China, central banking, loops and deja vu

Zero Hedge goes through a great financial analysis of the Chinese banking.

Last last week, Deutsche Bank analysts led by Hans Fan released what is the definitive research report summarizing all the latest troubling trends facing China, which judging by capital markets, nobody is paying any attention to. They should, because as Deutsche Bank puts it, if taken too far, they threaten an "uncontrollable liquidity event", i.e., the financial cataclysm that Kyle Bass and other perma-china-bears have been waiting for.

But the author did a constricted flow analysis, both the two color visible,then he derived allthe circular flows resulting from three color liquidity extension by the PBOC.  Circular flows are the extend and pretend credit extensions banks get from PBOC rule and rate changes. Essentially credit risk gets extended out to longer terms and their pricing runs through a loop. Default risk is evaluated by trading the government injected liquidity, each participating banks adds its cost. But it eventually returns to the liability side of the bailed banks, and the loop get prices, the loop degenerate back to a two color and the stress returns. The PBOC then has to make a longer term expend and pretend. Eventually the term risk is too great for the banking system. to manage.

The solution is to skip three way trades, automate the pit bossm and give it no property rights.  The economy works the same, bankers still domthe same job, we just use entry and exit to price default risk rather than running around in loops.