China Joins the Negative Yield Debt Club
It’s economic madness but China Borrows at Negative Rates for the First Time.
Superlow interest rates in Europe helped China to sell its first negative-yielding debt, as it raised about $4.7 billion in a three-part deal in euros.
The debt sale drew robust demand, aided by China’s rapid return to economic growth after tackling the coronavirus and the relative scarcity of Chinese bonds denominated in the common currency.
The deal was worth €4 billion, the equivalent of $4.74 billion, and split between 5-, 10- and 15-year bonds. The 5-year bonds were priced late Wednesday to yield minus 0.152%, while the 10- and 15-year securities were sold with positive yields of 0.318% and 0.664%, respectively.
Logical World Impossibility
In the logical world this is impossible.
It implies a negative time preference in which one would rather have 90 cents a year from now than a dollar today.
On the greater fools theory, investors bet that central banks will continue to drive down yields and they will get even more negative.
Others find China attractive because the rate in China is less negative than euro-denominated rates in the EU.
Interest Rate Trap
Central banks that pursue this madness find themselves in a trap they do not know how to get out of.
Spotlight Japan
Neither low interest rates, nor QE, nor wasted fiscal stimulus promote growth over the long haul.
Japan tried all three for decades. The results speak for themselves, recession after recession.
Hello Fed, Low Interest Rates Do Not Promote Growth
I discussed this recently in Hello Fed, Low Interest Rates Do Not Promote Growth.
Zombification
Instead of promoting growth, artificially low interest rates promote zombification.
Unproductive companies are artificially kept alive at the expense of more productive companies.
- December 16, 2017: Zombie Corporations: 10% of Companies Depend on Cheap Fed Money
- July 19, 2019: Zombification Perfected: Negative Yield Junk Bonds Take Hold in Europe
- November 18, 2019: China, like Japan in the 1990s, Will Be Dominated by Huge Zombie Banks
What Will the Fed Do?
The Fed understands the negative rate trap and it can see the problems facing the ECB and BOJ.
But the Fed may try something even worse. One possibility is direct printing, making the Fed’s liabilities legal tender or a medium of exchange.
Bond Bull Lacy Hunt Warns of a Huge Monetary Risk
I commented on the legal tender possibility twice. Both are worth a review.
- Aug 18, 2020: Bond Bull Lacy Hunt Warns of a Huge Monetary Risk
- October 22, 2020: Two Inflationary Tail Risks For US Investors
Mish
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This isn’t economics, it’s Left-ism and Mish should welcome it since he thinks so little of Trump and thinks Biden’s Globalism is the answer.
Anyone who thinks Biden who almost exactly = Trump who is almost exactly = Obama is going to stop the Fed from it’s SPV’s is delusional and not paying attention to the point they would say Bernie Sander or Jeremy Clyboyn is Socialist or that Venezuela has problems because socialism.
In other words, 100% anti reality.
who would feel comfortable owning a Chinese digital currency?
The Chinese. Nobody else matters.
And they will have absolutely no choice but to use it.
But it’s an easy sell because it will be very convenient to use for payments. It will adapt seamlessly with their current digital payment app (which is already widely used), and make tracking expenditures a snap…just like Google Pay.
But it will make the PRC’s ability to exercise financial repression over ordinary citizens fairly complete, which is a highly desirable thing for Xi and the oligarchs.
So…..China has this real debt problem too. The typical charts that compare China’s national debt with those of western countries are completely misleading….because it doesn’t include a lot of debt….local debt, pension obligations, debt in the extensive shadow banking system, and other hidden debt.
The reported national debt is about 5.5 Trillion (dollars)…but the actual debt is said to be maybe 3.25X the reported number.
Here’s a nice short synopsis.
China is going to be the first country to issue a sovereign cryptocurrency….and they are likely to be the first one to outlaw cash, too.
Theoretically negative interest rate will blew away the debt as inflation rate is higher than interest. But Japan said it didn’t work.
How many of us now feel like strangers on this planet?
What guarantees were you handed at birth?
The only guarantee we have is that we won’t get out of this alive.
History tells us that the world is full of surprises–many of them unpleaant.
“The only guarantee we have is that we won’t get out of this alive.”
You forgot taxes. -:)
No this is not impossible in the logical work. We regularly make intertemporal choices regarding expenditure/consumption. Whether it is an agrarian civilization farmer storing grain or a worker saving for retirement.
If you consider currency (physical or not) as something with zero risk and zero storage costs then yes this provides a lower bound for the interest rate. But the reality is that there is a risk and a storage cost.
There are a whole host of problems with Europe and much of the world’s monetarily policy that has lead us here. But from an economic perspective, negative interest rates are not illogical.
Sorry I didn’t mean to reply to ‘casual observer’. The quote I used was Mish’s.
Once you’ve taken the risk and paid for storage there’s also inflationary erosion of value. If inflation take hold lets see what happens in the bond market, it will be epic.
With the current policies I don’t expect there to be inflation. I won’t go into the arguments except to say look at Japan who has been doing this much longer than Europe and the US.
Of course if governments genuinely do start creating base money out of thin air then we could get inflation. Even a moderate amount would crater bonds.
Yes but by buying a negative yielding bond you’re hoping that the issuer will repay you in that same currency that has the risk and storage cost you mention. So you’ve just increased that risk by adding a middle man for which you’re paying for the privilege. The only logic to doing this is that someone else will pay you more for taking the same risk before maturity.
It is illogical period.
Negative time preference cannot happen in the absence of central bank manipulation.
We are talking about negative interest rates NOT storage costs, a different subject.
What are China doing with the Euros or have they swapped them into dollars I wonder.
America should just cut of US dollar supply to China, and China economy will collapse immediately.
Without billions of US dollars trade surplus, China cannot print trilions of Yuan yearly to subsidise all the R&D to make better high technology to compete against America high technology corporations.
Also China printing trillions of Yuan every year to build the biggest infrastructure in the world. ALL PAID BY AMERICAN CONSUMERS.
American consumers are stupidly helping China to buy the best technology and scientists from around the world, to destroy American empire. This OXYMORON behavior of American Congress is mind boggling.
America high technology should get the high technology supply chain from Taiwan and Thailand and all their problems solved. Taiwan should allow import of cheap labor from China and North Korea to reduce smartphone production cost.
America can survive without China trade. America partner and loyal allies such as Japan, South Korea, Taiwan, Thailand, Phillipines should be leveraged to contain China now.
But globalist elite from UK is helping China to be the next super power. Why ? You have to ask and hand it to Kissinger and Chatham House.
Anybody who know the secret discussion going on in Chatham House will have a clue what is going on in global geopolitics play.
PUTIN THE GREAT EQUALIZER
From
http://www.zerohedge.com
Mnuchin to End Key Fed Emergency Programs, Limiting Biden
Probably a smart thing. They can come up with a better plan to distribute the next stimulus. I know some businesses needed it but I know several who did not but took the loans.