• Fri
  • Dec 19, 2014
  • Updated: 11:38am
BusinessBanking & Finance

Rates soar as PBOC squeezes lenders

PUBLISHED : Friday, 20 December, 2013, 2:58am
UPDATED : Friday, 20 December, 2013, 2:58am

Mainland short-term money rates posted alarming surges for a second day yesterday after the central bank refused to inject money into the market to alleviate the crunch, raising fears that regulators are engineering another cash squeeze similar to the one that rocked global markets in June.

Most traders suspected the People's Bank of China was sending a message targeting specific players in the murky world of shadow banking.

"This is a complete mess," said a trader at a major state-owned bank in Beijing, pointing to the PBOC's decision to hold off from injecting funds for a fifth consecutive session as the reason for the surge. "Market sentiment is not good."

As traders scrambled to cover, the PBOC decided to extend trading by 30 minutes to give more time for settlement.

The PBOC also announced on its microblog that it had injected funds into the market through short-term liquidity operations, without specifying the amount or the date - an apparent attempt to assure the market that it was making liquidity available in order to cope with end-of-year tax flows.

"If necessary, the bank will continue to provide liquidity support using [such operations] in accordance with the fiscal situation, depending on the condition of financial institutions," it said.

One-year interest rate swaps based on the benchmark seven-day repo rate, which typically reflect liquidity conditions, closed at 4.97 per cent, a record high.

The average price for the seven-day repo itself closed at 7.0852 per cent, the highest since June 26, with individual quotes going as high as 9.8 per cent, compared with an opening quote of 4.85 per cent.


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This article is now closed to comments

You can also read Gordon Brown's latest article in the New York Times.
He says that 'corporate debt in China is now equal to the country’s annual income.'
My guess is that, at present, China's genuine total (regional) debt / GDP ratio is quite high (relative to other countries). Hence the prevailing cash squeeze.
Of course, this won’t be formally disclosed by the Chinese authority. When things get (real) serious, you have to lie --- this is management 101.
Perhaps municipal bonds (guaranteed by part of China’s US$ reserves or other central government's revenues) can be issued by the local governments, to rollover and extend the maturities of the present debts, to buy time for further economic reforms.
Money is credit. Everything is based on confidence.
It’s not the US QEs per se, but the restoration of confidence in the whole financial system, that has saved the US and the world from experiencing Great Depression II.
Hong Kong's prevailing linked exchange rate system also depends on the confidence of Hong Kong people.
If nothing goes seriously wrong, those secured US$ reserves or government revenues should be safe.
(Debt-for-share programs may also be considered.)


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