China Conducts Emergency Reverse Repos To Calm Money Market Liquidity, Fails, As 2 Week SHIBOR Hits Record 8.6%

Tyler Durden's picture

Yesterday, when we pointed out the surge in the overnight SHIBOR, many were quick to dismiss this dramatic contraction in liquidity, because it happened to be a replica of a comparable such move before the Lunar New Year which did not end result in an end of the world type event. And while many ignored this very disturbing interbank lending lock up sign, there was someone who did not: the PBoC. According to Market News, "The People's Bank of China has conducted reserve bond repurchase agreements with at least one bank in a bid to ease liquidity conditions, local media reports said Tuesday. The National Business Daily cited an interbank market trader as
saying the central bank injected at least CNY50 billion into the China
Construction Bank on Monday via a 14-day reverse repo at 7.5%." Which incidentally is how it should be done: want to get emergency funding from your central bank? Sure. But it will cost you a whopping 7.5%. Now the question of whether CNY50 billion is enough (and in related news, the USDCNY parity just dropped to a fresh all time record low of 6.4690) is a different matter altogether: we expect to get today's updated SHIBOR fixing any second, and have a feeling more reverse repos will have to be injected before this is over.


The official China Securities Journal also reported on reverse repos of CNY50 billion but said that two banks were involved. It did not identify the participating lenders.

Monday's reserve requirement hike -- the sixth of the year -- has sent money market rates surging to levels not seen since the pre-Chinese New Year holiday scramble for funds in late January.

Let's hope that like last time, and every time there is a liquidity crunch, the central bank cartel can step in and save the day. After all, all it takes for the global ponzi to get the See No Forest treatment is just one failure.

Overnight SHIBOR yesterday...

And today:

1 Week SHIBOR yesterday:

And today:

But more important is the terming out of the liquidity freeze, with the biggest overnight move affecting the 2 week SHIBOR which just an all time record:

And a longer view - note the record

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HungrySeagull's picture

I don't understand this. China is supposed to be what? 6 Trillion Surplus as a Nation this year? Where is the money?

holdbuysell's picture

As has been discussed here before, it appears that the country is loaded to the gills with debt.

This may be an early warning sign.

Fedophile's picture

An inverted yield curve is a strong indicator of a future recession.

See the FRBNY publication 'The Yield Curve as a Predictor of U.S. Recessions' by Arturo Estrella and Frederic S. Mishkin

Re-Discovery's picture

Fred Mishkin . . . uhhh . . . yeah.  Except he seems to have missed the biggest recession of his lifetime.  Completely AWOL in 2008.  Mishkin 'Seal of Approval" for the Icelandic banking system.

Fedophile's picture

Had he read his own paper in 2007 he would have seen an inverted US yield curve.

His subsequent stupidity only proves his own delusion and not his prior work invalid.

HistorySquared's picture

The yield curve is an excellent long term indicator that historically has forecasted  recessions and currency prices (note : Indian and Brazillian yield curves recently inverted)

The 1 week - 1 month forward curve inverstion has predicted Currency Crashes

"Predictable Changes in Yields and Forward Rates"

We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.
The indicator looks for a downward sloping yield curve using a 7 day vs 30 day interbank interest rate.


  • “To sum up, our indicator is able to identify both speculative pressures that were successfully combated by the central bank in the pre-crisis period, and starts signaling the impending crisis six days before the official announcement of the devaluation.”


  • 1997 Czech Republic crisis
    • Tight peg against DM and USD with bands of +0.5% to 7.5% until crises in May 1997
    • Trade Balance turned negative in 1996
    • Economic growth slowed
    • Upward Trend in currency from 1992-1997
    • Heavy central bank intervention in week before crises kept it within the band
    • Indicator was positive since early January 1997, accelerating in the week before the crises
    • Simple rate of change performed well to determine the threshold
    • Performed ok 5 days out for the Czech Republic but not for DM
Of course, nothing works 100% of the time. 


Debt Rolling's picture

1) There is a big difference between liquid cash and assets.

2) The banks' problems are usually their business (until it becomes too grave and the government is forced to the rescue).

quintago's picture

in real estate there is a rich, cash poor.

in China there is a similar saying... oh shit

ZerOhead's picture

Looks like the SHIBOR is about to hit the fan!

tmosley's picture

Of course it's going to fail.  They are trying to stop the flood by unplugging the drain and turning off the faucet while the storm of the century rages outside, and they don't have a roof!

The reverse repos might drain some liquidity, but there is no way it will be enough to make up for the flood of yuan entering the system via their dollar peg (where they print yuan for every dollar that comes into China, then sits on the dollar).  The storm, of course, is our little printing escapade we are on right now.  The faucet is the interest rate, which they are turning off by raising.

cougar_w's picture

ty for the explanation, that helped explain some things.

Charles Wilson's picture

Please write more on this.  If true, it is one more piece of the puzzle.  I have stated often  enough that we are at war with someone economically.  Bernanke may still be certifiably insane but in this game of "Chicken" Bernanke still has the pedal to the metal in his '57 Buick.

He is wagering Western Civilization against the East and he will not blink.  Bernanke is no Reagan but the methods may yet correlate:

"If you do not revalue the Chinese currency, we will unleash a catastrophe that you cannot  comprehend.  The Soviets foundered because they could not keep up.  You can't either.  Revalue or face the consequences."

I'm not too thrilled at the analysis, if true, but it may be one of only one or two rational reasons to do what the Fed is doing.



CrazyCooter's picture

I am not prepared to expand further on this thought, but somewhere along the way it occured to me that the US bankrupted the soviets because we had the petro-dollar. How might that have turned out different if the world ran on petro-rubles?

I really can't say I understand what the elite are doing, but it is obvious dollars are not what you want to denominate your savings in ... I prefer something that isn't readily debaseable ...



Urban Redneck's picture

I don't think currency revaluationmeans what Bernanke thinks it means.

Currency revaluation hurts American consumers by raising the price of everything we import from China, since margins are razor-thin now, prices would have to rise immediately.

On a slightly longer timeline, China's input import costs for energy and raw materials would decrease, the benefit most likely accruing to Chinese producer margins, and not US consumer prices.

I think USDCNY is more a game of M.A.D. - either side could wreak havoc on the other.  However, the US is the debtor, one of increasingly many to China, and the Chinese have more options due to the large inventory of F/X and commodity reserves and manufacturing capacity.

I think Bernanke is just trying to keep all of his member banks afloat as long possible.

Charles Wilson's picture

Yes, good answers and thank you for all the input, even the Junkers.

Cooter: You state: "it is obvious dollars are not what you want to denominate your savings in".

Exactly, and it is here that Bernanke's Keynesian megalomania shows. "Savings" <=> "Hoarding" and this is unacceptable - "Spend it all NOW".  A similar vein is found in his view of Monetarism.  Many trash Monetarism but Bernanke AGREED that Friedman and Schwartz were correct about their analysis of Great Depression 1 and indeed he based his "corrections" to the Banking Collapse of 1988 by providing immediate cash reserves to banks in trouble as Schwartz and Friedman advocated.

However, the curious part of this Chapter in the History of Monetarist thought is that, while eveyone ackowleges that Monetarism "works" in great expansions and contractions of the money supply, Friedman always advocated small, measured growth year over year.  "You could manage it with a computer", Friedman always said.  You cannot "micromanage" the money supply and, again, Bernanke's Keynesian predominance shows - "We know better and can manage much better than the peasants 'cause we're so much better than they are..."  Here is where the criticism of Monetarism usually comes.  The results: Huge swings in Money Supply measures and resulting economic uncertainty that DID NOT HAVE TO OCCUR.

Urban Redneck: Friedman also chuckled everytime someone would bring up "Trade Imbalances" and currency manipulation shenanigans. "We get the goods and services they produce for the price of paper and ink", he said on 'Wall Street Week' a long time ago.  "Where do they put their dollars...Under mattresses?"

Finally, I agree that the massive devaluation is destructive to the U.S. and World Trade but if you believe your job is micromanage and make economic decisions that would be made by the free individual otherwise, you will do so.  This is Bernanke at his worst and most dangerous.  Especially if your Second Mandate is to bring down a President who was obviously incapable and incompetant.  Dangerous, even.  But that's a conversation for another day.


Thanks again all,



qussl3's picture

SHIBOR spike indicate liquidity crunch.

Banks are doing the repo, PBOC is giving them liquidity ie cash.

The PBOC isnt draining its pumping.

This isnt about inflation its about banks having short term funding issues.

Those that know better please correct me if wrong thanks.

S-hai High's picture

exactly this.

New hike in RRR came into effect yesterday; and squeezed short-term funding a little too hard - hence the spike in shibor.

PBoC performed repo to ease liquidity conditions.. although, of course - the overall point the other poster made is true regarding a runaway inflation problem in the country.

tmosley's picture

Thanks for the correction.  I don't speak crazy very well when I am tired.

I think we can safely say "buh-bye" to China at this point.  The only thing that can save them at this point is dumping treasuries, which doesn't seem to be in the cards for unknown reasons.

qussl3's picture

Pressing sell = nuke up ass.

FischerBlack's picture

Not sure what you're getting at. Tyler reports a *reverse* repo by the central bank. So there's nothing liquidity draining about it. It's a liquidity injection. The bank sells some fixed income asset to the central bank while agreeing to buy it back at some future date. Spikes in interbank overnight rates tend to indicate lack of liquidity rather than excess.

Or maybe you had some other point I'm missing.

tmosley's picture

You are correct, it was late, and I misread it, apparently.  Trying too hard to think with some amount of logic, I guess.

So they are instead adding to the flood by turning up the faucet.

lol, this won't end well.

EB's picture

If A conducts a repo with B, B can be said to have conducted a reverse repo with A.  It's simply a matter of perspective.  The Federal Reserve reports all transactions based on the other party's perspective, so a Fed repo is always liquidity adding and a Fed reverse repo is always liquidity draining.  This convention is not necessarily used by other CBs. 

davepowers's picture

indeed, it's maddening trying to figure out which way the money is flowing in these deals when they all use 'reverse repo' and 'repo' interchangeably.

Sort of like trying to figure out which kind of inflation Mish is talking about when he refers to 'inflation' to cover either credit, price, and monetary inflation.

scratch_and_sniff's picture

umm, thats up there, time for the heavy gear. No one mentioned it yesterday though, it might get a mention today somewhere.

hound dog vigilante's picture

Yet another tell. The system continues to unravel.

Bazooka's picture

Hi Tyler,

Do you ever sleep? I do very much  appreciate your site! Or do you have a 2nd and 3rd shift staff?

qussl3's picture

Oz is so fucked lol.

JimRogers's picture

Best title in zerohedge history! 

KUTGW Teeds.

The Fonz's picture

WTG on the IOTTMCO Acronyms!

BORT's picture

The Liquidity is in the trees of the Sino-Forest, Bitchez

qussl3's picture

Ta ma de, ou mei cha bu duo wan le, hai kan zhe li ga mah.


disabledvet's picture

actually, just for being wrong on rally Monday i give you this instead:

johngaltfla's picture

Better call the Primary Dealers. They are the experts on "fixing" er, "manipulating" er, creating good looking rates despite market forces.

Just ask LIBOR and EURIBOR...

qussl3's picture

Wouldnt it be epic if as China is being billed to be bailing out the EU banks, they have a bank run of their own?

Mitch Comestein's picture

Tyler:  So for a comparison.  What was the SHIBOR high print in 08/09?  I tried looking myself with no success.

MacGruber's picture

Is that a Shibor in your pants or are you just happy to see me? To the moon Alice!

snowball777's picture

They say as the tsunami approaches shore, the wavelength shortens and the amplitude rises much higher than that of the initial wave...

Caviar Emptor's picture

Even dollar liquidity parameters not totally calm since last week.

The Fonz's picture

Uh, wait a second am I reading this right? The Yuan gained 5% of its value overnight? If that is so why are all the asian stock indexs running green? Shouldn't they be running red?

qussl3's picture

I think you missed a decimal.

The Fonz's picture

appologies and thank you :)

twinshot's picture

What has gone unmentioned here is the State Administration of Foreign Exchange (SAFE). They have recently implemented very strict controls on all foreign currency coming into China. You now need need to pony up copies of all invoices or contracts for all foreign cash coming in depending on which SAFE city jurusidiction you are in. It is making business nigh on impossible in some cities as the banks will not release your overseas earnings until you give them every copy of every USD 100 invoice. For some cities it is only for incoming funds over USD 500K so they have a cack-handed approach to it as they each interpret the rule differently. Essentially though, this is strangling incoming liquidity all in the name of preventing "hot money" flowing in - naturally it is the legitimate businesses that are suffering. At least a part of this liquidity squeeze is their own darn fault.

snowball777's picture

Interesting boots on the ground info, t-shot. This is exactly the kind of idiot maneuver one can expect from a truly centrally-planned economy and exactly the kind of protectionism that really kicked off the great depression in the 30s. Let's hope they get a clue before it's too late.

...cack?! aussie? ;)

twinshot's picture

Antipodean yes. Honestly having dealt with many of these various government agencies I am constantly surprised the Chinese can coordinate anything. There is "central planning" but this is dominated by local corruption and chaos.

trainrobbery's picture

What the hell happened in Jan 2011?