Big Trouble Potentially Brewing In China

PBoC suspends domestic cash transfers, liquidity issues again?

According to Gordon G. Chang, Contributor at Forbes: "The specific reason given—“system maintenance” at the central bank—is preposterous. It is not credible that during the highest usage period in the year—the weeklong Lunar New Year holiday beginning January 31—the central bank would schedule an upgrade and shut down cash transfers."

Speculation continues to point towards Chinese money market running low of cash ahead of the Luna New Year holiday period. While demand for cash is on the rise around this time, proper planning should definitely prevent such iliquid episodes from occurring unless the problem goes deeper.

As Chang notes: "Today’s “system maintenance” notice is a sign of a fundamental problem. Banks, in short, need cash to rollover ever-increasing amounts of nonperforming loans and wealth management products. This month, cash needs are even higher than normal because of the impending default of the Credit Equals Gold wealth product scheduled for January 31."

Chang draws the following conclusions: "Banks are evidently scrambling for cash. They have, in the past, resorted to desperate maneuvers at the ends of calendar quarters to meet regulatory requirements. The current crunch is even more alarming because it cannot be occurring for quarter-end reasons. Something is very wrong in China at the moment. Banks’ apparent need to conserve cash, coming just weeks after the last incident, looks ominous.

HSBC Asks Customers To Provide Reasons Why They Want To Withdraw Cash

As a responsible bank we must track all financial transactions. Cash presents more risk, and in particular financial crime risk, than other payment methods. It also leaves customers with very little protection if things go wrong. Therefore, we need to monitor particularly closely movements of cash in and out of the banking system. This is why we ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account.

Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for. However, it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We apologise to any customer who has been given incorrect information and inconvenienced. 

My view:

There seems to be an unusual coincidence between HSBCs rules regarding large cash withdrawals and ongoing liquidity problems in Chinese banks.

Anecdotal evidence, including a incident I experienced last March at a Canadian bank, suggests that cash reserves are rather thin in several institutions.

Fractional reserve banking systems are vulnerable to bank runs as the Cyprus experience taught us.

That leaves us in an investing predicament.

Where to go when risk increases.

The last few days suggest precious metals, gold miners and bonds are the safe havens.

Even the mighty US dollar is seeing little flight to safety interest.

While the charts suggest miners are overbought, no reversal signal has shown itself.

The next few days and weeks should clarify whether the risks are growing or contained.

Watch the stock market and gold for clues.