Credit Crunch Hits China: “It Could Be Worse Than Lehman”

Worries about a credit crunch in China drive investors in Bonds and U.S. Treasuries. Although China’s central bank tried to dispel the fear, but experts see more risks than the collapse of Lehman Brothers.

The Tokyoinvestors on the international markets do not come to rest.Hardly move the headlines on the European debt crisis somewhat in the background, a new construction is happening on. And this is precisely in China. The nervousness of investors is greater, because in the worst case threatens new financial crisis. “A credit crunch in China could still have severe consequences, as we have seen after the Lehman collapse,” said Akira Takei of Mizuho Asset Management in Tokyo.

China’s heavily indebted banks trust, as has become clear in recent days, the ability to pay their own competitors and therefore no longer lend to each other only at very high interest money. At times, it had to be spent whopping 25 percent. The high boiling fear is that small banks with high outstanding loan portfolios without aid from the Chinese central bank may go bankrupt – and infect the entire industry. Thus, the economy could be affected in tow and then key international trading partners as well as Germany. Investors reminded of the collapse of U.S. investment bank Lehman Brothers in the fall of 2008 and the subsequent banking crisis. They fear a repeat of history.

Credit crunch hits China

After the US Federal Reserve on Thursday indicated a possible end to quantitative easing, there was a major outflow of speculative “hot money” from Asia and other emerging economies. In China, a credit squeeze by the country’s central bank turned into a credit crunch.

Since the beginning of June, Chinese banks and financial institutions have been wary of lending to each other, leading to sharp rises in inter-bank borrowing rates (Shibor). On Thursday, however, inter-bank lending virtually froze. Against market expectations, the Chinese People’s Bank did not inject cash into the money market to ease an acute credit shortage.

The result was panic that pushed the seven-day rate up by 3.8 percentage points, to a record high of 12.06 percent, and the overnight rate more than doubled, from 5.98 percentage points to 13.85 percent. The benchmark seven-day rate was only 2.78 percent in May and in the range of 6 percent in early June.

China’s economy based on credit is and was from the beginning a mega bubble. Otherwise they would have never made it in the short of time this way.