ML-Implode News - Liquidity evaporates in China as 'fiscal cliff' nears

A budget squeeze is already emerging as the property slump drags on. Zhiwei Zhang says land revenues fell 21pc in the fourth quarter of last year. "The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown," he said.
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New regulations came into force in January that prohibit local governments from raising money off-books. If enforced fully, this will tighten fiscal policy by 5.5pc of GDP this year, roughly five times the dose in austerity in the UK each year since the Lehman crisis. That is the sort of fiscal contraction imposed on Greece.
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China cannot easily crank up monetary stimulus to cushion the fiscal shock because the "efficiency" of credit has collapsed. The economy is saturated. Extra growth generated by each extra yuan of loans has dropped from a ratio of 0.8 to 0.2 since 2008.
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Global markets greeted the recent cuts in lending rates and the Reserve Requirement Ratio (RRR) as evidence that China is turning on the spigot once again. This is a misunderstanding. The RRR cut adds no net stimulus. It offsets monetary tightening that occurs automatically as the central bank dips into the country's â‚¬3.8 trillion foreign reserves to shore up the currency.
China is no longer buying US Treasuries and global bonds. It has become a net seller, stepping in to offset accelerating outflows of capital. The capital deficit reached a record $91bn in the fourth quarter.
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Asia is "tapering" at a pace of $25bn a month. You could argue that this neutralises half the quantitative easing soon to come from the European Central Bank.... A country in China's predicament normally needs a devaluation, yet China has fixed the yuan - through a "dirty float" - to a soaring US dollar. The yuan has risen 60pc against the Japanese yen and 90pc against Brazil's real since mid-2012.

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Liquidity evaporates in China as 'fiscal cliff' nears