China's cash squeeze caused by shadow banking: Xinhua

SHANGHAI Sun Jun 23, 2013 7:08am EDT

Chinese 100 yuan banknotes are seen in this picture illustration taken in Beijing May 7, 2013. REUTERS/Petar Kujundzic

Chinese 100 yuan banknotes are seen in this picture illustration taken in Beijing May 7, 2013.

Credit: Reuters/Petar Kujundzic

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SHANGHAI (Reuters) - There is ample liquidity in China and the latest spike in money market rates was a result of market distortions caused by widespread speculative trading and shadow financing, state news agency Xinhua said in a commentary on Sunday.

China's central bank faced down the country's cash-hungry banks on Friday, letting interest rates again spike to extraordinary levels of some 25 percent for some banks as it stepped up the pressure to contain rampant informal lending.

Comments from Xinhua confirm analysts' suspicions that the central bank's funding squeeze is aimed at reducing non-bank lending, or shadow banking, which has boomed in recent years.

The cash crunch engineered by the central bank was intended as a warning to over-extended banks but has also fed fears that a miscalculation could trigger a full-blown crisis.

Xinhua said there was sufficient liquidity in the market, with data showing broad M2 money supply rose 15.8 percent in May from a year earlier, and the total social financing aggregate, a broad measure of liquidity in the economy, was more than 1 trillion yuan.

"The banks are short on cash, the stock market and small- and medium-sized enterprises are short on cash, but there is ample money supply in the market," it said in the commentary.

"Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread."

These factors showed that the liquidity crunch was not caused by a shortage of funds but by structural issues that kept money from reaching the real economy, it said.

On Sunday China's central bank reiterated that it was committed to prudent monetary policy and moderate credit growth.

It will use multiple monetary policy tools to enhance liquidity management so money will better serve the real economy and support economic restructuring, it said in its second-quarter report.

Overall financing in the Chinese economy increased 52 percent in the first five months of 2013 from the corresponding period last year, which analysts say was led by a surge in shadow banking activity and wealth management products that promised investors high returns.

The central bank's refusal to inject cash into the system, despite a spike in short-term lending rates, suggests its monetary policy has begun to shift from one focusing on quantity to quality of market liquidity, Xinhua said.

China's cabinet has vowed to ensure credit growth supports the real economy and to control the flow of new money into industries struggling with overcapacity.

(Editing by Clarence Fernandez and Greg Mahlich)

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Comments (2)
Whatsgoingon wrote:
“These factors showed that the liquidity crunch was not caused by a shortage of funds but by structural issues that kept money from reaching the real economy, it said.” Don’t we have the same issue here in the states?

Jun 24, 2013 12:39pm EDT  --  Report as abuse
dareconomics wrote:
The red line in chart above, B0, is the 7 day repurchase rate. The market has calmed down since the latest spike late last week, but funding remains tight in China. This is not a short-term phenomenon either as all of the longer term rates have risen since early May.

The PBOC has a conundrum on its hands. The bank is refusing to add liquidity in the hopes that it will be able to control the huge credit expansion from the shadow banking system, but there are consequences to this action or inaction, technically speaking. The lack of money will stop credit from expanding, but bad loans will also stop being rolled over creating many defaults across the system and so on.

Ultimately, the PBOC will blink, but it may be too late by then. Regardless, it will be a rough ride over between now and the end of the quarter.

Full post with charts, images and links:

http://dareconomics.wordpress.com/2013/06/24/around-the-globe-06-24-2013/

Jun 24, 2013 12:58pm EDT  --  Report as abuse
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