Caixin
Dec 05, 2016 05:21 PM
ECONOMY

Credit Squeeze Emerges in China as Money Market Rate Soars

(Beijing) — Rising borrowing costs in China are leading analysts to believe that the central bank is quietly increasing interbank interest rates to discourage debt-fueled financial investments, a media report said Monday.

The three-month Shibor, or Shanghai interbank offered rate, increased for the 31st straight trading day to 3.0686% on Friday, the longest period of gain since the end of 2010, said the Economic Information Daily, a newspaper run by the official Xinhua News Agency.

Shibor was launched by the People's Bank of China (PBOC) in 2007 to provide a pricing reference for lending activities between Chinese banks. It currently consists of eight maturities ranging from overnight to one year.

It is regarded as a gauge of funding sufficiency in the banking system. The rate goes up when liquidity is tight, while its decline often suggests banks' cash reserves are abundant.

"To put it plainly, the central bank has raised interest rates in the money markets, it is just that the hike is rather covert," the newspaper quoted Deng Haiqing, chief economist of JZ Securities, as saying.

Deng also compared the current credit squeeze to a crisis in 2013, when the PBOC stopped short of injecting cash into the market until the overnight Shibor rate skyrocketed to a record 30% — five times the then-benchmark one-year lending rate — to force commercial lenders to deleverage.

The report added that yields on interbank treasury bonds all increased last week.

The three-month Shibor rate increase extended into Monday to hit 3.0889%, though the overnight rate fell for the second consecutive trading day after soaring for 16 sessions previously.

China's monetary policy has become more prudent since the start of October, with the PBOC tightening liquidity as capital flight pressure intensified, economists with China International Capital Corp. said in a research note last week.

Chinese regulators were also concerned that relatively cheap borrowing costs had prompted some lenders to take advantage of interbank loans to buy wealth-management products that offered higher rates, while others repeatedly borrowed short-term funds to invest in longer-term bonds, the Economic Information Daily said.

"When stable, relatively low financing is challenged, risks of such interest arbitrage deals will surge," said Huang Wentao, a bond analyst with China Securities, according to the report.

Contact reporter Fran Wang (fangwang@caixin.com); editor Kerry Nelson (kerry@caxin.com)

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