China Is Literally On The Brink of An Unprecedented Systemic Collapse

PBoC refused to inject liquidity into the market

Short-term interbank lending rates surged 200 basis points to an all-time high of almost 8% on Wednesday after the PBoC refused to inject liquidity into the market. “The only explanation is that the central bank wants to send a warning signal to commercial banks and other credit issuers that unchecked credit expansion, particularly through the shadow banking system, will not be accommodated,” says CNC Asset Management’s Na Liu.

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While all eyes and ears will conveniently and expectedly be on the Fed announcement and press conference in a few hours, the real action continues to take place in China, where the liquidity crunch is becoming unbearable for the local banks (and will only get worse the longer Bernanke and Kuroda keep their hot money policies). The CNY benchmark money-market one-week repo rate was 138bp higher overnight to a 2 year
high of 8.15%. The 7 day Interest-Rate swap rose for a record 13th day in a row jumping +10 bps to 4.08%, the highest since September 2011. China sold 10 Year bonds at a 3.50% yield, above the 3.47% expected, and at a bid to cover of 1.43 which was the lowest since August 2012. Moody’s commented that local government financing
vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs
accounted for 14% of loan portfolios at end-2012 according to Moody’s.

Cash Squeeze in China, Interest Rate Swaps Rise Most in 22 Months; China’s Credit Bubble About to Pop; Shadow Banking Crackdown

Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale.

 China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction. 

“The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.” 

“The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”

Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.

Capital Flight

The statement by Chen Qi “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows” is interesting.

Qi’s statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens.




Fitch says China credit bubble unprecedented in modern world history

China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.


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LIBOR itself is quiet, which suggests that this problem is particular to China, at least for now.  The only LIBOR stories breaking are charges against bank traders for manipulating that interbank rate.

Here’s what’s behind the Chinese cash crunch
By Matt Phillips

“Remember Libor? When that once obscure measure of short-term interest rates shot higher in 2007 and 2008, it was one of the earliest warnings signs of what would eventually become the financial crisis. Now, its Chinese cousin—known as Shibor—is telegraphing the rising stress in the opaque financial system of the world’s second largest economy.

Awaiting China PMI: Things Could Get Even Worse

Activity in China’s vast manufacturing sector may have decelerated further in June, the flash estimate of the HSBC China purchasing manager’s index (PMI) is expected to show, exacerbating worries about a downturn in the world’s second largest economy.

The closely-watched flash PMI survey due on Thursday could fall to as low as 48.7, according to estimates by Credit Agricole and Nomura, worse than the final reading of 49.2 in May when the index moved into contractionary territory in seven months.

China Policy Bank Cuts Bond Sale Goal by 31% Amid Crunch

Agricultural Development Bank of China Co. scaled back the size of two bond offerings tomorrow by 31 percent as the worst cash crunch in at least seven years curbs demand for the securities.

The Beijing-based policy bank said it will sell up to 8 billion yuan ($1.3 billion) of three-year notes, down from 13 billion yuan previously, according to a statement on ChinaBond, the nation’s biggest debt clearing house today. An issue of five-year debt was reduced to 10 billion yuan from 13 billion yuan. The lender has options for each tenor that would allow the original issuance targets to be met, the statement said.

The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 6.03 percent in June, the most since the National Interbank Funding Center began compiling a weighted average in 2006. China’s Finance Ministry sold 9.53 billion yuan of 273-day bills on June 14, less than its 15 billion yuan target, and Agricultural Development Bank of China on June 6 raised 11.51 billion yuan in a sale of six-month bills, compared with its 20 billion yuan goal.

Steve Wang, Chief China Economist at Reorient Financial Markets says China’s banking system is undergoing transformation and he’s not too worried about the recent spike in interbank rates.



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