Overnight Shibor, the Chinese equivalent of Libor, or the benchmark rate for inter-bank short-term borrowing, shot as high as 13.44% on June 20. As a comparison, Libor overnight peaked at 6.88% during the 2008 crisis. Overnight repo rate was even crazier, reaching 25% briefly, though on very small volume. This is full-scale panic by any measure. It has calmed down quite a bit since, with the latest overnight Shibor at 5.736%. Still stressed, but no longer hyperventilating.
But more striking is what's not happening. People's Bank of China, China's central bank, did nothing. Yesterday it published a memo, issued to all major banks on June 17, saying that inter-bank liquidity is aplenty, we ain't seen no problems, y'all should watch out your risk management and plan ahead, good luck kids. In contrast to the hysterical cry of "the end is nigh please, pleeeeeze have some mercy for Mao's sake" all over Chinese financial industry, the apathy is both comical and intriguing.
And the cruel aloofness gets more striking considering that PBoC has made doves in the Fed look hawkish since the 2008 crisis. The moment any bank made a fuss, PBoC was there to provide liquidity, so much so that it earned a popular nickname of "Central Mommy," used with both affection and mockery (more of the latter, I suspect).
What prompted this 180-degree turnaround and what are the implications?
The credit/blame goes to the very top; after all, the PBoC head, Zhou Xiaochuan, has been one and the same since 2003 (and don't even think about Chinese central bank independence, which is a bigger joke than the general central bank independence). The last leadership in Beijing, which covered from 2002 to 2012, had been spectacularly mediocre and incompetent in every way, perhaps purposefully so by the entire leadership and those who chose them.
In their relentless pursuit of mediocrity, they put themselves under the feet of various interest groups. The whole set of socioeconomic policy gradually degenerated into an incoherent mess, solely reactive, never proactive. This is a primary cause (without going philosophical) for the current mess in local government debt, out-of-control shadow banking, massive capital misallocation, housing bubble, rampant overt corruption, and the dilemma of persistent inflation coupled with slower economic growth and higher currency exchange rate.
The new leadership has shown some encouraging signs of sensible, proactive leadership, at least in the socioeconomic field, as opposed to reactive management, with the strong inaction by PBoC being the latest. While hard data are hard to come by, most people in China I'm in contact with see no sign of the non-financial sectors being affected much. There may be some defaults, especially in the financial trust segment. To that I say, good riddance. The end of the Ponzi scheme is long overdue. But the pundits crying local government default obviously do not understand the Chinese system. Yes, some local government heads will roll (again, long overdue), but their debt (there's no municipal bond in China, only some special purpose bonds, and most debt is in the form of loans) will not be allowed to default.
Here's a story illustrating how the outside world sees a storm while those inside go around not noticing anything. Over the weekend, the credit/debit card system of Industrial and Commerce Bank of China stopped working. Then Monday morning the transfer and payment system of Bank of China stopped working. Both are among the Big Four banks in China. Both failures were conveniently attributed to technical glitches. I thought both coming right on the heels of inter-banking panic and U.S.-China spat over Snowden, the risk of these not being coincidental had to be considered. I tweeted on Sina (Sina Corppration ) Weibo, a Chinese equivalent of Twitter, that people should get some cash for potential temporary emergencies. I was laughed out of the weibosphere.
China is slowing down, no doubt about that. Part of it is due to the reality of falling external demand. Another part is by design of the new leadership. They finally abandoned the farcical, simplistic goal of GDP growth. They are cracking down on false statistical reporting such as local GDP and increasing export/import value by running truck back and forth across the Shenzhen import/export trade zone (not even with a courtesy visit to Hong Kong).
They are reining in local companies carry-trading USD/CNY on the expense of PBoC. It's been the land of the scams and fast money for a long while. Finally they're trying to change that. If they could further rein in the de facto monopoly by state-owned enterprises and provide more room for private enterprises to grow, the foundation would be in place for another decade of sustained economic growth, before they have to face the baby-boomer retirement problem that developed world is struggling with now.
I don't know when the Chinese market (iShares FTSE Xinhua China 25 Index ETF ) will calm down and turn around. But I don't think this is a systemic crisis. Considering how long and how badly the Chinese financial system has been managed and distorted, a proactive bubble bursting is very much necessary and healthy.
Ironically, this is only possible with the combination of the new leadership and the complete lack of independence of Chinese central bank. If they succeed in bursting the financial bubble and forcing the economic transformation without devastating the real economy, it would be a monumental achievement in the history of monetary policy. I wish them best of luck.
If you're lucky enough to have dodged the recent rout in Chinese market, it may be time to slowly ease into some exposure as part of diversification. No hurry, though, as short-term downside risk is still high and could last awhile. But it deserves close attention and could be one of the best long-term investment opportunities that do not depend on black swans.
At the time of publication the author is long FXI.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.