Chinese Banks Ready to Go Bust

Pivotfarm's picture

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Dive! Take cover! Or, at least, hold on to your pants in the scramble. The Chinese bubble has just burst. It looks like the world is going to have egg on its face and elsewhere as Chinese banks are scrambling to get the hands on cash.

Chinese cash rates didn’t just increase they shot through the roof today, Friday June 21st. This is not hyperbole. This is not exaggeration. They reached 25% when they were at their peak, and the only thing that calmed them down was the talk of a possible cash injection from the Chinese central bank. Rates dropped to 10%.

Some analysts are saying that the People’s Bank of China is trying to make a point to smaller banks that are using short-term funding for trading rather than lending that money out. That’s dicing with death some analysts reckon as some of the smaller banks are nearing collapse.

Overnight bond purchase rates are the measure of the cost of liquidity and the rates are double what they are expected to be at the present time (8.4920% today, which is lower than Thursday’s 11.62%, but still higher than they should be).

Two banks have refused to acknowledge that they received emergency loans from the People’s Bank of China last night to bail them out of trouble. Others say that they are strapped for cash. To boot, they are not just the small fish in the financial banking sector. The world’s largest bank in terms of assets was mentioned as being one of those banks (The Industrial and Commercial Bank of China). If the biggest banks in the world are currently strapped for cash, because they have been trading with that cash, then we may be preparing for another financial meltdown around the world. This time the question is: will it be bigger than the 2008 one? By the looks of it, yes. In 2008, China suffered also from the financial crisis around the world, but managed to maintain some sort of economic growth. Have the financial crisis and poor banking practices trickled through to the Chinese banks today leaving them without a cent available?

People's Bank of China

People's Bank of China

However, rates have not, according to analysts affected the economy as of yet. State-owned enterprises have enough cash for the moment to be able to get through a credit squeeze if there is one, although small companies are suffering already, apparently.  Some are saying that the credit crisis is like nothing that we have ever had to go through yet.

All eyes are fixed on the Shibor (Shanghai Interbank Offered Rate), which is calculated by averaging all the interbank lending rates. There are 18 commercial banks included in the price quotation and it is the barometer of Chinese credit liquidity. The two charts show the worrying progression of the Shibor.

China: O/N Shibor

China: O/N Shibor

China: Shibor 21st June 2013

China: Shibor 21st June 2013

The Libor surge prior to the Lehman Brother’s bankruptcy and the ensuing spiraling fall to hell recall the somber times of the financial crisis in 2008. Are we in store for the same?

But, the economies of China and the western world back in 2008 are not identical. Mature economies would be begging the central bank to act and double quick. Such high rates of interbank lending in the western world would scare the banks out of their living daylights. China often sees banks strapped for cash in particular just before holiday seasons when people tend to withdraw greater quantities of cash. Deposits dry up regularly before Dragon Boat Festival, so that’s nothing new. What is new, however, is that the People’s Bank of China has done little to ease that situation. In fact, it has made it worse, by withdrawing liquidity by selling three-month bills.   China sold CNY2 billion in bills on Tuesday (at a yield of 2.9089%). This was the starting gun for the message that was winging its way to the banks in China telling them that they had to start lending, as the People’s Bank of China would not come to their aid. With liquidity being withdrawn, banks decided to hoard cash and stop lending. The credit squeeze was on and liquidity became scarcer. The Shibor has shot through the roof because there is a fall in trust regarding the creditworthiness of Chinese banks right now.

Some might well criticize China’s madness regarding the flirting with the Shibor. But is there a method in their madness? Will banks have to maintain credit availability and also keep sufficient deposits on hand in case there is a run on the banks. Up until now, the banks have been slowing down their availability of loans which is causing damage to the Chinese economy, resulting in a slow-down in economic activity. But, now that the message has been given loud and clear that the People’s Bank of China is not prepared (at least, not immediately) to give a helping hand if they go under, they will have to stand on their own two feet. Trouble is, it seems a bit of a blast from the fire-eating dragon.

One or two banks might end up getting burnt and in the process set fire to a few of us in the meantime.

Originally Posted: Chinese Banks Ready to Go Bust

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HEY YOU's picture

Bernanke's chairman of China's central bank & Bush & Paulson are formulating TARP for China??

MFLTucson's picture

And US banks are no better.

ebworthen's picture

This was mentioned in the Santelli Exchange this morning.

Santelli joked that it was nicknamed the "Shiboom".

starman's picture

I'm surprised the fed doesnt print the dollar in China yet for 75% less labor costs!

Money 4 Nothing's picture

Lol!!  Hhmmmnhaha lol! You haven't a clue how close to the truth you just came.

Currency manipulators wasn't just a reference to sovereign bonds and securities.  N. Korea.

toadold's picture

"Hu, Hu, Hu she be buggy, Wu, Wu, Cu got ugly, Auntie upset can't get the gold, won't let her on the plane 'cause she's got a bad cold"

"Gotta anchor that baby, or we'll be out in the cold, I've got a condo to selll to Yuuuuuuuuuu."

thismarketisrigged's picture


ironmace's picture

You mean the world will have egg foo young on it's face.

I can't believe no one thought that.

PTR's picture

"What did he say?"

"He said there's a storm coming in."

GMadScientist's picture

"...a shitstorm a comin'"

justamousesquared's picture


Jonas Parker's picture

and with a sandpaper condom too!

Never One Roach's picture

Chinese don't trust the banks and do not trus ttheir stock market..that's why they are buying gold and houses. That's what the Chinese here tell me.

Fred123's picture

And the Chinese citizens still don't understand why gov't officials are leaving China for the West with their families and lots of cash. I'm sure the Chinese gov't will blame everyone in sight. Even their citizens. Looks like a Cultural Revolution 2.0 is coming up....

rsnoble's picture

Fuck China.

China's big problem is trying so hard to model themselves out of a collapsing country that was built to it's height on war and fraud.

I love watching some of them trying so hard to be like those of us in the US.  Keep trying look where it will get you.

malikai's picture

Question: Why would PBOC ever risk a banking crisis of their own making?

Answer: They wouldn't. This is a message.

tradewithdave's picture

Exactly what I have been thinking...

Uchtdorf's picture

Please elaborate further.

monkeydart's picture

Relax, benny will take care of this: Fed declares QEC - Fed spending 3 trillion to prop up Chinese banks

GMadScientist's picture

Or make JP Morgan buy them. :)

CH1's picture

Honestly, I think Benny's crashing China, to scare more money into the S&P. 

USisCorrupt's picture

But it's ALL GOOD!

USisCorrupt's picture

I am sure there is very little exposure to any US Banks.  NOT!


Let the dominos FALL, calling Greece for a little HELP!

zuuma's picture

Confucious and money:

Confucius Say

A fool and his money are soon partners.


Confucius Say
Hooker  Banker who like bondage always strapped for cash.


Confucius Say
Marriage like  bank account. You put it in, you take it out, you lose interest.


Confucius Say
Banker who sits in freezer, will have frozen assets.