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The sharp spike in SHIBOR that’s been grabbing headlines is a key indicator that the liquidity situation is deteriorating in China.And while that’s expected with the People’s Bank of China’s strategy of raising reserve requirements, it has been a little overboard.
From Morgan Stanley:
Compounded with the surge in liquidity demand before the week-long Lunar New Year holiday (February 3-9), market liquidity became very tight last week, as reflected by the surge in SHIBOR rates, led by the 478bp increase in the 7-day rate.
Analysts Steven Zhang and Qing Wang say that the nature of China’s re-launch of its reverse repo program to help with the liquidity problem shows that some banks are definitely having problems.
From Morgan Stanley (emphasis ours):
In our view, the re-launch of reverse repos last Thursday after their suspension for two years indicates that the severity of liquidity tightness might be higher than expected. In addition, what’s different this time is that the PBoC conducted the reserve repos with chosen banks instead of through open market operations. This suggests to us that besides the systematic liquidity tightness, some banks may be more vulnerable to continued escalation of tightening measures from the PBoC to control inflation.
What’s worrying is this is only the beginning of the tightening cycle for China, and already some of its banks seem in ill shape to handle it. That hard landing theory may have a little more ground to stand on if this is true.