When Will the Chinese Learn?

Apparently, someone forgot to pass along the message to the Chinese that the most important part of government bond auctions is making sure they can't fail. Bond auctions should function more like Storage wars, where there is always a buyer, than what happened in China. Here's the story ft.com/intl/cms/s/0/2b18fac0-d4c5-11e2-b4d7-00144feab7de.html#axzz2WBcfuavC"> out of China this morning .

The finance ministry sold only Rmb9.5bn ($1.5bn) of the Rmb15bn in government debt on offer, the first time in nearly two years that Beijing has fallen short of its target bond sale. The failure stemmed from a jump in money market rates that has occurred because the central bank has refused to pump liquidity into the economy despite signs of stress in the banking system.

Long story short, rates have spiked and markets have tightened up over the past few months without the central bank injecting short term liquidity into the market. Also, look at that 7 day repo... almost 7%! Juxtapose that against ours at all but zero. Anyway:

After a surge in credit issuance at the start of the year, officials have taken steps to tamp down on financing flows. Their concerns have focused on the overall accumulation of debt in China as well as the lightly regulated “shadow banking” institutions that have provided many of the loans.

Look, I'm not pointing this out to scream imminent tanking of markets and immense liquidity issues on the horizon. I'm looking at this as a sign that the Chinese are very cognizant of avoiding what the United States has ended up becoming over the past few decades. They are willing to hold back their economy with less liquidity and higher interest rates rather than literally opening up the fire hose and hoping something good happens. The other thing that I wouldn't be too surprised to see in the near future would be a greater opening of financial markets to outside participants so that these things don't happen going forward.