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Gold-buying Chinese aunties proven right as China loses control of its bond markets with yields at a nine-year high

-- Posted Tuesday, 26 November 2013 | | Disqus

By Peter Cooper

If Chinese borrowing costs don’t fall soon from nine-year highs it is doubful whether the real economy will be able to take the strain. The economy has already been close to zero growth this year with purchasing manager indices showing almost no change and failing to confirm astonishing GDP figures that simply do not adjust properly for high domestic inflation.

Indeed the higher and higher interest rates paid in the Chinese bond market are a reflection of this inflation. Higher interest rates are a tax on business expansion and constrain growth which has slowed to almost nothing this year whatever the official statistics claim.

Monetary tightening

The spike in yields has come as the government tightens monetary policy in order to try to rein in soaring lending and high inflation rates. The trend has led to increased borrowing costs in the wider economy and made it more difficult for business and government to tap the bond markets.

Chinese government-bond yields have continued to ease after hitting a nine-year high last Wednesday, when the rate on 10-year bonds reached 4.72 per cent and stood at 4.66 per cent today. A slow unravelling of Chinese debt markets is one of the most feared events among emerging market analysts.

China carries a huge debt burden in off balance sheet and shadow banking vehicles and so every percentage point rise in yields carries the risk of sending the market over the edge into a major downturn.

A financial crisis in the world’s second largest economy has been expected for a couple of years by the hedge fund billionaire Jim Chanos who has been on a losing wicket in shorting Chinese-related stocks. It could be his timing that was out, not his market prognosis.

Real estate bubble

The overbuilding in Chinese cities and high apartment prices are a massive bubble waiting to burst in the opinion of Mr. Chanos. In recent statements he said the situation now is far worse than anything he reported two or three years ago.

ArabianMoney has also long been on the record as expecting the next financial market implosion to start in the East this time. Japan’s Abenomic money printing is deeply destablizing and an additional catalyst waiting to reek havoc.

Chinese bond market yields are a canary in the Eastern coalmine. Watch those gold-buying Chinese aunties smile as paper money goes up in smoke!

-- Posted Tuesday, 26 November 2013 | Digg This Article | Source:

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