Credit Stress in China

I could escape this feeling
With my China girl
I feel a wreck without my
Little China girl
--David Bowie

Concern is rising about the health of credit markets in China. Recently, a Chinese company was 'permitted' to go bankrupt--apparently to the chagrin of the bond buying crowd who thought the Chinese government would navigate moral hazard for them.

Of greater importance is growing awareness that the Chinese government has been permitting, and perhaps even engaging in, re-hypothecation of assets to facilitate even greater degrees of credit creation.

For example, there is now chatter that a large fraction of Chinese copper imports hase been put up as collateral for credit projects. Copper markets have dropped about 10% in a matter of days.

Why would copper drop? Because once people fear that they don't 'own' the assets on their books--that instead someone has broken the chain of custody and lent those assets to someone else--then they will sell those assets to offload risk seven ways till Sunday.

The re-hypothecation situation helps explain how the PBOC balance sheet has grown orders of magnitude greater than the Fed's--which is saying something considering that the Fed balance sheet assets are now north of $4 trillion.

It also rekindles thought about a 'risk out' scenario--where investors flee securitized assets in general in the midst of a waterfall decline of deleveraging.

position sin copper, SPX