Chinese Interbank Liquidity Freeze Continues For Third Day, Will Persist As Inflation Expected To Rise Over 5.5%

Tyler Durden's picture

Three days ago we first reported that not all is well in the Chinese unsecured lending market as indicated by the country's interbank lending (SHIBOR) and repo rates. Subsequent to this, the PBoC attempted to restore some sense of normalcy to the market by conducting an emergency reverse repo for CNY50 billion on Monday night, which however as expected, did nothing at all. Alas, as a quick check of the most recent 1 week SHIBOR confirms, the liquidity lock up continues as the market is scrambling over the implications of what ongoing PBoC tightening implies for the market: 7 Day SHIBOR has once again risen overnight, this time by 51 bps, to a nosebleed inducing 8.83%, doubling from a week ago. This means that it costs banks nearly 10% to borrow one week cash from one another, and confirms there is absolutely no excess liquidity in the market. Looking forward, don't look for this number to go down notably any time soon: as Market News reports: "China's economic planning agency said Wednesday that efforts to control prices are having an impact, and that monetary conditions have improved, but warned that consumer inflation this month will likely exceed May's 5.5% y/y." Which means that the only recourse the PBoC will have after reporting a 5.5% CPI will be more RRR and Interest Rate hikes, which means more liquidity extraction, which means that the 1 week SHIBOR will likely pass 10% in the next few days. It is ironic that Europe's fate now rests with China whose interbank lending market is about 8 times more tight than the comparable one in Europe. Will Europe be forced to provide China with unsecured liquidity in exchange for China buying PIIGS bonds? Ah the wonders of a ponzi scheme.

One week SHIBOR:

And a quick glance at Chinese inflation:

The People's Bank of China raised the reserve requirement for a sixth time this year on Monday, despite signs of opposition from the banking sector, industry and some economists within the government.

A senior government source told Market News International earlier this week that the reserve ratio could continue climbing, dismissing complaints about a liquidity shortage and arguing that inflation remains a threat.

Concerns about resurgent price pressures have risen in response firstly to droughts, and now, severe flooding along China's Yangtze river. Food prices -- the swing factor in Chinese inflation trends -- rose 11.7% y/y in May, the highest so far this year, while weekly data compiled by the Ministry of Commerce suggests pork and egg prices are climbing rapidly.

The NDRC acknowledged that pork prices could continue rising in the months ahead, but said the impact of natural disasters will be only limited and that this summer's grain harvest is expected to be a good one.

"There is a very small likelihood of rapid rises in food prices," the NDRC said.

Although China's battle against inflation is lasting longer than was expected at the start of this year, the NDRC continues to maintain that price pressures will ease in the second half of the year.

"Due to rapid decline in carry-over effects in the second half of the year and new factors being continuously curbed, the y/y CPI growth will moderate in the second half and the full-year prices will be within a controllable range," it said.

The government is still expected to raise benchmark interest rates for what would be a fifth time in the current cycle at the end of this month or in early July, some analysts believe.

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Cassandra Syndrome's picture

China in 2008 Western World crash mode, now there's a Black Swan.

qussl3's picture

Cant keep fucking around with the RR anymore, PBOC has no choice but to raise rates.

Wonder how long Superman Stevens can keep jawing up the AUD.

ivana's picture

looking at AUD/YEN , considering yen repatriation ... really miracle.

Hope ZH will one day investigate and inform us with truth behind this scam.

Remember the "power" of powerz - AUD/YEN trade from March 15 till April 10th

sheep92's picture

No choice?

They can do whatever they want.  Why would you think they are going to intentionally crash their banking system ?  Just so doomers on ZH can get rich ?

dream on.

dcb's picture

wait, they have high inflation, therefore according to the bank of england more Qe i called for. the chinese leadership in regards to ecnomics certainly takes better care of their people than ours does.

SheepDog-One's picture

The Chinese and Russian govt tells their people they better load up on gold and silver, ours tells us to rack up our credit cards and take out a mortgage. Yet we call them evil communists. 

writingsonthewall's picture


It seems that people only see what they want to see...which is fine....but I hate it when they expect the rest of us to join them in their dellusion.

....and then there are those who play on it for their own gain....

101 years and counting's picture

maybe ben will initiate QE3 and send that money to china. 

Josh Randall's picture

+++ Of course he will, or do the twist or get the money there some way - unofficial WWIII b!tchez, this is economic warfare

SheepDog-One's picture

Certainly glad everything so great here in america where the DOW wont even shed 5 points hell we're in boom times I guess.

Central Bankster's picture

Or they could just let the Yuan rise to its free market exchange rate and inflation will drop.

qussl3's picture

Till they cant export anymore, and the resulting job losses blows everything up.

Yeah that'll work.

SheepDog-One's picture

Funny, we sit here in 'borrow and consume' bankrupt print-it nation and lecture others how they should be dealing with their inflation and how they should properly value their currencies. If america has 1 commodity going for it its ultra arrogance.

Going Loco's picture

Meanwhile in the UK (from Citywire) the newest member of the UK’s interest rate-setting committee has voted against raising rates, leaving just two members out of nine in favour of a shift from record lows of 0.5%... The pound dropped against the dollar and euro after the Bank of England published the minutes from its latest monetary policy meeting, in which Ben Broadbent cast his first vote. He replaced Andrew Sentence who had been calling for interest rates to rise for months in order to tackle rising inflation. Only Spencer Dale and Martin Weale are now behind an immediate rise in rates.... The bank faces above-target inflation, with CPI running at 4.5% in May on an annual basis. ...The publication of the minutes comes after comments from committee member Paul Fisher yesterday that officials haven’t ruled out extending their quantitative easing policy to support Britain’s ailing economy....

and one of our big energy companies just announced price rise 19%... and my currency has lost 98% of the value it had when I was born. Store of value gone beyond redemption. Unit of exchange next duck in the row.  I could wish the PBOC were in charge of UK monetary policy. Got sterling? Sell.

Going Loco's picture

Bloody computers. Duplicated post. 

UnpatrioticHoarder's picture

First hints that a financial crisis was kicking off in the US was Feb 2007 as I recall, then a bunch of MBSs were written down in July, then equities topped late 2007, fell into early 2008, suckered people like my pal Trent, equities bottomed March 2009, so that all took 2 years.

Where is China up to in this time frame I wonder. Or will it play out quicker due to less transparency and the possibility that China will panic faster due them never having had one of these home-grown financial crisis thingies for at least a few hundred years.

Sancho Ponzi's picture

Didn't Bernanke claim he could thwart inflation in 15 minutes? Why isn't that working in China?

/sarcasm off

thetrader's picture

credit crunch coming up....despite the liquidity provided


ivana's picture

... and only "chosen" will embark on Ben's arc.

Those chosen zombies will than terrorize rest of (western) world

slewie the pi-rat's picture

yup, irony:  china's banksters heard the one about helping bail the EU Titanic, and, within 24 hours---nomo liquidity!  now, nomo pomo!


janus's picture

I don't know nearly enough about international finance, so could someone confirm or dispel my thoughts on this:

It looks to me as if the entire world is exporting inflation to China (including most of the BRIC nations), and since the US is both agressively destroying the dollar and defending our right to do so, isn't China (because of the Yuan's relationship with the dollar) going to be forced into a sort of nuclear corner -- where they must either totally abandon the interests of their people or sabotage the economic super-structure?

Mediocritas's picture

The best way for China to deal with domestic inflation would be to freely float the Yuan. Sure, they have allowed it to appreciate steadily against  the US dollar, but nowhere near enough.