated in the banks’ widely-read, if on occasion perfunctory, quarterly reports. Below, is a brief review.

From 2014,�warning about the market’s dependence on central bank omnipotence:

To my mind, these events underline the fragility - dare I say growing fragility? - hidden beneath the markets' buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves.�Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed.

From March of 2015, speaking out about the dangers of increasingly illiquid secondary markets for corporate bonds:

As a result, market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions. And, more broadly, investors may find that liquidating positions proves more difficult than expected, particularly in the context of an adverse shift in market sentiment.

What do the changes in market-making described here mean for markets and policy? There are at least two key issues.�First, reduced market-making supply and increased demand imply upward pressure on trading costs, reduced secondary market liquidity, and potentially higher financing costs in new-issue markets. Second is the question of how markets will behave under stress - that is, whether they will be able to function in an orderly fashion in response shocks or broad changes in market sentiment...

And in September of last year, Borio�delivered the following rather dramatic assessment�of an overleveraged world hooked on central bank stimulus:

Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening.�This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks' every word and deed, in turn complicating the needed policy normalisation. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy's ills.

Right. So pretty much everything Claudio could be worried about, Claudio�was�worried about, and the most amusing thing about his concern over undue central banker influence is that the BIS board looks like this:

Well in any case, Borio is back at it and now he can say "I told you so." In the BIS' latest quarterly report, the bank wastes no time in describing the first two months of the year: "uneasy calm gives way to turbulence."

After noting that January was one of the most abysmal months for stocks in market history, the bank breaks the meltdown into two distinct "phases":

And then came the obligatory nod to dwindling counter-cyclical capacity:

Underlying some of the turbulence was market participants' growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.

But the real punchline comes in the end, when the BIS touches on a topic that we've been discussing since mid-January. Namely that this seems to be the year in which the world woke up�to the fact that central bankers are not, in fact, omnipotent. We went further:�

That rather unpleasant revelation has in turn caused some to reconsider the wisdom of the policies that drove stocks to nosebleed levels off the 2009 lows. That is, if it’s now clear that ZIRP, NIRP, and QE have failed when it comes to stimulating global demand and trade and reinvigorating the inflationary impulse, one is left to wonder what happens when the world careens back into recession against a backdrop of extreme capital misallocation and exhausted counter-cyclical policy maneuverability.

Almost as if the BIS had simply read the quoted excerpt above and paraphrased it for their own report, here is what the central bank for central bankers says:

Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options. Markets pushed out further into the future their expectations of a resumption of gradual normalisation by the Fed. And as the BoJ and ECB signalled their willingness to extend accommodation, markets showed greater concerns about the unintended consequences of negative policy rates. In the background, growth remained disappointing and inflation stubbornly below targets.�Markets had seemingly become uncertain of the backstop that had been supporting asset valuations for years. With other policies not taking up the baton following the financial crisis, the burden on central banks has been steadily growing, making their task increasingly challenging.

We couldn't have said it better ourselves. Except that we did.