China Interbank Market Freezes As Overnight Repo Explodes To 25%
“Counterparty mistrust is beginning to reach extreme levels…”
It seems liquidity (or counterparty mistrust) is beginning to reach extreme levels in China as the nation’s banking system is now quoting overnight repo transactions at 25%. The explosion in funding costs echoes the collapse in trust (and surge in TED spread) among US banks in the run-up to the Lehman bankruptcy. MSCI Asia-Pac stocks are down over 3% with China’s Shanghai Composite -2.5% at seven-month lows.
- China’s 1-day Repo Rate Climbs to Highest Since at Least 2006
- MNI – CHINA OVERNIGHT REPO FIXING AT RECORD HIGH
China’s bond market is also collapsing:
Yield on 3.1% govt bonds due January 2016 jumps 39 bps to 3.749%, biggest rise since notes were issued in January
China this week…
US in the run-up to Lehman…
The Chinese Interest Rate Chart That Has The Entire World On Edge
All eyes will be on the Shibor, or the Shanghai Interbank Offered Rate. This is the benchmark interest rate used in lending activities between banks. These rates underlie the mechanism that holds the Chinese banking system together.
Simply put, it’s a barometer of liquidity in the Chinese credit markets.
In recent periods, Shibor has been surging, stoking fears that Chinese credit was seizing up.
However, the People’s Bank of China has largely remained silent. Some analysts have suggested this inactivity is the PBoC’s way of passively reigning in what is already an overheated credit market.
Other’s are reminded of the dark days of the financial crisis, when surging LIBOR rates preceded the Lehman Brothers bankruptcy and the deepest periods of the financial crisis. They warn that if the PBoC, or some other force, doesn’t intervene soon, China will plunge into recession and take the rest of the global economy with it.
The True Chinese Credit Bubble: 240% Of GDP And Soaring
Which Chinese Banks Have The Biggest Default Risk?
With China’s credit-to-GDP ratio over 200%, it appears, as Barclays notes, that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth. Though they expect that the PBoC is likely to stabilize the interbank market in the near term (perhaps by more of the same ‘isolated’ cash injections), short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions. With the small- and medium-sized banks having grown considerably quicker than the larger banks, having been more aggressive on interbank business (i.e. alternative channels to get around lending constraints), the following banks are at most risk of major disturbance of the funding markets remain stressed leaving the potential for retail bank runs or greater fragmentation in the commercial bank market.
China Bond Prices Fall on Liquidity Crunch; Yields Inverted
Turn those machines back on, get those people back in here!!!