China's Credit Crunch Surprises Banks

In China yesterday, the interbank short-term interest rate jumped more than 200 basis points to a new record of 8% annual rate for loans of one month and less. The central bank (People's Bank of China - PBOC) has failed to follow through on a long-term policy of continuing to pump liquidity into the money market.

This has surprised banks which have been operating on the assumption that their credit expansion would be backed by money supply growth. It is not yet clear if this is a short-term adjustment or a longer term effort by the central bank to move to a less accomodative stance.

Follow up:

The overnight SHIBOR has been even more volatile in the past two weeks, as can be seen in the following graph.


From Chinese Securities Journal:
"The PBoC has made it clear in the past 10 days that overly-rapid credit expansion would not be accommodated and banks may have to scale down their credit growth plans and manage their own liquidity more prudently," said Wang Tao, chief China economist at UBS.

According to the Financial Times, credit had grown for the first five months at a 22-23% rate, up from 20% in 2012. Analysts quoted by FT indicated that the current action might be a "warning shot" (Na Liu, CNC Management) or that this may be the start of an effort to bring the credit growth rate down to "17 or 18%" (Wang Tao, UBS).

Wang Tao added a caution (FT):

“A liquidity crunch could happen unexpectedly somewhere. There could be a disorderly deleveraging in the interbank market.”

Many analysts have been projecting that China GDP could fall further from the 7.7% growth of the first quarter as the year progressed. Even without a financial crisis, as feared by analysts such as Viskas Shukla of Value Walk, the current credit market actions by PBOC could add pressure in the direction of reduced growth.