On Tuesday, the Communist Party of China’s central bank carried out 950 billion yuan of medium-term lending facilities (MLF, commonly known in the market as “spicy powder”) operations and 10 billion yuan of 7-day reverse repo operations, not only far exceeding the December maturity of 600 billion yuan, but also a single record high. For the massive release of water by the CCP, some professional analysts pointed out that the growth rate of China’s broad money has risen rapidly from the original 8% to more than 10% since March 2020, and judging from historical experience and logic, China’s inflation will come immediately in the next 3-6 months.
China’s central bank renewed the “spicy powder” in excess of the tight supply of funds
The Central Bank of the Communist Party of China (CBC) announced on December 15 that it conducted a 950 billion yuan medium-term lending facility (MLF, commonly known as “spicy powder” in the market) operation with a winning rate of 2.95%, and a 7-day reverse repo operation with a winning rate of 2.2%, which is the fifth consecutive month of net injection using MLF tools.
According to the data disclosed by the CPC central bank in the past, a total of 600 billion yuan of MLF expired in December 2020, the renewal was foretold as early as the end of November, but the scale of operation was as high as 950 billion yuan, another record high single-day operation, exceeding market expectations.
According to the usual practice, the CPC central bank will carry out medium-term lending facility operations on the 15th of each month. Public data show that the 950 billion yuan MLF is the largest operation since 2020.
Bloomberg reported on Dec. 15 that the recent successive debt defaults by Chinese companies have squeezed loans in China’s interbank market, and the injection of liquidity into the financial system has become more urgent. Tight financial markets have pushed up money market interest rates, leading to higher borrowing costs. The negative effect of rising borrowing costs spilled over to government bonds, causing them to lose money for the eighth consecutive month, making it the longest streak of losses in 13 years.
In addition, banks also needed to come up with 2.4 trillion yuan to repay short-term interbank debt and buy newly issued government bonds in December, as China’s commercial banks need to withhold cash for regulatory scrutiny and demand for cash typically increases at year-end.
“Banks are still under considerable funding pressure,” said Ming Ming, head of fixed-income research at Citic Securities Co.
This comes after the Communist Party’s central bank had surprisingly added 200 million yuan via MLF in November, but prices of government bonds continued to retreat in December, with yields on China’s 10-year government bonds still near their highest levels since May 2019, indicating that investor interest in Communist Party government bonds is waning.
Analysis: Massive Discharge of China Inflation Coming Soon
According to the National Bureau of Statistics, China’s consumer price index (CPI) grew at a negative rate year-over-year in November and the producer price index (PPI) has also remained negative over the past year, Chinese asset allocation researcher “Lu Caiwei” wrote on Dec. 15. This means that after 11 years, China is officially in deflation according to official statistics.
However, with iron ore and copper prices skyrocketing and food prices rising sharply since 2020, the statistics bureau is telling us that China is in deflation, says Lu.
Lu Zaizhao quoted Nobel laureate Friedman as saying, “Inflation is always a monetary phenomenon at any time, at any time.”
According to Friedman’s research on monetary expansion and inflation, in the U.S., inflation generally occurs 12-24 months after a monetary increase.
And according to Lu Caiwei’s personal study of the relationship between broad and narrow RMB money and inflation in China over the period 1979-2009, inflation in China, generally appears 6-12 months after monetary expansion.
The reason why there is such a difference in time between China and the United States, according to the analysis of Lu Zaimao, is that the value of the currency in the United States has been stable for a long time, so the general public in the United States, does not feel so deeply about the monetary expansion, and the money-price relationship, which is transmitted more slowly in the chain of the entire socio-economic system, takes a longer time. China’s CPI, on the other hand, is a bit more closely related to the narrow money M1, which generally reacts 6 months after the change in the growth rate of M1, and slightly lags behind with the broad money M2, but at the latest, it generally does not exceed 12 months. This means that inflation may be late, but definitely not absent, as long as monetary expansion accelerates.
In terms of the growth rates of China’s narrow money M1 and broad money M2, the Chinese economy as a whole has entered a deleveraging time since 2017, and since then both China’s M1 and M2 growth rates have fallen rapidly, with the growth rate of narrow money M1, from the original 15-25%, all the way down to close to zero, and the growth rate of broad money, from the original 10-13%, all the way down to about 8%.
However, since February 2020, China’s narrow money M1 growth rate has picked up again, rebounding from 0 to over 5% and rising all the way to 10% in November. Correspondingly, the growth rate of broad money has also risen rapidly from 8% to over 10% since March and has remained largely at that level since then.
Despite the rapid increase in the growth rate of China’s narrow and broad money, from March to November, eight months have passed, and China’s CPI data not only did not rise, but even fell. Some people say that this is the “second brother” ability is very big, with a pig power, in the past year, pull up China’s CPI data, and in November, suppress China’s CPI data.
In this regard, Lu Zaizhao questioned: can a pig change China’s 45 trillion yuan of currency increase in the past three years? Can change the past 10 months 15 trillion yuan of currency issuance? Can change the momentum of narrow money growth from 0 to 10% rebound? Can change the strength of the broad money growth rebound from a 40-year low?
Lu Zaizhao said that the pigs do not have that kind of ability, do not believe in what deflation. Judging from historical experience and logic, within the next 3-6 months, China’s inflation will come, and now China is on the eve of inflation.