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As China’s Banking System Freezes, SHIBOR Tumbles To Lowest In A Decade

As China’s Banking System Freezes, SHIBOR Tumbles To Lowest In A Decade

One trading day after we reported that China was “Hit By “Significant Banking Stress” as SHIBOR tumbled to recession levels, and less than a week after we warned that China’s interbank market was freezing up in the aftermath of the Baoshang Bank collapse and subsequent seizure, which led to a surge in interbank repo rates and a spike in Negotiable Certificates of Deposit (NCD) rates…

… China’s banking stress has taken a turn for the worse, and on Monday, China’s overnight repurchase rate dropped to its lowest level in nearly 10 years, after the central bank’s repeated liquidity injections to ease credit concerns in small-to-medium banks: The rate fell as much as 11 basis points to 0.9861% on Monday, before being fixed at exactly 1.000%.

Seeking to ease funding strains after the Baoshang collapse and to unfreeze the financial channels in the banking sector, the PBOC has been injecting cash into the financial system to soothe credit risk concerns in smaller banks following the seizure of Baoshang Bank, which sent shockwaves through China’s markets.

Also helping drive the rate lower is China’s move to allow brokerages to issue more debt, said ANZ Bank’s Zhaopeng Xing, quoted by Bloomberg. As a result, at least five brokerages had their short-term debt quotas increased by the People’s Bank of China in recent days, according to filings.

The improved access to shorter-term debt will cut costs for brokerages compared with alternative funding sources such as bond issuance. The flipside, of course, is that the lower overnight funding rates drop, the greater the investor skepticism that China’s massive, $40 trillion financial system is doing ok, especially since the last time overnight funding rates were this low, the near-collapse of the global financial system was still fresh and the S&P was trading in the triple-digits.

 …click on the above link to read the rest of the article…

China Hit By “Significant Banking Stress” As SHIBOR Plummets To Recession Levels

China Hit By “Significant Banking Stress” As SHIBOR Plummets To Recession Levels

It’s probably not a coincidence that just days after we reported that China’s interbank market was freezing up in the aftermath of the Baoshang Bank collapse and subsequent seizure, which led to a surge in interbank repo rates and a spike in Negotiable Certificates of Deposit (NCD) rates…

… that Beijing is doing everything in its power to keep liquidity flowing within the world’s largest, ~$40 trillion, financial system.

Case in point: China’s overnight SHIBOR lending rate tumbled overnight, sliding from 1.253%, and 1.924% a week ago, to just 1.11% today. This, as Commodore Research points out, marks the lowest level seen since June 12, 2015. 

In fact, the only other time this decade that SHIBOR rates fell to such a low level was back in 2015 (which was a period when China was likely undergoing a recession). Prior to 2015, the previous time that SHIBOR rates fell to 1.11% (or lower) was during the global financial crisis in 2008/2009.

As Commodore further notes, “there recently has remained talk of liquidity problems and banking fears in China (and these concerns have only grown since the Baoshang Bank failure in May). Low SHIBOR lending rates are supportive and accommodative in nature — but rates sitting at rare multi-year lows are likely an indication that China is facing significant banking stress at the moment.”

The report’s conclusion: “It is very rare for the overnight SHIBOR lending rate to be set as low as 1.11%.”

Meanwhile, as the world’s biggest financial time bomb ticks ever louder, traders and analysts are blissfully oblivious, focusing instead on central banks admitting that the recession is imminent and trying to spin how a world war with Iran would be bullish for stocks.

Meanwhile In China, Echoes Of Lehman As Interbank Market Freezes

Meanwhile In China, Echoes Of Lehman As Interbank Market Freezes

One month ago we wrote that in the aftermath of the shocking government May 24 seizure of Baoshang Bank – not shocking because the bank failed as most Chinese banks are insolvent if left to their own devices due to the real, and far higher levels of non-performing loans, but because the government allowed it to happen in the open, sparking fears of who comes next (and when) – the PBOC “finally panicked and injected a whopping net 250 billion yuan ($36 billion) into the financial system via open-market operations, as it fills what traders have dubbed a growing funding gap following the Baoshang failure.”

In retrospect, the PBOC failed to restore confidence in the stability of the Chinese banking system, and since then things have taken a turn for the far worse.

Yet with the world fixated on the U.S.-China (Mexico, Europe, etc) trade conflict, it is easy to understand why many have brushed aside the Baoshang harbinger and its consequences which have exposed giant fissures under China’s calm financial facade and are gradually freezing up the Chinese banking system.

As the WSJ writes, on Sunday, China’s securities regulator convened a meeting asking big brokerages and funds to support their smaller peers, according to a meeting summary circulated among industry participants Monday. The briefing cited rising risk aversion in money markets after defaults in the bond repurchase market.

The immediate reaction, which we pointed out back in May, is that some of the key interbank lending rates – those which banks rely on to obtain critical short-term funds – have moved sharply higher in recent weeks, with the 1 month repo soaring, and almost doubling over the past month.

 …click on the above link to read the rest of the article…

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