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Sancho Panza

China Rates Approach Crisis Levels Despite Central Bank Measures

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New York Times 23/12/13

'HONG KONG — An exceptional bid by China's central bank to curb soaring interest rates and relieve pressure on the financial system appeared to have come up short on Monday, as Chinese money market rates shrugged off the measure and continued to approach the crisis levels seen in June. The central bank, the People's Bank of China, said late Friday that it had provided more than 300 billion renminbi, or about $50 billion, in short-term funds to selected banks over a three-day period that week.

Rates continued to surge on Monday, however, in China's money markets — a key source of short-term funding for commercial banks and also for financial institutions engaged in risky, off-balance-sheet shadow lending.

One key rate, the seven-day repurchase rate, rose as high as 10 percent on Monday. That was double the rate of a week earlier and the highest level since June, when the People's Bank of China allowed rates to surge in an effort to curb speculative investment in the country's sprawling shadow banking sector.

China's banks are scrambling for short-term cash to meet month-, quarter- and year-end regulatory requirements. At the same time, demand for cash is high among Chinese companies seeking to meet year-end payments.

These and other factors have combined to push the costs of short-term borrowing in China up drastically, a situation that if left unchecked, could leave some banks struggling to meet their obligations and could have implications for the broader economy.

As was the case in June, part of the reason for China's liquidity shortage is that the central bank has been purposely refraining from its regular open-market operations — the buying and selling of money-market instruments to manage liquidity and interest rates.

Analysts see this as a signal that the People's Bank of China is serious about reining in the shadow banking sector. But to help ordinary banks meet their day-to-day funding needs, the central bank has been resorting to a method that is less commonly used and less transparent.

In a posting on its official account on Sina Weibo, China's Twitter-like messaging service, the central bank confirmed on Friday that it had sought to ease pressure in money markets by providing assistance through short-term liquidity operations — an exceptional measure to provide funding selectively to large banks, which it did not identify.

The central bank noted that some commercial lenders appeared to be hoarding cash, with excess reserves in the banking system topping 1.5 trillion renminbi, or about $250 billion, a level it described as "relatively high" when compared with the same period in previous years.

"At the same time, we suggest the main commercial banks make rational adjustments to the structure of their assets and liabilities, and improve their liquidity management using a scientific and long-term approach," the central bank said its statement.'

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When the inevitable banking crisis hits China it will be interesting to see what the response is.

Will China's banking system cause shockwaves across the global economy?

I suspect it'll mainly impact commodity countries with countries such the US, UK et al largely unaffected. Depending on the level of disorder there maybe supply line impacts but ultimately China is not a source of demand for Western goods in the aggregate so it is hard to see it. When Japans bubble blew did it take other countries down with it?

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http://www.reuters.com/article/2013/12/23/us-markets-china-7dayrepo-idUSBRE9BM0C020131223

(Reuters) - China's cash market squeeze showed little sign of easing on Monday, reinforcing the view the central bank has shifted to tighter monetary policy.

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I suspect it'll mainly impact commodity countries with countries such the US, UK et al largely unaffected. Depending on the level of disorder there maybe supply line impacts but ultimately China is not a source of demand for Western goods in the aggregate so it is hard to see it. When Japans bubble blew did it take other countries down with it?

Nope. China is now 10% of the global economy and the biggest single contributor to world GDP growth outside the US. Any sustained slowdown would impact everybody. In the event of a Chinese hard landing Japan, Taiwan and South Korea would be deeply harmed, with exports and investments taking the biggest hit. OTH resource exporters would hold up best, since commodity markets tend to adjust continuously until all production is sold, export volumes would be more likely to hold up under price pressure. The South-Eastern Asian economies Thailand, Indonesia etc. are already in deep trouble because their outsized budget deficits and domestic property/lending bubbles. India too, of course, with a significant shadow banking exposure of its own.

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What is different about China that you could not have said about Japan in the 90s?

It's already twice the size relative to the rest of the world, and far more interconnected. In addition to the huge volumes of commodities it sustains, a huge proportion of Asian electronics and machine parts are exported to China for final assembly before being sent on to consumers in the US and Europe. The future of the world economy is intimately tied up with China's success or failure.

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China has, recently, had liquidity crisis at this time of year for years.

Interesting this wasn't in mainstream when Chinese stock market falling but now is, just as it may have bottomed.

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It's already twice the size relative to the rest of the world, and far more interconnected. In addition to the huge volumes of commodities it sustains, a huge proportion of Asian electronics and machine parts are exported to China for final assembly before being sent on to consumers in the US and Europe. The future of the world economy is intimately tied up with China's success or failure.

Maybe I am too sanguine but I would stand by my view that China going down isn't a long term problem. The final demand is still in the West - Chinas demand is a subsidiary of this. Anyway I could well be wrong - from a personal point of view Japan would definitely be negatively impacted something they are trying to negate through being matey with ASEAN but ASEAN doesn't have the infrastructure yet.

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Maybe I am too sanguine but I would stand by my view that China going down isn't a long term problem. The final demand is still in the West - Chinas demand is a subsidiary of this. Anyway I could well be wrong - from a personal point of view Japan would definitely be negatively impacted something they are trying to negate through being matey with ASEAN but ASEAN doesn't have the infrastructure yet.

FWIW another gloomy assessment from AEP.

http://www.telegraph.co.uk/finance/economics/10535540/Chinas-cash-crunch-threatens-Shadow-Banking-shock.html

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.

...

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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http://www.telegraph.co.uk/finance/economics/10535540/Chinas-cash-crunch-threatens-Shadow-Banking-shock.html

A blast of money from China’s central bank has failed to stem a deepening cash crunch in the country as liquidity dries up and struggling lenders hoard funds.

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.

I can't see a problem with that, I mean what could possible go wrong when all the liquidity dries up!

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