Courtesy of Mish.
Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale.
China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.
“The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.”
“The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”
Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.
Capital Flight
The statement by Chen Qi “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows” is interesting.
Qi’s statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens.
A front-page editorial on Friday in China Securities Journal – an arm of the regulatory authorities – warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” it wrote.
The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade.
It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output,” it said.
There have been signs of serious stress in China’s interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default.
“Liquidity conditions have tightened severely due to the crackdown on shadow banking activities,” said Zhiwei Zhang from Nomura.
China’s Credit Bubble About to Pop
In a followup post, Ambrose Evans-Pritchard writes Fitch says China credit bubble unprecedented in modern world history
China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. …
