Risk of imminent liquidity crisis seen as minimal
Beijing is ready to inject cash into the money market as Fed may end stimulus, economists say
With the Mid-Autumn Festival and National Day holidays approaching, along with a possible tapering of quantitative easing by the United States, concerns that another cash squeeze could hit the mainland's money market this month are gathering steam.
The crux of the credit crunch seen at the end of June remains unsolved - many banks finance their loan-book expansion by heavy short-term borrowing in the interbank market - but economists say the central government has the will and the way to avoid a crisis this time.
At the end of June, interest rates hit record highs in the mainland's interbank market when demand for cash surged during the Chung Yeung Festival and foreign-exchange inflows fell abruptly, depressing money supply.
Banks that usually match short-term liabilities with long-term assets, which limits their ability to repay interbank debts, fretted about mounting default risk. The credit crunch did not ease until the central bank injected cash through major lenders to boost liquidity in the world's second-largest economy.
"Such a liquidity squeeze will come again and each time it will become more and more intense," said Xu Weihong, a researcher at Southwest Securities in Chongqing.
When the central government deleveraged the economy, the whole financial sector was affected, Xu said in the latest issue of Tianjin-based New Champions magazine, and problems in local government financing vehicles, a hotbed for bad loans, would be transmitted from shadow banking to the banking system.
"And the liquidity problem will be exacerbated by the US' gradual exit from quantitative easing," he said.