Last orders at the liquidity bar?

Furthermore, we would fully attribute the recent gravity-defying – and bad news-defying – behaviour of financial markets to these strong liquidity trends. In fact, we would go so far as to suggest that global financial market liquidity conditions have been as lax as at any time since the mid-2000s over recent months.

Some of the recent growth in global liquidity can be attributed to China’s still immense capital outflows. These have clearly made their presence felt in many of the world’s asset markets, such as the property markets of the US Bay Area, London, Sydney or Auckland, collectible watches, aging footballers, and of course the various cryptocurrencies. Indeed, we calculate that last year Chinese credit growth was in excess of US$3.5 trillion and we estimate that, at least prior to the recent introduction of more stringent capital controls, roughly a third of the funds that were being directly created by this credit boom were finding their way abroad. Moreover, at the same time we must note that domestic demand in China was rising in response to the (over) easy monetary conditions and this in turn resulted in a $150 billion increase in China’s demand for imports. This was not an insignificant amount even within the context of the global economy and it certainly provided a lift to the revenues of many of the world’s exporters.

Consequently, China was providing a great deal of ‘liquidity’ to the rest of the world via its capital account leakages in foreign property and financial markets and at the same time its revival in import demand was the primary catalyst for the global reflation story that so occupied the financial markets as 2016 drew to a close. However, we must now recognize that China is now in the midst of a credit crunch the like of which we have not witnessed since the GFC and which bears comparison to the UK in 1989 (ahead of the ERM Debacle) or Japan in 1991 (ahead of the ‘lost decades’).

China: Bank Lending to Private Sector