The People’s Bank of China infused as much as 50 billion yuan ($8.2 billion) into the economy on Thursday, the Bank of Communications’ chief China strategist told BloombergChina’s benchmark rate Shanghai Interbank Offered Rate (SHIBOR) spiked overnight to a record high of 13.44% today from 7.66% on Wednesday.

The PBOC supplied cash to only one lender through “targeted liquidity operations”. Reports said that more Chinese banks are in talks with the central bank to obtain financing. Chinese banks use Shibor rates to lend money to each other. The severe cash crunch comes at a time when China’s economic growth is slowing. HSBC flash PMI for China fell to 48.3 in June, compared to the consensus estimate of 49.1.


The cash squeeze started about two weeks ago, sending benchmark interest rates to their record levels. The continued cash crunch has forced many small banks in China to alter their lending terms. The tighter liquidity could further push lending rates. The 7-day repo rate climbed to two-year highs of 8.20 percent on Wednesday. Yesterday, China’s interbank market was open for an extra hour to help banks that have failed to obtain sufficient short-term funding.

China Repo Rate Squeeze



China Yield

The Worst Case Scenario

In the worst case scenario, lenders with shaky balance sheets and high exposure could default. The vulnerability could potentially take other banks into its grip, initiating runs on deposits by customers. So far, the Chinese central bank has officially maintained inaction.

Analysts say that the People’s Bank of China’s inaction towards the deepening cash crisis is aimed at reining in small Chinese banks. Small banks in the country have tapped into the interbank market to obtain low cost funds that they use for off-balance sheet activities, investments in high-return bonds and shadow banking.

These banks have launched several so-called wealth management products that promise higher and steady returns compared to saving deposits. According to Fitch Ratings, these wealth management products are worth about $2.1 trillion as of March.

BAML on China

Bank of America Merrill Lynch said in a research report that though the rising interbank lending rates will punish reckless lenders in China, it can disrupt the financial markets as well as broader Chinese economy if the cash crunch last too long. BAML analyst Winnie Wu said that a prolonged liquidity squeeze will increase the cost of capital in Chinese economy, in terms of lending rates, bond rates and discounted bill yields. Private sector enterprises that have very few sources of funding could get into serious trouble.

BAML sees a dramatic deleveraging and severe credit crunch in the shadow banking markets due to rising risks and high short-term funding costs. It could help eliminate shadow banking from the economy, but will prove costly for bank earnings, GDP growth and employment.