Well-informed Beijing sources confirm China interbank market is basically frozen, rates are quoted but no transactions taking place.

— Patrick Chovanec (@prchovanec) June 20, 2013

The question is one of political will. Which means you need a Beijingologist, not an economist.

- Jake

Friends come and go. Enemies accumulate.

Export! To whom? If aliens wish to make contact now would be a propitious moment.

"It is not necessary to have hope in order to persevere."

In May 2012 the Kauffman Foundation released a study on actual market performance of Venture Capital Funds.  The report, We Have Met the Enemy ... And He is Us, "a comprehensive analysis of the Kauffman Foundation's more than 20 years of experience investing in nearly 100 VC funds."  The finding isn't pretty:  

... the Limited Partner investment model is broken.

and Kauffman would have done better to invest their money in the Russell 2000 index of small-cap stocks.

Several reasons for this, the most important one is the General Partners (GP) of the fund are in the business of raising money and collecting management fees.  How well a GP manages the investments isn't in the picture.  

Which is weird but there it is.

I doubt the average Chinese wealth manager is any better than their American counterpart.  Lemming-like behavior is a well known property of the US investment markets thus I am confident it's a property of the PRC's investment markets too.  Some proof lies in the reports China has entire cities with houses, apartments, stores, etc. 100% purchased, as an "investment," and ~100% unpopulated.

This diary also provides a bit of evidence for something I've been thinking for some time: the world is awash in cash, most of it deployed and/or locked into economically useless fol-de-rol.  

If so, cannot one start to seriously question, and examine, the Pop idea:

cash = wealth

?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

The fundamental reason why money is tight is that Beijing is now starting to let the economy adjust.  Then Premier Wen Jiabao did not allow adjustments when the global downturn hit China in 2008.  His successor, the newly installed Li Keqiang, is starting this critical task.  "Their choice is not whether to tighten or not, but when to tighten," says Zhang Zhiwei of Nomura.  "The earlier they act, the lower the cost.  If they waited longer, there would be more bad loans to deal with."

The oft-quoted Zhang makes it sound as if China is starting early.  The new premier, to his credit, is starting in the first days of his tenure as premier, but Beijing should have begun tightening long before he was formally installed in March.

The primary constraint Premier Li faces is China's massive debt.  Total credit looks like it reached an incredible 198% of GDP by the end of last year.  By 2015, that number will hit 245%, according to Francis Cheung of leading brokerage CLSA Securities.  Fitch Ratings has just sounded an extraordinary warning on China's credit creation.

Li Keqiang has few options, and none of them are good.  True, he can avoid a day of reckoning by just continuing the lax monetary policy.  That course, however, aggravates the underlying debt problem by keeping money cheap and thereby permitting even more bad investment decisions.  China has long passed the point of diminishing returns when it comes to debt.  In 2007, Wen Jiabao created 83 cents of gross domestic product for every dollar of credit he authorized.  Today, Premier Li gets just 17 cents of output for every dollar.

The popular explanation for the rise in Chinese repo rates is being linked to the government's desire to rein in the shadow banking sector. That is to say the tightness is intentional.

But what if it isn't. What if it has more to do with the unwind of yet another carry trade?

Deutsche Bank's Bilal Hafeez made a strong case for this interpretation last week. We think it's worth revisiting the argument.

There are three main factors that need to be considered, he argued:

1. Adjusted for volatility China now offers the highest FX carry in the world. This, he says, has led to a surge in flows into the CNY (and CNH) by both onshore and offshore entities over the last few years.
2. The performance of the carry was reaching breaking point last week.
3. Any combination of higher US yields, regulatory clampdown or higher FX volatility or CNY appreciation could trigger an unwind.

And as he warned, the demise of the carry trade would then remove an important channel of cheap funding for the Chinese economy.

Yao says the answer to where the money is going is a growing "debt snowball" which doesn't contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

This fits with the theory first put forward by economist Hyman Minsky of Washington University in St. Louis. His financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.

Using methodology from the Bank for International Settlements, Yao estimated a debt burden of non-financial companies and local government financing vehicles of about 150 percent of GDP at the end of 2012. Assuming an average interest rate of 6.3 percent, Yao estimates a "shockingly high" debt service ratio of 338.6 percent of GDP.

Similar ratios were evident in countries as they neared financial and economic crises, including the U.S. and the U.K. in 2009, South Korea in 1997 and Finland in the early 1990s.

"The logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing in a Minsky framework," said Yao. "This is one more data point in China that evokes the troubling thought of a hard landing."

Izabella Kaminska: An unwind in the great Chinese over invoicing carry trade

and

Yanis Varoufakis

"The future is already here -- it's just not very evenly distributed" William Gibson

For many years, critics of China who identify with this mythical phoenix like creature called `the markets' have been telling China that it needs to do something about its debt problem. Eventually Beijing, says `Oh, OK' and deliberately stages - not allows to happen, but deliberately stages - a Lehman event across its banking system. This was not a response to a crisis: the PBOC could have pumped more money into the system this time just as it had done before. It's an act of will.

And `the markets' promptly crap themselves, though I don't know if this is actually serious or that `granny just saw a flasher' response that you seem to get a lot of. Actually, what the folk on the trading desks have been exposed to is something that people in China have known for a long time: this is how China solves its problems, with brutal and ruthless fixes. Ok, we have a problem. We also have absolute power. HULK SMASH. Think of this as being in the tradition of the One Child Policy.

This approach is sometimes characterised as Maoism, but it's really Dengism; the adaptation of all the tools in the Leninist box away from ideological mobilization and towards real world problems. Who cares whether the cat is black or white so long as it's a fucking huge apex predator?

At the moment, the most likely end game of all of this is more realisation of misdirected investments that have resulted from the vast wave of credit growth over the past few years (which has in turn taken the place of export growth as China's primary key of growth).

Recognising the misallocation -- or being forced to recognise it -- would in turn imply a steeper growth slowdown. Just look at how the sub-8 per cent growth has shaken global confidence. Nomura are now putting a 30 per cent chance of sub-7 per cent growth in H2.

Here's another thought. Stevenson-Yang, who closely watches the amazingly rapid innovations in China's shadow finance world, sees a risk that China's feted huge foreign capital reserves could dry up.

That would be a shock.