The Mechanism That Holds Chinese Banks Together Is Falling Apart
China’s seven day repo rose to a record high of 10.77% in Shanghai, the highest since March 2003, according to Bloomberg*.
Meanwhile, the one-day rate hit a record 12.85%. And Zerohedge reported that overnight repo hit 25%.
The liquidity squeeze in China first began ahead of the Dragon Boat festival earlier this month. Spikes in interbank rates are common right before holidays.
But Diana Choyleva at Lombard Street Research said this is symptomatic of a bigger problem. She said capital flows had “become a more important driver of domestic liquidity conditions in China’s managed exchange rate system.”
One Detail In China’s Ugly Manufacturing Report Was Almost Unbelievably Bad
Everyone’s a little freaked out about the China’s June Flash manufacturing PMI report, which missed expectations and unexpectedly dropped to a 9-month low of 48.3.
Any number under 50 signals contraction.
China’s Central Bank Inaction Could Have Dire Consequences
It is remarkable that China’s central bank has been unable or unwilling to contain the spike in short-term rates, as the interbank liquidity squeeze continues. This is roughly the equivalent of the Fed not being able to control the fed funds rate. You can certainly have fluctuations, but within a couple of days a major central bank should be able to inject enough liquidity into the system to bring down rates – unless of course the central bank wants the rates higher.