All the chatter in China this week has been about a credit crunch in China.
On Thursday, the SHIBOR, or Shanghai Interbank Offered Rate, the benchmark interest rate used in lending activities between banks, surged to 13.44%. The overnight repo rate hit 25%.
After the central bank reportedly intervened with targeted injection of 50 billion yuan into the market, interbank rates fell from their highs on Friday, but nevertheless remained at elevated levels.
But how concerned should we be about the rise in interbank rates?
In terms of markets, SHIBOR might not be as important as interbank rates of developed markets, Morgan Stanley's Richard Xu wrote in a research note on Thursday.
He pointed out that the total balance of both official interbank lending and over the counter interbank lending, in which rates are directly affected by SHIBOR, represents only around 8% of total bank assets.
SHIBOR's impact on the real economy is also limited.
"We estimate that rates of ~12% on credits to the real economy (such as discounted bill rates) are more directly affected by SHIBOR. The rest – including loans, corporate bonds and interbank NSCA – are affected in a milder way. Despite the 150–300bps surge in SHIBOR this month, rates on the aforementioned types of credit increased ~20–80bps during the same period."
In an excellent piece, FT Alphaville's Kate Mackenzie writes the Chinese central bank has been talking about controlling risks in the banking sector for some time. A meeting of China's State Council saw top policymakers emphasize that the financial system needs reform and that credit should be channeled towards industries with that could drive economic growth. From Mackeznie:
"It all suggests this is a very deliberate move to direct China’s credit into more effective investments — things that will actually make some kind of return, rather than requiring debt rollovers and the like."
We have previously reported that the central bank seems committed to "punishing" banks that had taken advantage of stable interbank rates to fund their purchase of higher-yield bonds. In other words, much of this is calculated, even if the silence on the part of the PBoC has everyone on edge.
For now there hasn't been a bank run at the retail investor level, according to Credit Suisse's Dong Tao. Large state owned enterprises are still flush with cash, though smaller businesses are "struggling with liquidity."
Tao thinks Shibor has peaked though rates will remain elevated. He also thinks the duration of these elevated rates are more important than the rate spikes. "The longer this lasts, the more likely that some banks may face serious liquidity issues and that would further undermine the creditability between banks, creating a chain reaction," he wrote.
"It is our view that draining interbank liquidity at the interbank market could cause unintended consequences, at a time at which duration and risk mismatch among the banks are severe, account receivables in the corporate sector are surging, and the inflow of FX reserves is decelerating sharply."
So, there definitely is good reason to be worried about risks in China's financial system, and the spiking interbank rates definitely point to a liquidity squeeze. But this suggests that comments in recent days comparing the surge in SHIBOR to the spike in rates in the run up to the Lehman crisis, were overstated.
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