Beijing moves to ease liquidity crunch
But the focus is rapidly turning to how China's financial system will cope with several short-term debt milestones in coming weeks, and whether the government's desire to clamp down on unrestrained lending would see economic growth slow significantly more than expected.
"Persistently high short-term rates will further dampen China's already sluggish real economic activities," said ANZ chief China economist Liu Ligang. "While the new government appears to be able to tolerate low growth, it will have to honour its growth target of 7.5 per cent set this year. Otherwise, it runs the risk of losing its credibility."
In a statement released after a routine quarterly board meeting chaired by governor Zhou Xiaochuan on Sunday, the bank made no direct reference to the surge in borrowing costs for banks, but instead repeated commitments to maintaining a prudent monetary policy.
But the addition of the subtle phrasing of "fine-tuning" for the first time since September was interpreted by most as a positive signal.
Overnight interbank rates spiked alarmingly to a record 12.9 per cent last week, sparking fears of a credit crunch similar to the one that led to the global financial crisis. By Monday, the overnight rate had eased to 6.5 per cent, while the benchmark one-week rate was at 7.3 per cent.
"The worst of the liquidity crunch may now be behind us, but we believe interbank rates will stay at elevated levels until at least the second week of July," said Stephen Green, an analyst at Standard Chartered.
Despite reports of direct intervention from the central bank, it remains unclear what, if anything, the PBOC has done to bring interbank rates down. "The government is managing these demands as best it can, but there could be surprises," said Anne Stevenson-Yang, research director at J Capital Research, who said WMPs were essentially derivatives that in many cases cranked high-risk debt into short-term securities at high interest rates.
Underlying the products are property and infrastructure projects that would not produce a return for many years, yet WMP maturities are invariably short-term.
"What makes the current crisis particularly dangerous is that it's not a liquidity crisis: it's a debt crisis. The WMPs have actually served to delay a crisis," she said.
But Mr Green said he believed the central bank remained firmly in control, and events of the past month had been a deliberate policy to rectify a banking system flooded with cheap credit. "Comparisons with the Lehman-related freezing of interbank liquidity in the US in 2008 are unhelpful - this is not a run on liquidity caused by a credit event," he said. "Instead, we believe it is a deliberate policy meant to de-risk the interbank system."
Frequently Asked Questions about this Article…
The liquidity crunch was driven by a sudden spike in short-term interbank borrowing costs as banks scrambled for cash. Analysts point to a build-up of risky short-term financing — including wealth management products (WMPs) that repackaged high‑risk debt — and a broader effort by regulators to rein in unrestrained, cheap credit in the banking system.
Overnight interbank rates spiked to a record 12.9% at the peak of the stress, then eased to about 6.5% by the following Monday. The benchmark one‑week interbank rate was reported around 7.3% as markets calmed somewhat.
WMPs are often structured products that, according to the article, acted like derivatives by turning higher‑risk debt into short‑term securities. They are typically backed by long‑dated property and infrastructure projects that won’t produce returns for years, yet the WMPs themselves mature quickly — creating mismatches that can amplify liquidity and debt risks for banks and investors.
The PBOC repeated its commitment to a prudent monetary policy and for the first time used the phrase “appropriately fine‑tune,” which analysts read as a positive signal. However, the article says it’s unclear exactly what direct measures the PBOC took; some analysts believe the central bank is managing the situation while aiming to de‑risk the system rather than simply flood it with cheap credit.
Analysts in the article caution against simple comparisons to 2008. One expert warned the problem is less about a classic liquidity run and more about a debt problem linked to WMPs, while another argued recent actions look like deliberate policy to de‑risk a system long fed by cheap credit rather than a Lehman‑style freeze triggered by a single credit event.
Persistently elevated short‑term rates can dampen already sluggish real economic activity, potentially slowing growth further. The article notes concerns that the government still needs to meet its 7.5% growth target, so prolonged tightening could affect property, infrastructure and corporate borrowers — sectors that matter to many investors exposed to Chinese assets.
One analyst cited in the article expected interbank rates to stay at elevated levels at least until the second week of July, suggesting short‑term volatility could persist while the system stabilises.
Investors should watch short‑term interbank rates (overnight and one‑week), PBOC communications and wording (for signs of policy fine‑tuning or intervention), stress in WMPs and related short‑term markets, and upcoming short‑term debt maturities or milestones that could test the system’s liquidity.
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