A squeeze on credit in China that is rattling world markets appeared to ease slightly as a key interbank interest rate edged lower, prompting speculation the country’s central bank may have intervened to calm ravaged nerves.
Analysts say the spike in the rates that banks charge each other for short-term borrowing is part of a deliberate, belated effort to trim off-balance-sheet lending that could threaten the financial stability of the world’s second largest economy.
Coming at a time of deepening uncertainty over a slowdown in China’s growth, though, the credit crunch is having an outsized impact on markets far beyond the Chinese mainland that already were jittery over U.S. plans for “tapering,” or scaling back massive monetary easing as conditions in the U.S. improve.
But interbank lending rates play a less important role in China, where the one-year deposit benchmark rate is the key policy tool, than in the U.S. and Europe, says Yi Xianrong, an economist at the China Academy of Social Sciences in Beijing.
“If this same thing happened in Europe and America, the problem would be bigger, but in China it’s not really a problem,” Yi said.
The shift to a new generation of Chinese leaders appears to have freshened Beijing’s resolve to tackle intractable hazards such as looming debts that are not reported on bank balance sheets but lurk throughout the country’s murky, still developing financial system.
In a recent analysis, Moody’s Investors Service noted that China’s central government finances remain strong, but that rapid credit growth and liabilities at the local level pose a threat to growth.
The People’s Bank of China generally does not comment on its market activities. The interbank lending rate fell from 11.65 per cent to about 10.21 per cent by midday Friday, according to the National Interbank Funding Center in Shanghai.
The rate spiked at over 13 per cent on Thursday, while charts for other interbank short-term rates show an abrupt, nearly 90 degree rise in recent days, from below 5 per cent.
“It’s not just a short-term thing. It’s an intentional policy to try to crack down on the high amount of leverage in the economy,” said Rob Subbaraman, chief Asia economist for Nomura, in Hong Kong.
The worries over China have accentuated volatility already prevailing in the markets.
Share prices fell overnight in the U.S. and were mostly lower Friday in Asia, while the mainland’s main benchmark, the Shanghai Composite Index, fell 0.5 per cent to 2,073.09.
The short-term liquidity squeeze may take a bite out of already slowing lending. But the global economy and even China’s big, cash-rich state banks are unlikely to be severely affected.
China’s growth is still likely to remain in the 7 per cent to 8 per cent realm, robust by most standards, though global markets are still adjusting to that reality, says Daniel Martin, an economist with Capital Economics.
“We don’t believe in the China crash story,” he said.
The Bank of China, one of China’s big four state-owned commercial banks, issued a statement late Thursday denying media reports of rumours it had defaulted on some repayments, contributing to the spike in interbank rates. The bank said that as of Thursday evening all of its payments due had cleared.
China’s biggest bank, Industrial and Commercial Bank of China, likewise issued a statement denying it was facing a liquidity crisis.
Still, the lack of cash will likely slow lending by even those big banks. And it is a problem for smaller Chinese banks and trust companies, private businesses and even smaller state-owned enterprises that may have built up significant debt in the easy money years since recession-fighting stimulus was unleashed into the economy in 2009.
Bank analysts do see risks for meeting repayment obligations for popular wealth management products that are not subject to government interest rate controls and thus offer higher returns than usual bank deposits.
More than 1.5 trillion yuan ($245 billion) of such assets are expected to mature in the last 10 days of June. That will push up demand for cash and thus keep rates high, Fitch Ratings analyst Charlene Chu said in a report Friday.
The share of wealth management products in total deposits ranges from about 10 per cent for state-owned banks to up to 30 per cent for smaller lenders, she estimates.
“The Chinese authorities have the ability to address the liquidity pressures, but their hands-off response to date reflects in part a new strategy to rein in the growth of shadow financing,” said Chu, who has been warning for years of the risks from off-balance sheet debts.
The closing of the credit spigot could have a domino effect, warns Zhou Dewen, chairman of the Wenzhou SME Development Association, which represents private businesses in Wenzhou, a bastion of entrepreneurship in southeastern China.
“The rate of bad loans has kept rising and liquidity is getting even tighter. This capital chain reaction could break some companies, and it will get even worse in the second half of the year,” Zhou said in a phone interview.
But other experts see the move to crack down on excess leverage as an overdue and necessary effort to address structural problems in China’s state-dominated economy.
Since China’s big, state-owned banks are unwilling to lend to any but their biggest, most influential clients, the vast majority of smaller businesses must rely on so-called shadow banking, which in China includes underground banking, trust products and wealth management products, among other activities.
“Recently, shadow banking has been difficult to deal with,” said Yi of the Chinese Academy of Social Sciences, explaining that the central bank mainly is working to curb speculative dealings.
“The central bank does not really need to do anything,” he said. “If I were the central bank, I would more heavily punish the rampant shadow banking activity among small and medium banks. In the short term, there is no need to make too large a move.”
Researchers Fu Ting in Shanghai and Zhao Liang, Yu Bing and Flora Ji in Beijing contributed to this report. Kurtenbach reported from Tokyo.