I think the magnitude of this event was emphasized to me in a blog commentary I saw (posted first in this series).
http://bloodandtreasure.typepad.com/blood_treasure/2013/06/were-all-dengists-now.html
http://www.nytimes.com/2013/06/21/b...st-level-in-9-months.html?pagewanted=all&_r=0
Bloomberg: China Money Rate Jumps to Record as PBOC Holds Off on Cash Boost
http://www.bloomberg.com/news/2013-...o-record-as-pboc-holds-off-on-cash-boost.html
Reuters: China's money rates hit record, central bank squares off with market players
http://www.reuters.com/article/2013/06/20/us-markets-china-bonds-idUSBRE95J10220130620
The Economist: The Shibor shock - Chinas central bank allows a cash crunch to worsen
http://www.economist.com/news/finan...l-bank-allows-cash-crunch-worsen-shibor-shock
Graphs shamelessly stolen from magenta.
Bloomberg does say that the PBOC has started to make some cash available in the last hour, but the shots have been fired:
http://www.bloomberg.com/news/2013-...o-record-as-pboc-holds-off-on-cash-boost.html
we're all Dengists nowChina this week...
US in the run-up to Lehman...
http://bloodandtreasure.typepad.com/blood_treasure/2013/06/were-all-dengists-now.html
New York Times: Credit Tightens in China as Central Bank Takes a Hard LineFor many years, critics of China who identify with this mythical phoenix like creature called the markets have been telling China that it needs to do something about its debt problem. Eventually Beijing, says Oh, OK and deliberately stages not allows to happen, but deliberately stages a Lehman event across its banking system. This was not a response to a crisis: the PBOC could have pumped more money into the system this time just as it had done before. Its an act of will.
And the markets promptly crap themselves, though I dont know if this is actually serious or that granny just saw a flasher response that you seem to get a lot of. Actually, what the folk on the trading desks have been exposed to is something that people in China have known for a long time: this is how China solves its problems, with brutal and ruthless fixes. Ok, we have a problem. We also have absolute power. HULK SMASH. Think of this as being in the tradition of the One Child Policy.
This approach is sometimes characterised as Maoism, but its really Dengism; the adaptation of all the tools in the Leninist box away from ideological mobilization and towards real world problems. Who cares whether the cat is black or white so long as its a fucking huge apex predator?
One thing that can be said for Hu Jintao is that he didnt really go in for big bang solutions. He just let things go on, or metastasize, nagging from the sidelines about moderate overall prosperity and harmonious societies.
Xi and the new boys have more vigour, whether its building 10,000 Stevenages overnight or conducting mass rectification campaigns. Hulk is smashing again. And on this occasion, those of us outside China are on the edge of his fist.
http://www.nytimes.com/2013/06/21/b...st-level-in-9-months.html?pagewanted=all&_r=0
Chinas financial system is in the throes of a cash squeeze as the government tries to restructure the economy and punish speculators, with interbank lending rates spiking on Thursday and bank-to-bank borrowing nearly stalled.
Chinas interbank and money market rates have soared over the last two weeks, and banks and other financial institutions are afraid of lending to one another. Without that lending, an economy can quickly stultify. Those in need of short-term cash, or liquidity, must pay dearly or risk default.
Chinas central bank, the Peoples Bank of China, has refused to provide large amounts of additional cash to the credit market. Analysts say the government is holding off for a reason: it is trying to reshape the economy while reducing its future role. The bank is not independent, unlike many other central banks, and reports to the State Council.
A huge shadow banking operation has emerged in China in recent years, with smaller banks and trust companies borrowing from bigger state-run banks and relending that money at high interest rates to private companies and property developers, a practice that fuels speculation.
Pressuring speculators is a risky strategy for the Chinese government, which is also grappling with a slowing economy. Many borrowers may have a harder time paying back their loans, and analysts fear the losses could ripple through the banking system.
The central bank wants to accelerate reform, said Zhu Haibin, an economist at JPMorgan Chase. They want to give the market a lesson: you need to manage your risk and not rely on the central bank.
Mr. Zhu and other economists say restructuring the economy, which has grown addicted to easy money, could be perilous for another reason. The decision could reduce lending and slow growth too quickly.
The worst case, absent intervention by policy makers, would be defaults at lenders with the most exposure and shakiest balance sheets. The damage could spread to other banks, setting off runs on deposits by ordinary Chinese. In the near term, markets will probably continue to be rattled, especially shares in financial institutions.
That was certainly the fear on Thursday around the globe. Chinas interbank market is basically frozen much like credit markets froze in the United States right after Lehman failed, said Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management. Rates are being quoted, but no transactions are taking place.
...
Chinas policy makers have an arsenal of options at their disposal to inject more money into the financial system, including conducting open market operations trading in securities to control interest rates or liquidity or, more drastically, freeing up some of the trillions of renminbi that banks are required to keep on reserve with the central bank, the Peoples Bank of China. In the past, when Chinas economy has hit a rough patch, the government usually stepped in, forcing state-run banks to pump liquidity into the market, even though there was a risk it could drive up asset prices and lead to overinvestment.
Chinas central bank, by allowing a spike in interbank rates to persist for longer than usual, is sending a message to the market that liquidity needs to tighten and credit growth slow at the margin," Andrew Batson and Joyce Poon, analysts at GaveKal Dragonomics, wrote Thursday in a research note. "Indeed, the central bank has been using its open-market operations to drain liquidity from the interbank market since January, setting the stage for just this kind of showdown with banks.
If the central banks inaction toward the deepening liquidity squeeze is a form of financial brinkmanship, some analysts see it as aimed at reining in smaller banks that had been tapping the interbank market as a source of low-cost funding for their investment in higher-yielding bonds, or to finance off-balance-sheet activities, or shadow banking.
The P.B.O.C. and some other regulators could be taking the opportunity of the tight funding conditions to punish some small banks which had previously taken advantage of the stable interbank rates," Ting Lu, China economist at Bank of America Merrill Lynch, said Thursday in a research note.
Mr. Lu said that although the surge in interbank lending rates could have its desired effect on reckless lenders, it will undoubtedly disrupt both the financial markets and the real economy if the liquidity squeeze lasts too long.
...
While the economy faces up to many difficulties and challenges, we must promote financial reform in an orderly way to better serve economic restructuring," Chinas State Council, or cabinet, said in a statement Wednesday after a meeting presided over by Mr. Li, according to Xinhua, the state-run news agency.
The central bank wants to accelerate reform, said Zhu Haibin, an economist at J.P. Morgan. They want to give the market a lesson: you need to manage your risk and not rely on the central bank.
Yu Song, an economist at Goldman Sachs, said in a report Thursday that the governments decision to tighten liquidity to deal with financial risks could slow growth in the near term. But, he added, the flip side to this new approach is that the reform measures should reduce systemic risks and possibly raise the level of potential growth.
...
The surge in interbank lending rates is a similar test for the Peoples Bank of China, which, unlike many other central banks, is not independent and reports to the State Council.
The rise in interbank rates began to take off two weeks ago, before China went on a three-day national holiday to observe an ancient dragon boat festival. Banks typically face higher demand for cash before public holidays, and the initial uptick in rates was not considered abnormal at the time.
But as the situation has worsened, the central bank refrained from injecting new money into the system. Benchmark seven-day repurchase rates, another measure of borrowing costs, briefly soared as high as 25 percent on Thursday, up from 8.5 percent on Wednesday, before closing at 11.2 percent.
Bloomberg: China Money Rate Jumps to Record as PBOC Holds Off on Cash Boost
http://www.bloomberg.com/news/2013-...o-record-as-pboc-holds-off-on-cash-boost.html
Chinese banks need to step up efforts to support economic reforms and do more to contain financial risks, the central government said June 19 after a meeting led by Premier Li Keqiang.
The markets move is not just because of liquidity but due to a policy stance that wont change, said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. (ANZ) After Lis statement, the market now sees the crunch lasting longer. Until after mid-July, liquidity wont get better significantly.
...
The PBOC clearly has an agenda here, said Patrick Perret-Green, a former head of Citigroup Inc.s Asian rates and foreign exchange who works at Mint Partners in London. To fire a massive warning shot across the banks bows and to see who is swimming naked. Moreover, it fits in well with the new disciplinarian approach adopted by the government, he said.
Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesnt involve local banks, so-called shadow banking, according to Fitch Ratings.
The tightening is emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels, Charlene Chu, Fitchs head of China financial institutions, said in a June 18 interview.
Reuters: China's money rates hit record, central bank squares off with market players
http://www.reuters.com/article/2013/06/20/us-markets-china-bonds-idUSBRE95J10220130620
China's interbank funding costs surged again on Thursday, with the two shortest-term rates hitting record highs, as the central bank again ignored market pressure to inject funds into the market, despite fresh evidence that the economy is slowing.
The People's Bank of China (PBOC) told the market that it would not conduct repo business in its regular open market operations on Thursday, frustrating widespread expectations that it would use reverse repos to inject cash to ease an acute market squeeze over the last two weeks.
The State Council, China's cabinet, reiterated its commitment to prudent monetary policy and moderate credit growth risks at a meeting on Wednesday afternoon.
If money market rates remain high, it could translate into higher financing costs for businesses, economists say.
"The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage," said a trader at a major Chinese state-owned bank in Shanghai.
"That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust operations and even arbitrage."
The money market squeeze that began early this month has worsened this week, forcing banks and other financial institutions to trim non-essential businesses, traders said.
The Economist: The Shibor shock - Chinas central bank allows a cash crunch to worsen
http://www.economist.com/news/finan...l-bank-allows-cash-crunch-worsen-shibor-shock
The surprise was that the central bank then did little to ease the strain. Instead of printing money and buying stuff, it decided to sell three-month bills on June 18th, withdrawing money from circulation. The amount was tiny. But the signal was clear: no help could be expected from the Peoples Bank of China (PBOC). Banks with money to spare chose to hoard their funds, worsening the crunch for others.
Why was the PBOC so hard-nosed? It sets an explicit target for money-supply growth and an implicit target for credit growth. These targets are supposed to be consistent with each other and with economic stability. From its point of view, if banks find themselves short of money they must have provided too much credit. That may well be the case. Although straightforward bank loans are under control, banks have simply invented new ways of lending.
That is regrettable. But it seems odd to use monetary policy to punish banks for behaviour that the regulator should have prevented. With luck the banks will now slow their lending and conserve their cash, at least until they pass quarter-end regulatory reviews. Some banks, however, may flirt with default. A cash crunch is a terribly clumsy way to curb credit growth. In a more mature economy, a central bank could assert itself in clear, calibrated steps by raising its policy rate. In China the PBOC has instead drawn a line in the shifting sands of credit and waited for banks to discover it.
Graphs shamelessly stolen from magenta.
Bloomberg does say that the PBOC has started to make some cash available in the last hour, but the shots have been fired:
http://www.bloomberg.com/news/2013-...o-record-as-pboc-holds-off-on-cash-boost.html