Chinese banks face new credit squeeze

People's Bank of China pumps funds into system as interbank interest rates surge, raising fears of the crunch seen in June

PUBLISHED : Wednesday, 25 September, 2013, 12:00am
UPDATED : Wednesday, 25 September, 2013, 4:04am

The great squeeze is back as interbank interest rates begin to rise again on the mainland, forcing the authorities to inject cash into the system.

The overnight Shanghai interbank offered rate (Shibor) surged to 3.81 per cent on Monday from less than 3 per cent at the beginning of this month, while the one-month borrowing cost jumped to about 6 per cent from 4.5 per cent, raising fears of another credit crunch.

The People's Bank of China yesterday injected 88 billion yuan (HK$111 billion) into the banking system through six-day reverse bond repurchase agreements.

That tamed the Shibor overnight rate somewhat, bringing it down by 20 basis points to 3.61 per cent yesterday. But the one-month rate continued to rise, closing up 10.5 basis points from a day earlier at 6.1 per cent.

In June, a liquidity crisis hit the interbank market, with the overnight borrowing cost soaring to a record high of about 14 per cent.

The sky-high borrowing costs in June underscored the brewing capital crunch in the mainland's financial system amid mounting worries about bad debts and shadow banking.

It was estimated at the time that some financial institutions would collapse because of defaults. The decline in interbank rates in the following two months did not necessarily mean the liquidity crisis had eased, bankers said, adding the fundamental problem remained unresolved.

During the June squeeze, the central bank injected cash through major lenders. In July, it pumped 17 billion yuan into the money market through reverse bond repurchase agreements, the first time in nearly six months.

"Obviously, any effort to boost liquidity by the central government would only be a short-term pill and the cash crunch is expected to hit again," said Dong Jun, a Shanghai-based hedge fund manager. "The question is just how severe the problem will turn out to be this time."

Traders on the interbank market predict Beijing's tolerance level is 7 per cent, meaning the central bank would crank up its intervention tools if the overnight Shibor crossed this level. Overnight borrowing costs normally hover at 3 per cent.

Premier Li Keqiang is understood to have taken a tough stance in curbing lending sprees by banks and restricting wealth management products that constitute the backbone of the mainland's shadow banking system.

In June, the cabinet turned a deaf ear to banks' pleas to open the money taps, sending a stern message that the government would not relent on more stringent banking norms.

Bank of America Merrill Lynch said the leadership could not afford another liquidity crisis ahead of the plenary session of the Communist Party's Central Committee in November.

The ripple effects of the cash squeeze in June had spread to the stock market and the real economy, causing a crisis of confidence. The leadership would not want a rerun of that now. The central bank could reduce the reserve requirement ratios or issue more reverse bond repurchase agreements to inject fresh cash into the banking system.