ECONOMIST: 'Why The Chinese Central Bank Is Doing More Harm Than Good'

china cracked

Chinese interbank rates, or the rates at which banks lend to each other, have been rising since before the Dragon Boat festival earlier this month.

Moreover, the recent statement from the People’s Bank of China suggests that Chinese policymakers are willing to take on short term pain (spiking interbank rates and a liquidity squeeze) for longer term gains (more stable economic growth).

But Bank of America’s Ting Lu writes that the PBoC’s actions are actually doing more harm than good:

“The benefit of this liquidity squeeze is that banks that have behaved aggressively will be punished. With deleveraging on the part of smaller banks, China could reduce its risk of a systemic financial crisis. But the costs could be much higher. 

“First, all past efforts on developing Shibor as China’s new benchmark interest rates appear to have been wasted, in our view. Second, China’s financial liberalization including deregulation of interest rates will be significantly delayed. Third, big banks will partially regain their dominance which may not be efficient. Fourth, the brinkmanship displayed in dealing with these issues could be risky to China’s economic stability as policymakers may not have full control of the unfolding volatilities set off by the liquidity squeeze even though the squeeze is supposed to be temporary.” 

We have previously argued that overall interbank lending accounts for just 8% of total bank assets.

While spiking interbank rates aren’t’ isn’t as important to banks’ funding in China as they are in developed markets, and some of the recent rhetoric has been exaggerated, they do raise concerns about a cash crunch in China.

Analysts expect rates to stay elevated till July.

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