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CHINA:  Liquidity Crunch in China’s Interbank, No Easy Solutions

CHINA
EM BulletAPACChinaEmerging Market NewsBulletMarketsFixed Income BulletsForeign Exchange Bullets
  • A sharp funding squeeze for China’s domestic banks is pushing short term funding rates to extreme levels with the 7-day interbank pledged repo index rising to the highest it has been in over a year.
  • Yesterday, as markets headed into the close, the CCDC delayed clearing by ten minutes as settlement failures wreaked havoc in the interbank market with the increase in borrowing costs. 
image
  • Yesterday’s open market operations saw net CNY954bn injected in what appeared to be a straightforward injection leading into the Lunar New Year period, according to local media.
  • However the reality is that funding is very challenging at present for banks as retail investors prefer to park their cash in the bond market, in lieu of bank deposits.
  • The PBOC in recent weeks has been defending the currency arguably at a time when it could have been softening the pressures in the interbank market.
  • This week’s funding squeeze is a potential early warning that yesterday’s large injection may need to be the first of many as Lunar New Year, Tax Time and bond demand withdraws cash from the system.
  • The rise in the interbank rate prompted officials to recognize that currency stability is not their only priority and at a press conference late on Tuesday indicated that: ‘ their goal was to keep the currency stable, whilst taking steps to maintain liquidity in they system.’
  • Some market commentators are suggesting that as liquidity and funding pressures are rising so rapidly into the holidays, the PBOC may be forced to cut the RRR in the near term as a measure to support the liquidity in the system. Onshore media commentary has noted that recent liquidity injections are the equivalent of a 0.5ppt RRR cut.
  • Whilst this appears to be an easy fix, it could fuel further investment into a very hot bond market creating bubbles - something that the Central Bank would appear unlikely to want.
  • Easier policy settings may bias the yuan softer, all else equal, highlighting the difficult policy juggling act the authorities have at the moment. 
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  • A sharp funding squeeze for China’s domestic banks is pushing short term funding rates to extreme levels with the 7-day interbank pledged repo index rising to the highest it has been in over a year.
  • Yesterday, as markets headed into the close, the CCDC delayed clearing by ten minutes as settlement failures wreaked havoc in the interbank market with the increase in borrowing costs. 
image
  • Yesterday’s open market operations saw net CNY954bn injected in what appeared to be a straightforward injection leading into the Lunar New Year period, according to local media.
  • However the reality is that funding is very challenging at present for banks as retail investors prefer to park their cash in the bond market, in lieu of bank deposits.
  • The PBOC in recent weeks has been defending the currency arguably at a time when it could have been softening the pressures in the interbank market.
  • This week’s funding squeeze is a potential early warning that yesterday’s large injection may need to be the first of many as Lunar New Year, Tax Time and bond demand withdraws cash from the system.
  • The rise in the interbank rate prompted officials to recognize that currency stability is not their only priority and at a press conference late on Tuesday indicated that: ‘ their goal was to keep the currency stable, whilst taking steps to maintain liquidity in they system.’
  • Some market commentators are suggesting that as liquidity and funding pressures are rising so rapidly into the holidays, the PBOC may be forced to cut the RRR in the near term as a measure to support the liquidity in the system. Onshore media commentary has noted that recent liquidity injections are the equivalent of a 0.5ppt RRR cut.
  • Whilst this appears to be an easy fix, it could fuel further investment into a very hot bond market creating bubbles - something that the Central Bank would appear unlikely to want.
  • Easier policy settings may bias the yuan softer, all else equal, highlighting the difficult policy juggling act the authorities have at the moment.