SHIBOR: We Have A Liquidity Problem
In our now globally accepted bizarro world, where problems are priced in before they even appear, disclosing swans of assorted colors becomes a moot point. After all, all the bad news in the universe couldn't possibly matter as long as the irrational exuberance persists. That the higher stocks go, the farther they will crash eventually (and for those with their finger on the sell buttong, good luck selling into a bidless market) is a given, but maybe, just maybe the laws of gravity are different this time. On the other hand, maybe they are not. For those who are convinced that no matter the amount of data fudging, accounting fraud, and dollar debasement that the Fed endorses, nature will eventually take its course, may want to take a look at the below chart of 1 week, 1 and 3 month SHIBOR. In a nutshell: there is no marginal liquidity left in the world's fastest growing economy. Eventually this will dawn on the world. Until then, BTFD.
And since it is not visible on the chart above, all three lines are way above the levels hit when Lehman filed for bankruptcy, when there was another liquidity collapse but for different reasons. The latest catalyst, the PBOC's Christmas Day interet rate hike has certainly not helped.
Here is Morgan Stanley's explanation of what is happening in China:
SHIBOR surged: As multiple RRR hikes have started to take effect, market liquidity has become very tight. Compounded with the year-end liquidity shortage and heightened expectation of further rate hikes, large banks have almost stopped lending into the interbank market. In this context, the SHIBOR has surged in the past two weeks, with the 7-day, 1-month and 3-month rates jumping 269bps, 187bps, and 74bps, respectively (Exhibit 2).
As for what is forthcoming, here is Morgan Stanley's expectation:
What’s next: Given the surging interbank rates and heightened expectation of further rate hikes, the liquidity management function of open market operations will likely remain paralyzed unless the reference yields are lifted aggressively to restore the attractiveness of bill issuances. Since the amount of matured bills should rebound significantly in January (Exhibit 5), the risk of an RRR hike (or differential RRR hike) is rising.
And the 64k question: if China, whose economy is far more than even that of America reliant on excess liquidity is shutting down the interbank market, what does that leave for Bernanke's centrally planned fiefdom?
And incidentally, when we discussed this very issue back in June, when we noted that the "China 1 Month Interbank Rate At Multi Year Highs, More Than Doubles In One Month" we summarized the issue perfectly: "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." Curiously, since then neither has there been much if any progress in the CNY reval, nor has the SHCOMP actually done anything material. So all those who are claiming liquidity conditions in China are irrelevant, would be very much urged to actually read a book or two on monetary policy and momo theory.