Mainland China squeeze is bad news for Hong Kong banking system
A surge in loan demand from mainland companies may be on its way - and that could pose increasing risks for the city's financial institutions
The Federal Reserve-induced rout in international financial markets yesterday largely obscured another indicator of mounting stress; one that could pose a major risk to Hong Kong's financial system.
On the mainland, a tightening liquidity squeeze pushed interbank interest rates up to unprecedented highs. At one point the closely followed overnight repo rate surged to 25 per cent, up from 3 per cent just a few weeks ago.
At the same time the three-month interbank rate, which has more implications for borrowing costs in the real economy, climbed to 6 per cent, from less than 4 per cent two weeks ago.
A clutch of factors have contributed to this sudden squeeze. As has become clear, China's economy is slowing, and hot money has begun to flow out of the financial system, reducing the available liquidity. Meanwhile, window dressing ahead of the end of the quarter next week has triggered a scramble for funds.
But above all, interbank rates have shot up because the central bank has refrained from injecting cash into the system to relieve the gathering squeeze.