BEIJING - For the second time in six months, a shortage of cash in one corner of China’s banking industry has stirred anxiety in financial markets.
The interest rate charged on loans from one bank to another spiked to nearly 9 percent this week, well above the usual 2 percent to 3 percent. That came even after the Chinese central bank injected $50 billion of extra credit into the interbank market last week.
The rate spike doesn’t apply directly to borrowing by companies or households. But it could have repercussions for the world’s second-largest economy if the cash shortage forces banks to restrain commercial lending.
In June, money markets suffered an even bigger rate spike after the central bank tried to rein in a credit boom. Interest paid by banks for overnight loans soared to a record 13.4 percent.
The People’s Bank of China auctioned $4.8 billion of seven-day reverse repurchase agreements at ayield of 4.1 percent Tuesday, after the $50 billion of targeted cash injections failed to hold borrowing costs down. Rising interest rates in the world’s second-largest economy pose a risk to growth, which economists predict will be the slowest in 14 years in 2013, and heighten the risk of defaults.
“The central bank is under pressure, so it conducted the operations Tuesday, which was unexpected by us,” said Xu Hanfei, an analyst at Guotai Junan Securities Co. in Shanghai. “The tight cash situation is expected to ease toward year-end.”
Banks might be forced to reduce lending temporarily if they cannot raise enough cash to satisfy regulatory minimum requirements, though that appears unlikely. That might affect credit to companies and households.The central bank already is taking action to prevent that.
Citic Securities Co. and Guotai Junan, two of China’s three biggest securities firms by assets, predicted that the central bank would refrain from using open-market operations to inject funds this week. Haitong Securities Co., which ranks second, forecast funds would be made available to stop interest rates from climbing too high. The last such cash injection was Dec. 3, when the monetary authority added about $3 billion.
“The PBOC won’t change its neutral-to-tight monetary policy, but saving the market looks to be the only option now,” Wei Fengchun, head of macro strategy at Shenzhen based Bosera Asset Management Co., wrote in a note Tuesday. The relatively tight stance of the People’s Bank of China along with increased cash demand at the year’s end, delays to the transfer of fiscal deposits and the scaling back of U.S. monetary stimulus all contributed to the recent spike in rates, Wei said.
China Coal Energy Co. canceled a $165 million sale of seven-year bonds that was scheduled for Tuesday because of market turbulence, according to a statement posted on the website of Shanghai Clearing House.
“After the July liquidity squeeze and the current tightness, market participants will be more cautious, and hence money-market rates could remain elevated until the Chinese New Year break at the end of January,” said Frances Cheung, Hong Kong-based head of Asian rates at Credit Agricole CIB. The People’s Bank of China is likely to conduct reverse repossessions again Thursday as Tuesday’s amount wasn’t big and the tenor doesn’t cover the year end, she said.
“Higher rates should add downside risk on the Chinese economy in 2014,” Citigroup Inc. economists led by Minggao Shen wrote in a note Tuesday. Gross domestic product is forecast to increase 7.6 percent in 2013 and 7.5 percent next year, based on the median estimates in Bloomberg surveys of economists.
China’s state-owned banking industry is the world’s strongest financially. It avoided the mortgage-related turmoil that battered Western institutions. The four biggest commercial lenders have total assets in excess of $10 trillion. Information for this article was contributed by staff members of Bloomberg News and The Associated Press.
Business, Pages 27 on 12/25/2013