"The Market Would Have Collapsed" Had The PBOC Drained: Chinese Liquidity Shortage Hits All Time High

Tyler Durden's picture

Those who have been following our coverage of the bipolar Chinese liquidity situation (most recently here and here) are well aware of the unique position the world's fastest (if only on paper) growing economy finds itself in: on one hand, it is the target of massive external hot money flows from both the Fed and the BOJ, which are pushing select inflation in the country higher, manifesting itself best in the real-estate market now higher for 12 consecutive months. On the other hand, the local banking system is in such dire need of liquidity, that not only have various short-term SHIBORs soared to multi-year highs but as Market News reported last week, China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in the market overnight and almost ushering in the first bank failure in China.

The unprecedented liquidity shortage in China is seen best on the overnight SHIBOR chart below which just hit an all time high. In a nutshell there is zero free liquidity in the system.

Which all culminated to last night's surprising move by the PBOC to step aside from draining funds from the financial system for the first time in three months as even the PBOC now realizes that in the battle against Bernanke and Kuroda's cash it is about to lose the fight.

Bloomberg summarizes:

China’s central bank refrained from draining funds from the financial system for the first time in three months after a cash squeeze pushed up the overnight money-market rate to an all-time high.


The People’s Bank of China hasn’t offered repurchase contracts or bills today, according to two traders required to bid at the auctions. Two calls by Bloomberg News to the PBOC’s media office went unanswered. The central bank has held repo operations every week since February to drain cash and resumed sales of bills in May for the first time since December 2011.


The overnight repo rate, which measures interbank funding availability, touched 9.78 percent on June 8, the highest since May 2006, when the National Interbank Funding Center started compiling the weighted average. China’s financial markets were shut in the first three days of the week for the Dragon Boat Festival holiday. The rate was at 6.32 percent as of 10:39 a.m. in Shanghai today, little changed from June 9. The seven-day repo rate dropped 34 basis points to 5.63 percent.

So what would have happened if the PBOC had continued on its merry way of withdrawing liquidity from the interbank market? Very bad things.

If the PBOC sold repos or bills today, the market would have collapsed,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-biggest lender. “The cash shortage hasn’t eased and banks are still busy borrowing money.”

Which means one thing: any minute now the PBOC, which has moved from a tightening to neutral stance, will have to continue along the spectrum, and quite soon, proceed to once more inject liquidity, either via RRR or an outright Interest Rate cut.

Aside from the fact that this is just the catalyst that gold bugs have been waiting for (recall 2011), this means that the global inflation exporting game is about to go into overdrive as now the Chinese Central Bank is about to join the Fed, the BOJ, and soon the BOE in actively easing. At that point the countdown to the ECB's joining the race starts, because the real fun will begin only when all global central banks engage in actively injecting liquidity into the system.

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Jason T's picture

tis why this whole system needs to crash and burn

camaro68ss's picture

Just print money like the bernake, duh

Dr. Engali's picture

I'm saving my fiat for kindling to heat the house.

Jason T's picture

There will be no hyperinflation .. per Armstrong: "No mainstream government has EVER expired in such a manner. The danger of mature economies is deflation as government needs money, increases taxes, and sucks the lifeblood out of everything. "

Skateboarder's picture

Except those taxes don't even begin to cover the interest on the debts incurred, let alone the principal, ever.

Uchtdorf's picture

Government in default has technically expired, no?

LawsofPhysics's picture

Bullshit.  No society or currency has ever died/collapsed because it's purchasing power was too strong.

Armstrong is yet another scared paper-pushing shill.

Bay of Pigs's picture

Very disappointing to read Armstrongs comments these days. Did he flip to get out of jail?

fonzannoon's picture

I was just listening to an economist on CNBC that explained that as Japan blows up and money starts fleeing Japan it will drive the U.S 10yr below 1.5% which is the cover Bernanke needed to make sure bonds get bought while the fed "tapers". That will also probably have a positive effect on equities.

It seems like a very plausable scenario. It's funny the new stimulus programs are other countries imploding.

Bay of Pigs's picture

I'm beginning to understand what being "played like a fiddle" means.

(as we go green again)

fonzannoon's picture

At a certain point we will be told the market was up when it was down. We will be told interest rates dropped when they rose. We are rich when we are poor. I heard Cramer yesterday and Andrew Ross Cocksmoker today explain that rich people were entitled to more information, and should be allowed to trade it ahead of us peons because that's just how it goes.

walküre's picture

the richer they get, the wider the gap, the hungrier the poor, the closer they get to hanging on lampposts

Chump's picture

Except for all that "buying on margin," everywhere.  There is no money to flee.

therover's picture

I agree 100% Fonz. This is the way the Fed can clandestinely 'taper' and not cause total chaos (for now).

Funny how the Nikkei plunges 800 yet we are now up 84 on the Dow ( as of 1:10 PM, 6/13).

As they say on ESPN when commentating on a good basketball shot...RELEASE, ROTATION, SPLASH.

HedgeHammer's picture

It's funny the new stimulus programs are other countries imploding.


You don't know how right you are Sir! This is absolutely intentional.

smlbizman's picture

the fat lady just hit a sour note...

Doubleguns's picture

If we get the fire started then maybe it will crash. We need to start in Utah however at the NSA building. Suspect they will be recording this and any add on comments so be careful out there........Someones beating on the door gotta go. 

Skin666's picture

If anybody has been tracking the comments on ZH, they must be hearing "Fuck you Bernanke" in their sleep!

Midasking's picture

Believe in free markets or central planning? 

Scro's picture

All they are doing is shuffling paper around. That's all anybody does anymore.

This will not end well.

Bokkenrijder's picture

So much for a gold backed Yuan/RMB...

swissaustrian's picture

Central planning, bitchez!

butchee's picture

Sometimes it's liquidity, sometimes it's solvency......  If it's not one thing, it's another.  Just shit the bed already.

Paper CRUSHer's picture

Notice how crude oil remains pretty firm trading around +90 levels despite liquidity evaporating globally and a build in oil stocks ............damn the kid is resilient.Gold/Oil ,Silver/Oil Gold/Silver ratios,High Yielding Junk still signalling potential trouble ahead.

Non Passaran's picture

Sweet. Keep stackin', folks!

SheepDog-One's picture

Elephant hanging by a thread.

The Axe's picture

That index    especially around the holidays    always does crazy shit.....

TheMayor's picture

I am going to call it here, BTFD is dead.

SheepDog-One's picture

I think the NY Fed started stealth tapering about a month ago.

LetThemEatRand's picture

Just like take out.  Order some liquidity and you'll be hungry again an hour later for more.

Eisenhorn's picture

If the PBOC sold repos or bills today, the market would have collapsed.”


But it didn't, because nothing will be allowed to collapse until it is convenient.

Move along.  Nothing to see here. 

rubearish10's picture

If the PBOC sold repos or bills today, the market would have collapsed.”

Sounds just like all the other qulaifying remarks such as; "on the verge", this will not end well", "the end is nigh" etc etc... Sure, "everything is about to blow any second now". Add that one too! Give me a frekin' break! 

pitz's picture

Got Gold?  Got Silver? 

Headbanger's picture

Got ammo?  Got Sig?  Or Glockenspiel? Or vintovka Mosina?

philosophers bone's picture

Yes and Yes.  Thoughts:

Currently, indestructible precious metals (in which one can have ultimate confidence) are priced largely based on derivative contracts (in which one can have no confidence, particularly when one can be forced to accept cash instead of the physical)?

The result is that there is no legitimate price discovery.  For holders of physical, it is a waiting game until the "price discovery" event / events occur (which are inevitable, but timing is uncertain).  So, the risk of buying physical is really a liquidation risk (easy to liquidate, but not at proper price).  Therefore, leveraging to buy physical is risky as the timeline for price discovery is not known.


Dr. Engali's picture

Print moar bitchez! We are one digital credit closer to the collapse.

timbo_em's picture

Some guys out there are about to get squeeeeezed.


Unknown Poster's picture

Some machines may have seen a double at ES ~1600.

fonzannoon's picture

I drove past a huge mall this morning. It was 8am and the parking lot was packed. As I proceed by i realize that the cars were all new unsold cars being stored there by car dealers who must have no more space on their lot. Crazy. 

- squeeky fonz

boy reporter

NoDebt's picture

I went past there, too.  You're talking about the Potemkin Village Mall.  Yeah, I did a double-take on that one myself.