Will strain in the financial system affect dry bulk shippers?

Xun Yao Chen
January 15, 2014

Will China's financial crisis crash the dry bulk shipping party? (Part 5 of 7)

(Continued from Part 4)

The interbank lending rate rises

As the Chinese government tries to reign in on shadow banking, the interbank lending rate (interest for lending and borrowing between banks) rose from just 4.00% at the beginning of 2013 to near 8.0% at the end of it. On January 13, 2014, the interest rate stood at 6.75%, and there’s no sign at the moment that the tightening will ease.

Reigning in on the shadow bank

A higher interest rate is one method that China’s central bank is using to reign in on shadow banking. As the interest rate rises, demand for loans should fall because it makes borrowing on debt more unattractive. Suppliers will also reduce the amount of credit available, on the fear that the borrower may not be able to pay back these loans. As some banks failed to make payments in June 2013, banks have become more cautious.

Government yield rises

A higher interbank lending rate, used to reign in on excess credit, has had the negative consequence of driving the yield on government bonds up. On January 10, 2014, bond yields with five-year maturity stood at 4.47%—up from around 3.25% during mid-2013, when liquidity started to tighten.

Analysts attribute this rise as a signal of China’s commitment to freeing up interest rates and letting the market decide supply and demand. Bloomberg also noted that improvements in economic conditions have contributed to higher yields.

Yet, another view suggests that demand for government bonds is now lower, as banks are trying to maintain their profitability by keeping higher-yielding products and selling lower-yielding bonds, according to Shadow PBOC—a weekly economics seminar held at Peking University. This is unlike the past, when banks still could have achieved high returns by buying bonds after borrowing from other banks.

In the past, economic growth has accompanied higher rates. But when rates became too high, they coincided with slowdowns. Learn more on this in the next part of this series.

Continue to Part 6

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