Big Trouble Lurking In China

China Cash Squeeze Seen Creating Vietnam-Size Credit Hole

China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey.

June credit data due as soon as this week will give investors clues to how much the cash squeeze, which sent interbank borrowing costs soaring to records last month, is affecting the world’s second-biggest economy. In the latest sign of financial strains in China, state media have reported that the northern city of Ordos has resorted to borrowing from companies to pay municipal workers.

“The liquidity crunch has increased downside risks,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who estimates it will reduce aggregate credit by 1.8 trillion yuan this year. “As long as policy makers cushion the impact through fiscal and exchange-rate measures, the damage to the economy could be quite modest.”

My view:

The damage to China's economy through a liquidity crunch could prove devastating to the property bubble if the central bank does not intervene or intervenes too slowly.

What is interesting in the article is the acknowledgement by state media that Ordos, the nearly empty newly built city, does have financial problems.

One wonders if the Chinese government may gradually become more transparent with their statistics?

If they eventually propose to float the yuan, transparency will be necessary.  Perhaps this is also a reason they are buying so much physical gold to back a contender to the US dollar?

Nevertheless, China has large structural issues to overcome, thanks in part to low domestic demand for its own goods, before it can prove to the world that it has a stable enough economy to be a candidate for a major world currency.