Opinion | Cash crunch lifts lid on squabble between state and banks
After Li Keqiang's initial tough stance on injecting liquidity, the central bank eventually consented but not without opening some raw wounds
Never have we seen a more eye-opening public fight between the leadership and vested interest groups than the cash crunch in the past two weeks.
There was a dated ultimatum for liquidity injection leaked to foreign press. When the People's Bank of China said no, rumours of major bank defaults and the failure of ATMs followed (see table).
Now the central bank has provided the emergency funds. Has the towel been thrown in? Far from it.
First, the central bank is only the fists and kicks. In the past week, there has been two State Council Standing Committee meetings in support of the central bank. The fighter is Premier Li Keqiang.
Li refused to boost the economy with more money. On more than three occasions, he called for a better use of existing liquidity. He wants to squeeze the liquidity out from the interbank market, and carry trade and other speculative activities into the real economy.
Second, the message has been sent home. Banks have taken liquidity for granted for years. Every spring, banks loan out 99.9 per cent or more of their target. Every June, the interbank rate climbs while bankers scramble for savings to satisfy mid-year regulatory checks. Every time, the central bank chips in. Not anymore.