HSBC Turns into China Stimulus Junkie

By David Stockman, Budget Director under President Reagan and author of the bestseller, The Great Deformation: The Corruption of Capitalism in America. This article originally appeared on David Stockman’s Contra Corner.

China’s Services PMI for August veered upwards, but that’s not the news. Noting that China’s massive but fracturing bubble in unused luxury apartments (upwards of 70 million are empty) is a serious headwind, analysts for HSBC were quick to plead for more stimulus:

The economy still faces downside risks to growth in the second half of the year from the property sector slowdown. We think policy makers should use further easing measures to help support the recovery.”

Stunning. Even the comrades in Beijing know that China’s credit tsunami has unleashed a dangerous speculative mania throughout the land that has no parallel in human history. Total credit outstanding (which Beijing’s red capitalists are pleased to call “social financing”) has exploded from $1 trillion at the turn of the century to $25 trillion today.

There is nothing in the financial world more dangerous than easy credit. But when it multiples by 25X in just 14 years in an economy where there is essentially zero market discipline (because all debts are bailed-out and rolled-over when push comes to shove), you are dealing with a monumental catastrophe in the making. So China’s leaders now hop from one foot to the other, endeavoring to slow down the credit monster one week, while taking steps to goose the macro economy the next.

Beijing’s schizophrenia is at least understandable. If it allows the bubble to splatter, the historical anomaly of a collectivist one-party regime presiding over a wild-west casino would surely suffer a brutal demise at the hands of hundreds of millions of busted gamblers. So it continues to temporize and equivocate, hoping that China’s monstrously inflating bubble will keep on……well, inflating.

But why would presumably financially literate analysts at one of the world’s premier banks egg them on? Why do they not, instead, warn investors to get out of harm’s way while its still possible?

The baleful reality is that the entire global financial system has been corrupted by two decades of central-bank-fueled credit inflation. At the end of the day, financial players and advisors survive by plying trades which work, at least for the time being. And credit inflation does work during its expansionary phase—funding a robust “bid” for rising financial assets and booming real investments in housing, industry and infrastructure, alike. So the inhabitants of the financial system learn to buy on the dips and pound their pans for more (credit) stimulus whenever short-term dislocations threaten.

The financial market stimulus chorus is now universal—virtually identical from Hong Kong to London to New York, despite ostensibly deep differences in policy regimes. At the end of the day, however, there is not really a dime’s worth of difference between the Bush/Obama/Bernanke model and the economic model employed by the politburo overlords in Beijing. It’s all about insensible, contagious, addictive credit expansion, and the phony wealth and temporary prosperity which it breeds.

The tragedy is that when the global bubble finally reaches its breaking point, there will be no warning from the financial market gambling pits by the inside players who ought to know better. They have become trained seals who have no remaining vocabulary except to bark mindlessly for “moar” stimulus.

The zoo at HSBC is proof of the case. Its inhabitants sit up close and personal long side of China’s monumental house of cards, and can not even see it. So the “ort, ort, ort” of their stimulus barking reverberates around the world and through the canyons of Wall Street.

Call Goldman Sachs. They will tell you that China’s red capitalism is the great white hope of global growth and endlessly rising stock prices. All it takes is just another shot of “stimulus.” By David Stockman. This article originally appeared on David Stockman’s Contra Corner.

The four largest banks in China, state-owned all of them, are showing officially tolerated signs of increasing stress. Culprit? Struggling companies in manufacturing, wholesale, and retail, and those involved in the now curdling property market. Read…. The Sky Is Falling on Chinese Corporations

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  7 comments for “HSBC Turns into China Stimulus Junkie

  1. HD
    Sep 4, 2014 at 9:23 am

    Stockman’s been very active lately. Good, I like his contributions and the man doesn’t exactly have a shady background. Good credentials are an asset to cherish in the world of alternative financial blogs.

    And it is unbelievable indeed. Going from 1 trillion to 25 trillion in 14 years is quite a feat, even if I should imagine not all of this debt is so toxic. Elsewhere I’ve read that total debt on this globe grew with 40 % since 2008. What a way to fight a global credit problem, right? The world keeps stacking cases full of dynamite in its economic warehouse and still no fuse has caught fire by accident. But when it does, and I for one believe it will, the ensuing explosion will be a spectacle to behold.

    I am ready on a personal level for what is to come. And then again no, because if those around me aren’t ready, preparing yourself for the financial upheaval that is sure to come – we live in just in time-economies, remember? – doesn’t mean squat. You just become a target. So I’m not very hopeful at this point.

  2. Gil Obrero
    Sep 5, 2014 at 4:09 am

    There is a silver lining to all this, and I dropped on to it accidentally when in Guangzhou several months ago.
    I knew that China had surreptitiously allowed its citizens to move cash offshore through its banks in Guangzhou, but after meeting with a friend who has some deep insight into what is happening in China we came up with a plan to capitalize on this.
    Although HSBC has dropped money transfers for Chinese clients, the reality is that the Chinese government will turn a blind eye to any form or means that allows wealthy Chinese to move as much cash off shore as possible if that cash can be turned into foreign held assets.

    Thus draining some of the liquidity in China and especially so if those assets are solid income producing assets.

    The trick was to come up with a vehicle we could use that could enable that and now we have a three way consortium of companies based in China the UK and the Philippines that is enabling our activity’s to proceed without the UK govt even being aware of it, as the operational side is offshore, or the Chinese government who can be easily persuaded to turn a completely blind eye.
    I suspect many more will catch on soon enough and the wealthy in China will soon be turning those poisonous bonds they hold into western assets, first to pay the losses and then to shift inflationary pressure out of China.
    And no one can accuse the Chinese banks of breaking their own laws.

    • Sep 5, 2014 at 1:25 pm

      Gil, I just posted your (very interesting!!) comment on the front page, right column, so that more readers have a chance to see it.


  3. tom kauser
    Sep 5, 2014 at 7:08 am

    Long before Lehman was taken down or CRAMERS famous buy on Bear Stern there was a housing glut. This glut was massive and required at least two bailouts BEFORE the GSE’s were taken IN! I believe that the Central government in China will follow this example and have already started to kick the can? I believe there to be many such examples of can kicking and the collapse will continue to broil for several more years! The new normal in international finance revolves around UST? IF YOU HAVE UST YOU STILL GET ANOTHER CHANCE TO BORROW AND FIX YOUR WATERLINE?

  4. Sep 5, 2014 at 3:27 pm

    David Stockman is a crank who should not be allowed to publish anything more complex than a limerick.

    “The baleful reality is that the entire global financial system has been corrupted by two decades of central-bank-fueled credit inflation.”

    The baleful reality is we all like free lunches, and the finance system is ready and willing to lend us the money to gain them. Finance has been providing loans — inflation — for centuries.

    Finance is ready and willing until the accumulated debts become unsupportable, until there is little left in the way of capital to burn up for nothing.

    The central banks have nothing to do with our situation, we have all brought ruin to ourselves due to our own stupidity, our eagerness to deceive ourselves. Finance bubbles require nothing but the willingness of private sector institutions to lend to themselves with inadequate – nonexistent collateral.

    Now comes reality: thermodynamic laws insist that free lunches are impossible, that they are illusions founded upon consumptive waste of non-renewable capital. Now comes the bitter times, when capital is gone it’s gone forever.

    • Robert
      Sep 6, 2014 at 4:30 pm

      “The central banks have nothing to do with our situation, we have all brought ruin to ourselves due to our own stupidity, our eagerness to deceive ourselves.”

      The central bankers are like the bully who, grabbing a child’s hand and slapping him with it, says “Why do you keep hitting yourself?”, because technically, the citizens have elected the governments which continually run up the debt. But the fact is that without central bankers, (who originally appeared on the scene to enable massive war spending that even a Bismarck was loath to directly tax the citizens), there could never have occurred such fantastic levels of national debt as now witnessed. It is hard to give enough credit to a leader like Andrew Jackson, who regarded even a matter of millions as a peril to the nation, vowed to leave office with no debt, and even as he was assailed by the Fed predecessor, the BUS, with a depression after refusing to renew their charter, did so, and left Washington to the grateful cheers of thousands of bystanders.

      P.S. Scotland, do likewise and give the Queen her walking papers. And then keep your budgets balanced!

  5. Iain
    Sep 5, 2014 at 7:13 pm

    @Steve. How you can not connect the dots from Central Bank interest rate management to the crazy boom in credit, is the reason we’ve had the boom! They go hand in hand, and made worse by the policy of To Big To Fail. Free market rate setting, while not perfect would eventually pop credit bubbles, and the failure go institutions involved in both lending and borrowing would help ensure that the same mistakes don’t get repeated. You have to stop assuming all the teaching of your econ professors was correct, many of these people are misguided! Don’t believe me? Look around at the mess we are in.

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