With everyone focused on the dead and buried Spanish interbank market (no, no STD is the healthiest bank in the world, for realz) is the real liquidity threat elsewhere... about half a world away to be precise? As the chart below shows, since June, the Chinese 1 Month Repo Rate has exploded and is not looking back.After trading in the 1.5% area for years, in the past 3 weeks, this has nearly tripled, and today traded at a 52-week (and close to all time) high of 3.8%. While for many Chinese banks, flush to the gills with money due to a tapering in consumer lending, this is not an issue, we are fairly confident there are various banks that will be impaired by this spike. And it certainly did not occur in a vacuum - there a distinct, and extremely levered, correlation between the CNY fixing and the 30 Day Repo. Should China go ahead and reval the renminbi, must we expect a complete lock up of the Chinese lending market? Perhaps with the Shanghai Composite hitting a fresh 52 week low today, at least someone is paying attention.
And correlating the RP1M and the CNY (ignore the wobble at the end: today's fixing was 6.833)
And lastly, the Shanghai composite in all its correction splendor - bet you haven't seen this much on bubblevision lately?
Here are some thoughts on this troubling development from BofA's TJ Bond and Ting Lu:
Short-term interbank rates climbed again in the week, despite the RMB166bn net money injection by the PBoC into the market. The seven-day repo rate rose 51bp, to 2.733% on 11 June. The one-year PBoC bill yield rose 8bp, to 2.0929% and threemonth PBoC bill yield was up 4bp, to 1.5704%. We think the renminbi market could be quite tight at present and volatilities in money rates could be expected ahead of the giant IPO of the Agriculture Bank of China in July. In addition, some people could be converting the renminbi into the dollar, as the market pushed back the expected timing of the renminbi appreciation. We reiterate our view that the rising PBoC bill rates are not signals for an imminent policy rate hike by the PBoC. We continue to expect the first rate hike in 4Q10.