The credit squeeze in China is no longer a local issue and any misjudgment by
the central bank will have global ramifications
One-week borrowing costs in Shanghai jumped 119 basis points to 8.643pc, the
highest since the cash crisis in June that sent minor tremors through the
financial system. Though less volatile, the crucial 3-month ‘Shibor’ rate
watched for signs of trouble in the shadow banking sector has climbed 80
points to 5.52pc since the beginning of the month.
Fitch Ratings says the biggest risk may lie in China’s wealth management
products, a “hidden second balance sheet” of the banks alone worth $2
trillion.
Half of all liabilities have to be rolled over every three months and a
further 25pc every six months. There are reports that some are already
under water.
If rates remain at current levels for long, weaker funds could be caught in a
squeeze akin to the shock that hit Northern Rock and Lehman Brothers in the
West when the capital markets seized up.
It is unclear whether the latest ructions in China’s money markets are a
repeat of the year-end squeeze seen last December or the start of a more
serious upset.
The central bank is walking a tightrope as it tries to rein in banks and check the dangerous surge in credit, now 220pc of GDP according to China Securities Journal.
Hot money has been pouring into the country on a wave of optimism after the Communist Party’s Third Plenum in November, which promised a blitz of reforms. This raises the likelihood of even more violent outflows if the music stops, a risk that has risen since the US Federal Reserve began winding down dollar stimulus last week.
The latest spike in rates goes beyond safe levels. The central bank injected almost $50bn in liquidity late last week to stabilise the market, even taking the unprecedented step of broadcasting the move on Weibo, China’s Twitter.
The Financial Times said propaganda authorities have ordered China’s journalists to stop writing gloomy articles about the cash crunch, a sign that events may be slipping out of state control.
The central bank has a trump card if efforts to deflate the credit boom gently spin out of control. “They can cut the reserve requirement ratio (RRR) at any time,” says Daokui Li from Tsinghua University.
Lenders have parked $3 trillion with the authorities to meet the RRR rule of 20pc. Yet J Capital Research in Beijing says this is “deceptive”, failing to capture the scale of shadow banking. The real rate may already be down to 15pc, while the loan-to-deposit ratio may in reality be 90pc rather than 75pc as claimed. If so, China’s safety buffer is less than supposed.
While credit levels in China are not high compared to rich OECD states, they are very high for a mid-income country without deep capital markets.
Growth in lending has been 20pc to 30pc a year since the Lehman crisis, when China ramped up credit to cushion the global trade shock. Rating agencies says this is far above the safe speed limit.
The drama is no longer a local Chinese issue. Credit has grown from $9 trillion to $24 trillion in five years. It is now equal to the entire banking systems of the US and Japan combined. Any misjudgment will have global ramifications.
The central bank is walking a tightrope as it tries to rein in banks and check the dangerous surge in credit, now 220pc of GDP according to China Securities Journal.
Hot money has been pouring into the country on a wave of optimism after the Communist Party’s Third Plenum in November, which promised a blitz of reforms. This raises the likelihood of even more violent outflows if the music stops, a risk that has risen since the US Federal Reserve began winding down dollar stimulus last week.
The latest spike in rates goes beyond safe levels. The central bank injected almost $50bn in liquidity late last week to stabilise the market, even taking the unprecedented step of broadcasting the move on Weibo, China’s Twitter.
The Financial Times said propaganda authorities have ordered China’s journalists to stop writing gloomy articles about the cash crunch, a sign that events may be slipping out of state control.
The central bank has a trump card if efforts to deflate the credit boom gently spin out of control. “They can cut the reserve requirement ratio (RRR) at any time,” says Daokui Li from Tsinghua University.
Lenders have parked $3 trillion with the authorities to meet the RRR rule of 20pc. Yet J Capital Research in Beijing says this is “deceptive”, failing to capture the scale of shadow banking. The real rate may already be down to 15pc, while the loan-to-deposit ratio may in reality be 90pc rather than 75pc as claimed. If so, China’s safety buffer is less than supposed.
While credit levels in China are not high compared to rich OECD states, they are very high for a mid-income country without deep capital markets.
Growth in lending has been 20pc to 30pc a year since the Lehman crisis, when China ramped up credit to cushion the global trade shock. Rating agencies says this is far above the safe speed limit.
The drama is no longer a local Chinese issue. Credit has grown from $9 trillion to $24 trillion in five years. It is now equal to the entire banking systems of the US and Japan combined. Any misjudgment will have global ramifications.
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