China’s dash for cash
China’s economy has embarked on a dash for cash: equity fund raising has increased, inventories are being liquidated and import shipments are decreasing as companies attempt to conserve their supplies of FOREX. The private sector is also aggressively borrowing liquidity from the PBoC. China’s private sector appears to be actively raising cash to reduce the country’s debt burden, particularly its now significant foreign liabilities stock. This ‘dash for cash’ has resulted in interbank rates remaining elevated despite the PBoC’s apparent generosity within the money markets. We suspect the PBoC isn’t being more generous due to fears of China’s already record-breaking level of capital outflows pressurising the exchange rate. If the FX rate falls quickly, it would significantly damage those Chinese entitles that have perhaps as much as $3 trillion in foreign debts. Once the debt burden reduces, the PBoC will then allow the RMB to join the global currency depreciation cycle. The apparent ending to China’s domestic credit boom and its raising cash attempt resulted in rising China’s national savings rate which proves to be highly deflationary for the global economy. In fact, the world’s second largest economy may be on the cusp of a debt deflation cycle that will continue to have global ramifications and which the PBoC only has limited means to alleviate despite its massive FOREX reserves.