[Ahovking]

Hard landing guys are looking like geniuses right now.

China is having a liquidity issue. A country that prints trillions of yuan and has four or five major government banks running the country’s lending portfolio — one would think — should shave a lock on financial woes creeping up on the country.

China is entering a crisis mode all its own. And while some in the market think it means a hard landing, even more still believe Beijing can handle it. Investors will be caught in this tug of war. So far, the bears are winning.

Popular traded China funds, like the iShares FTSE China (FXI) exchange traded fund is likely heading to the high 20s if concerns over the No. 2 economy continue, and solutions to the liquidity problem there are deemed unsatisfactory by the market.

On June 17, the Central Bank of China (PBoC) issued a guidance note to commercial banks asking them to strengthen their liquidity management processes. The PBoC put the guidance note on its website Monday morning.

This is yet another sign that the PBoC is not willing to loosen policies or inject liquidity to bring down interest rates. The guidance note stated that “overall bank liquidity conditions are at a reasonable level” and asked banks to “prudently manage liquidity risks that have
resulted from rapid credit expansion”, “appropriately contain the pace of loans and bill financing” and “utilize the stock of money and credit to support the economy”. In short, the banks in China — for now — are on their own.

Some will say China is playing coy. If China says the temperature is just 98 degrees and no one has a fever, China skeptics figure the fever is 103 and investors should be ordering body bags.

Nomura Securities economist in Hong Kong, Zhiwei Zhang, said again Monday that these statements by the Central Bank suggest that their monetary policy stance remains tight. Interest rates will not be coming down anytime soon. The decision to put this note on its website suggests the PBoC wants to reiterate that policy stance, Zhang said. He maintains the view of a 30% probability that China’s GDP growth will fall below 7% in the second half of this year.

China is going through its own set of growing pains. It is trying somewhat desperately to shift from a low-cost manufacturing/export economy to a more value added consumer driven one. Its overspending on full employment, infrastructure build-out and manufacturing seems to have come home to roost. And this rooster has the bird flu.

Not every international investor thinks this is the death sentence for the China boom story investors have grown to love over the years.

The Chinese authorities have the power anytime they want to inject liquidity into the interbank market to end the recent stress. They may choose to do so if the stresses increase further. However, so far they have opted not to intervene. This may be because the stress in the Chinese financial market — in particular the insider baseball reverse repo market — is really part of the authorities’ effort to reduce regulatory arbitrage by smaller and medium sized banks in the interbank market.

“This is a prudent measure by the Central Bank,” says Jan Dehn, an economist with Ashmore Group, a large emerging market investment firm in the U.K.

He sees it as a form of “tough love” from PBoC and part of the broader shift away from credit-fueled and export-led growth of old China towards a more sustainable domestic demand led growth. China’s heyday if 8%-plus GDP is gone.

Still, that might not be a bad thing if China cleans up its act. Some still trust it to do so.

“We are strongly encouraged by what we continue to see in China,” said Dehn. “We see no systemic risk.”
http://www.forbes.com/sites/kenrapoza/2 ... isis-mode/

What is china's fate?

I personally do see this as “tough love” to try and help shift away from credit-fueled and export-led growth of old China towards a more sustainable domestic demand led growth, after all the Chinese authorities have the power anytime they want to inject liquidity into the interbank market to end the recent stress but to date they have chosen not to.

People should remember too that China is unlikely to see a financial crisis (if it happens) like the one the United States experienced in 2008, because China has much more control over its banking system.

But again i could be wrong.

[Sithsaber]

A bigger problem would be their ghost cities and institutionalized corruption. Maybe they could revert to utter state capitalism painted with thte veneer of "maoism considering how the masses blame all of their problems on local officials and call for greater state influence.

[Ahovking]

A bigger problem would be their ghost cities and institutionalized corruption. Maybe they could revert to utter state capitalism painted with thte veneer of "maoism considering how the masses blame all of their problems on local officials and call for greater state influence.

corruption rates in china while high when compared to westen states (developed nations) china has a very low corruption when compared to other developing state like india for example.

Also the amount of Chinese migrating from the countryside to the city is massive and even though there are hundreds of these ghost cities, they are slowly but steadily filling up these ghost cities.

And also i would like to add the current blame is on the government and the banks (government is blaming itself and its banks) and have already taken steps to soften the coming crisis.