http://www.zerohedge.com/news/2013-12-20/china-bails-out-money-markets-second-day-row-following-repo-rate-blow-out
China Bails Out Money Markets For Second Day In A Row, Following Repo Rate Blow Out
Submitted by Tyler Durden on 12/20/2013 08:23 -0500
As reported yesterday, following a surge in various short-term and money market rates in the aftermath of the Fed's taper announcement, the PBOC admitted after the close that it used Short-term Liquidity Obligations (SLO) to add funding to the market, and in doing so, bailing out money markets - the same product that nearly collapsed the financial system in the aftermath of Lehman.
The bank didn't specify when it added the funds but, in another direct echo of the June panic, the PBOC said it is prepared to add more. However, it seems the market was less the convinced, and despite an early plunge in the seven day repo rate by over 2%, it suddenly and rapidly reversed direction and instead blew out hitting a whopping 9%, the highest since the June near-crash of the Chinese banking sector.
The outcome: China said it injected another $50 billion to bailout and stabilize its money markets in what is increasingly looking like a replay of this summer's liquidity lock up. Perhaps the PBOC hinting at tapering at a time when the Fed is actually doing so is not the smart choice...
China's central bank said it had injected over 300 billion yuan ($49.2 billion) into the nation's money markets over a three-day period as interbank interest rates surged to their highest levels since June.
The People's Bank of China said on its official Twitter-like weibo account that the banking system had current excess reserves of over CNY1.5 trillion and it called that level "relatively high."
The central bank said that it had injected the funds through its "short-term liquidity operations" and this was in response to the year-end market factors.
The interest rates banks charge each other for short-term loans jumped to 8.2%, the highest level since the June cash squeeze.
The stress in the banking system is starting to spread elsewhere, with stocks in Shanghai falling for a ninth straight day to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.
The turmoil has been sparked by a scramble for funds by banks as they near the end of the year when they typically need extra cash to meet regulatory requirements as well as the demand for funds from companies.
The central bank also said reminded banks that they need to manage liquidity better.
As to what drove the rapid mood reversal, the Chinese market was hit early on with talk of a missed payment at a local Chinese bank. For now it has not been confirmed, and even if it was the PBOC is expected to never allow any government-backstopped bank to fail. Still, a few more days like the last two and the world may just find out how prepared for a bank failure a credit-stretched China really is.
China Bails Out Money Markets For Second Day In A Row, Following Repo Rate Blow Out
As reported yesterday, following a surge in various short-term and money market rates in the aftermath of the Fed's taper announcement, the PBOC admitted after the close that it used Short-term Liquidity Obligations (SLO) to add funding to the market, and in doing so, bailing out money markets - the same product that nearly collapsed the financial system in the aftermath of Lehman.
The bank didn't specify when it added the funds but, in another direct echo of the June panic, the PBOC said it is prepared to add more. However, it seems the market was less the convinced, and despite an early plunge in the seven day repo rate by over 2%, it suddenly and rapidly reversed direction and instead blew out hitting a whopping 9%, the highest since the June near-crash of the Chinese banking sector.
The outcome: China said it injected another $50 billion to bailout and stabilize its money markets in what is increasingly looking like a replay of this summer's liquidity lock up. Perhaps the PBOC hinting at tapering at a time when the Fed is actually doing so is not the smart choice...
China's central bank said it had injected over 300 billion yuan ($49.2 billion) into the nation's money markets over a three-day period as interbank interest rates surged to their highest levels since June.The People's Bank of China said on its official Twitter-like weibo account that the banking system had current excess reserves of over CNY1.5 trillion and it called that level "relatively high."The central bank said that it had injected the funds through its "short-term liquidity operations" and this was in response to the year-end market factors.The interest rates banks charge each other for short-term loans jumped to 8.2%, the highest level since the June cash squeeze.The stress in the banking system is starting to spread elsewhere, with stocks in Shanghai falling for a ninth straight day to the weakest level in four months while government bonds dropped, pushing the 10-yield up to near the highest in eight years.The turmoil has been sparked by a scramble for funds by banks as they near the end of the year when they typically need extra cash to meet regulatory requirements as well as the demand for funds from companies.The central bank also said reminded banks that they need to manage liquidity better.
As to what drove the rapid mood reversal, the Chinese market was hit early on with talk of a missed payment at a local Chinese bank. For now it has not been confirmed, and even if it was the PBOC is expected to never allow any government-backstopped bank to fail. Still, a few more days like the last two and the world may just find out how prepared for a bank failure a credit-stretched China really is.
Chinese Interest Rates Are Spiking Again, And Jim Chanos Thinks We're Witnessing A 'Bit Of A Banking Crisis'
REUTERS/Aly Song
The seven-day repurchase rate was up to a six-month high of 7.6% in Shanghai on Friday. It closed at 7.06% on Thursday. The People's Bank of China [PBoC] injected money through short-term liquidity operations on Thursday.
We already saw a severe credit crunch in China back in June, and some are worried that we're going to see a repeat of that.
Hedge fund manager Jim Chanos described this week's run up in money market rates as "a bit of a banking crisis," in a CNBC interview.
Patrick Chovanec of Silvercrest Asset Management tweeted that China's banks have "huge off balance sheet cash obligations like wealth management products that come due and they "rely on continued injections of new cash to stay liquid, otherwise they default."
But why are rates rising now? China's move to let the market determine interest rates and not conduct reverse repos have weighed on liquidity. "One theory which could quickly attract audience for its simplicity is that the omnipotent PBoC intentionally guided interbank rates higher to force banks and their clients to deleverage," writes Bank of America's Ting Lu.
"The People's Bank of China [PBoC] knew that the bottom-up interest rate liberalization pushed up short-end rates and bond yields, so even Shibor rose, credit growth remains high (such as the case in November). If the PBoC wants to contain credit growth, it’s forced to allow interbank rates to rise."
Ting characterizes this as some confusion on the part of the central bank and writes that "with its limited predictability of flows and its insensitivity to market reactions, the PBoC finds it much more likely than before to make operation mistakes."
Many argue that the central bank's efforts to impose discipline haven't been fruitful. "With its limited predictability of flows and its insensitivity to market reactions, the PBoC finds it much more likely than before to make operation mistakes," writes Ting.
The Shanghai Composite is down 1.65%.
Market Watch
China money-market interest rates jump
SHANGHAI--Interest rates in China's money markets jumped Friday to levels last seen during a crippling cash crunch this summer, as banks continue to struggle to raise funds in the interbank market.
The borrowing costs initially fell early Friday after the central bank said Thursday that it had "recently" injected cash to try to ease stress, but rates later rose higher. Traders said it remains difficult to borrow in the interbank market despite yesterday's central bank pledge to offer liquidity.
The rates, which serve as the funding costs for pricing and investing in bonds, have been trending higher in recent weeks. Until yesterday, the central bank had refrained from adding cash to the system for two weeks in a row.
The stress, though, is starting to take its toll on other markets. China's benchmark Shanghai Composite Index was down 0.9%, while Hong Kong's Hang Seng Index was off 0.4%. It has also led to a sharp spike in government and corporate debt yields in recent months, further burdening a slowing economy and a less profitable corporate sector.
The benchmark weighted average of the seven-day repurchase agreement rate, a measure of short-term funding costs, rose to 7.75%--the highest level since June 21--and compares to Thursday's close at 7.06%. The central bank said yesterday via its Weibo, or microblog account, that the recent spike is being driven by factors such as fiscal spending and year-end expenditures.
Analysts said the central bank's Thursday use of so-called short-term liquidity operations may also have a limited impact because these lending facilities will mature by the end of the year.
The PBOC introduced the SLOs as a new tool to adjust the supply of funds in the money market in January, in addition to its routine twice-a-week publicly announced open market operations.
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BEIJING, Dec. 20 (Xinhua) -- Chinese shares slumped more than 2 percent on Friday, as concerns over tight liquidity persist despite intervention from the central bank.
The benchmark Shanghai Composite Index tumbled 2.02 percent, or 43 points, to finish at 2,084.79. The Shenzhen Component Index fell 2.22 percent, or 180.99 points, to finish at 7,966.72.
Total turnover on Shanghai and Shenzhen bourses rose to 153.55 billion yuan (25.09 billion U.S. dollars) from 140.06 billion yuan on the previous trading day.
The central bank announced late Thursday that it had injected liquidity into the market via short-term operations "recently" because of growing concerns of tight money supply toward the end of the year.
Despite the action, the interbank bond repurchase rates climbed on Friday with the rate for one-day products rising 12 basis points to 3.95 percent, and the seven-day rate increasing 100 basis points to 7.6 percent.
The Shanghai Interbank Offered Rate (Shibor), which shows the cost of interbank borrowing, also gained, with the overnight Shibor rising 8.1 basis points to 3.93 percent. Seven day and two week rates both increased sharply to 7.65 percent and 7 percent respectively.
The suspension of reverse repurchase operations by the central bank has also added to worries of a possible liquidity crunch as seen in June. The weak performance of the markets was also a response to the U.S. Federal Reserve's decision to start tapering its quantitative easing by reducing its asset-purchasing program from 85 billion dollars to 75 billion dollars beginning from January.
The China CITIC bank slumped 8.67 percent to 3.58 yuan per share. China Construction Bank fell 6.16 percent to 3.96 yuan, while the Inner Mongolia Baotou Steel Rare-earth Hi-tech Co., Ltd. dived 9.49 percent to 21.74 yuan.
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