China’s Catastrophic Deleveraging Has Begun!

• China’s Catastrophic Deleveraging Has Begun! 
  by Dee Woo, Beijing Royal School , http://www.businessinsider.com/
  1. The frustrated and aggressive central bank
  If one wants to know how bad the health of China’s economy has gone,  look no further than the PBOC’s composure, which seems rather frustrated and  aggressive as of late. On 5th July, the central bank cut benchmark interest  rates for the 2nd time in less than a month. This happened right after the fact  that in December 2011, PBOC cut the reserve requirement ratio(RRR) by a 50 bp to  21%, it followed up with another 50 bp in February and another 50 bp in May to  20% currently.
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  On top of all the rate cuts, PBOC also made its biggest injection of funds  into the money market in nearly six months. The PBOC injected a net 225 billion  yuan ($34.5 billion) through the reverse-repurchase operations(repo) on last  Tuesday and Friday, following a combined injection of 291 billion yuan in the  previous four weeks.
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  2. The systematic short-circuit of debt financing’s in  order
  So why PBOC is in such an urge to open the floodgate of liquidity? This  economist will spare you the boredom of looking at the diagrams of China’s  economic misery: HSBCPMI, etc, since you can  find those eye candies everywhere else on the web. Let me cut to the chase:  However high it aims, PBOC’s action in practice merely work as the band aid to  the bleeding economy. But it won’t be able to fix it. The central bank’s  aggressive pro-liquidity maneuvers at best serve to sustain the over-leveraged  economy and avoid the systematic short-circuit of debt financing. Now allow me  to divulge:
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  The main drivers of China’s debt financing, China’s state-owned banks, are  starving for cash. According to Citigroup  estimates, in 2011 seven of the biggest Chinese banks raised 323.8 billion  renminbi ($51.4 billion) of new fund. Several financial firms are expected to  raise another $17.7 billion in the next few months, with China’s fifth-biggest  lender, the Bank of Communications, accounting for $9 billion. The unprecedented  lending binge encouraged by the central government,increasingly rigorous  requirement of regulatory capital and excruciating maintenance of excessive  dividend payouts have rendered the most-profitable banks in the world–Chinese  banks–in a rather precarious position.
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  GaveKal’s data will illustrate this  is no exaggeration: In 2010, China’s five biggest banks — the Big Four plus the  Bank of Communications — paid more than 144 billion yuan in dividends while  raising more than 199 billion yuan on the capital markets. The ballooning  balance sheet caused by the loan frenzy and strict capital requirement make  China’s banks’ cash-craving burning at both ends:this march, China’s big four— Industrial and Commercial Bank of China, the Bank of China, China Construction  Bank and Agricultural Bank of China — have a combined 14 percent increase in  total assets, to 51.3 trillion yuan, which is roughly the size of the German,  French and British economies combined.
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  Meanwhile, under a new set of rules, the country’s biggest banks will need to  increase their capital levels to 11.5 percent of assets by the end of 2013.Their  core Tier 1 capital ratio will need to be at least 9.5 percent. These  requirements are more stringent than the rules that apply to American and  European banks. Hereby, we shouldn’t be surprised why the world’s most  profitable banks are in the dire need of cash. It has to be PBOC who comes to  the rescue.
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