Globally synchronized growth has taken a beating so far in 2018. As a narrative, one factor after another has turned against it. Europe was booming and was even going to be in a leadership position for the global economy. Now? Not so much. The dollar would continue to fall just as it did in the years before Bear Stearns, a return to something like normalcy. Again, that’s been rudely interrupted.

More than those was China. The Chinese economy after suffering the “unexpected” setback of 2014-16 was roaring back to life. It would deliver marginal growth the rest of the worldwide system needed to get back on track finally. Last year, many people were so convinced of it they even saw the PBOC pursuing a “tightening” interest rate policy. China’s economy was in danger of being too good.

What, then, might they say about Chinese money rates today?

Rates in China have collapsed over the past few days. There can be no doubt as to a shift in perception if not policy. Rather than higher rates, the Chinese central bank has been fighting against them for a long time (“dollars” on the asset side of the central bank balance sheet). Going back to October, they’ve become only more aggressive through time.

With CNY falling hard anyway, why hold back any longer?

The Chinese economy is in trouble and officials know it. How do we know they know? We’ve seen this thing before. More than that, it’s when it last occurred that we should take note. The similarities are beyond remarkable.

The history and pattern are practically identical. In narrative form, it is a carbon copy. In 2014, global growth was supposedly picking up just as it was presumed last year. The PBOC was also in 2014 thought to be biased by higher interest rates in anticipation of economic acceleration.

Only that wasn’t what was going on. The Chinese were trying to get control of a growing “dollar” problem that just wouldn’t relent. They became more and more desperate until early in 2015, faced with some immediate and serious economic consequences, they threw caution to the wind and brought out the big guns.

In February 2015, they would stop fighting the “dollar” which meant that with the asset side shrinking the money side would necessarily follow. To offset that internal RMB contraction, bank reserves, the PBOC intended for Chinese banks to pick up the slack; the RRR was adjusted downward, twice initially.

It appeared to have worked but only for a couple months until June 2015. SHIBOR rates collapsed, falling farther than they have now. From a high near 3.50%, the big banks flooded the RMB markets with freed up reserves which was supposed to then cushion the Chinese economy from the stiffening eurodollar storm.

Eventually, however, Chinese banks realized the dangers. Instead of freely relending those additional reserves, they began hoarding liquidity just as they had in 2013. The big August 2015 “devaluation” occurs here. Additional RRR cuts later that year did nothing, nor did further reductions to benchmark PBOC policy rates (the “double shots”). The economic and financial course was set for the scale of their downturn, China’s central bank almost helpless along for the ride.

There are those who still believe the Chinese are Economic supergeniuses, their central bank having been given full authority therefore the perfect expression of technocratic competence. What I see instead by their 2015 experience is exasperation punctuated by bouts of panic. I see these things again in 2018.

In truth, 2017 was the same only for a time it appeared to have worked. CNY rose if for reasons most people could only misinterpret (Hong Kong was a Hail Mary). The economy recovered but it didn’t really recover. Like globally synchronized growth, there was nothing behind China’s 2017 rebirth just as there was nothing to it in 2014.

As I wrote all throughout last year, like good Western Economists those practicing in the East were expecting that appearances (see below) would be enough to do the trick. Rational expectations theory is a worldwide plague.

I’d like to claim preternatural powers but it was nothing more than coincidence when I wrote back on January 26, the Friday just prior to the first global liquidation which seems to have turned the whole thing upside down, that:

In other words, when EUR started to rise as more “dollars” flowed out from the continent (and not just to China via Hong Kong) they did so under “reflation” expectations. China in particular was at the end of 2016/beginning of 2017 thought to be accelerating as the key basis for “globally synchronized growth.” What if that doesn’t happen? Will European banks, though back in dollars but reluctantly so, keep on supplying through Hong Kong? How might they respond if Hong Kong starts to get a little dicey (HKD) itself?


We are, in essence, asking the very same questions that eurodollar participants have been asking about other factors at various points (2008, 2011, 2014) over the last decade. The answer to all those questions have so far been uniformly negative. Is this time different? Does the Hong Kong bypass, lovely and elegant as it has been, provide a lasting solution where all those others haven’t?

No, it appears, this isn’t turning out any different. History will never repeat but boy does it rhyme sometimes. The reason is always the same, and simple, as I wrote seven months ago. “At some point the boom has to boom, risks have to have a plausible payoff for it all to continue.”

With SHIBOR now falling like it did in 2015, what are the chances of that?