Something is amiss here. China is risking a recession
unless the PBoC can bring this under control. Both the repo and
the SHIBOR rates have risen to new highs in the past few days.
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Source: Reuters |
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1-week SHIBOR |
Some have suggested that the PBoC is in fact trying to
tighten liquidity in the financial system in order to put
the brakes on the rapidly growing shadow banking sector.
While an admirable goal, creating a liquidity squeeze in the
banking system and sending short term rates to multi-year
highs is NOT the way to achieve that. This is especially
scary in the face of an already "moderating" economic
growth.
Reuters: - China's short-term funding costs surged on
Wednesday, with the benchmark money market rate hitting a
multi-year high, and authorities postponed the market's
close by 30 minutes to give banks extra time to complete
their borrowing.
The money market squeeze that began early this month has
worsened this week, forcing banks and other financial
institutions to trim non-essential businesses, such as
wealth management and arbitrage, traders said.
That response may be welcomed by the central bank, which has
adopted a hawkish stance towards market liquidity since May,
partly to clamp down on an increase in risky shadow banking
activities, traders said.
...
The interbank market decided to extend the trading time to 5
pm as many banks failed to obtain enough short-term money
needed for business at the normal closing time of 4:30 pm,
traders said.
Such trading extensions have occurred several times recently
amid the acute squeeze, traders said. "Everybody is
disappointed at the central bank's non-action," said a
dealer at an Asian bank in Shanghai.
It's not clear if people fully appreciate the potential impact
of this liquidity squeeze - including folks at the PBoC. This is
not a game. These tight conditions and high rates over a longer
period can easily derail lending activities across the country
while potentially putting a number of financial institutions at
risk and sending the economy into a tailspin. With the Eurozone
still struggling in the aftermath of the crisis, let's see what
a recession in China (12% of world's GDP) can do for global
growth. Mr. Bernanke and company may need to go back to the
drawing board very soon.
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