Chinese Cash Squeeze Leads To First Failed Liquidity-Draining Debt Auction Failure In 23 Months

Tyler Durden's picture


It was less than 24 hours after we warned that the Chinese "liquidity shortage" had hit an all time high, as a result of the PBOC's intransigence to inject liquidity into a financial system roiled by Bernanke's and Kuroda's offshore hot-money flows, that things got worse when early in the Chinese trading session we learned that the PBOC experienced its first liquidity drainage failure in 23 months, when the Chinese Finance Ministry failed to sell over 30% of the debt offered at auction - the direct result of a cash squeeze currently ravaging the country's banks.

The ministry sold 9.53 billion yuan ($1.55 billion) of 273-day bills, less than the 15 billion yuan target, according to Chinabond, the nation’s biggest bond-clearing house. Agricultural Development Bank of China Co. raised 11.51 billion yuan in a sale of six-month bills last week, less than its 20 billion yuan goal.

We explained the reasons for this previously but, once again, here is why China continues to find itself between an inflationary, foreign-liquidity sourced rock, and a contracting and failing credit transmission mechanism hard-place.

Banks are hoarding money to meet quarter-end capital requirements at the same time as capital inflows are easing amid a worsening economic outlook and speculation the Federal Reserve will rein in monetary stimulus. The seven-day repurchase rate, a gauge of interbank funding availability, has more than doubled in the past month and the Hang Seng China Enterprises Index (HSCEI) of shares slid today for a record 12th day in Hong Kong.


“The cash crunch is curbing demand for bonds,” said Chen Ying, a fixed-income analyst at Sealand Securities Co. in Shenzhen. “The crunch may persist if the central bank doesn’t come out to inject more capital into the financial system. If it lasts longer, it may affect issuance of both government and corporate bonds.”


The average yield at today’s bill sale was 3.76 percent, according to two traders who are required to bid at the auctions. That compares with a 3.14 percent rate yesterday for similar-maturity existing securities, according to data compiled by Chinabond. The ministry’s last failed auction was a sale of 182-day bills in July 2011.

The PBOC has been very unwilling to inject any incremental liquidity in a long time, halting reverse-repo based injections in February 7.

The People’s Bank of China added a net 92 billion yuan to the financial system this week, down from 160 billion yuan in the five days through June 7, according to data compiled by Bloomberg. The monetary authority refrained yesterday from draining cash for the first time in three months as money markets reopened after a three-day holiday. The last time it used reverse-repurchase agreements to inject funds was Feb. 7.


“If the central bank doesn’t conduct reverse-repurchase agreements or short-term liquidity operations to inject capital, cash supply will stay tight for the rest of the month,” said Cheng Qingsheng, a bond analyst at Evergrowing Bank Co. in Shanghai.

What is more disturbing is that China also stated that this may not change much any time soon as a result in a downshift in growth (and inflation) strategy, which is always dictated via the monetary, and credit channels. So while we expect that the PBOC may surprise the world with an RRR, or interest rate cut, as we speculated yesterday, whether or not China does this is another matter.

We are confident (or at least hope) the PBOC realizes that the trade-off to a slowing economy is a banking system which is unsustainable if the credit expansion to which the local banks are used, continues to "taper."

And the flipside is that if and when it finally gives in and resumes injecting liquidity, then the people, well-conditioned from years of inflationary fears, will line up dutifully in calm, cool and collected lines to buy up that old barbarous relic: gold.

Those who wish to keep track of Chinese liquidity first hand, best visualized by various SHIBOR tenors, can do so at the following site. And while ultra-short term liquidity conditions have improved modestly in the past 3 days, SHIBOR beyond a 1 month maturity continues to rise.

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Fri, 06/14/2013 - 08:31 | 3657658 fonzannoon
Fri, 06/14/2013 - 09:03 | 3657730 RSloane
RSloane's picture

This is just the first salvo of many more buyers lining up in the future all across the globe.

Fri, 06/14/2013 - 09:10 | 3657759 fonzannoon
fonzannoon's picture

"Hangman, hangman, hold it a little while,
Think I see my friends coming, Riding a many mile.
Friends, did you get some silver?
Did you get a little gold?
What did you bring me, my dear friends, To keep me from the Gallows Pole?
What did you bring me to keep me from the Gallows Pole?"

Fri, 06/14/2013 - 09:12 | 3657763 ParkAveFlasher
ParkAveFlasher's picture

I hope the average Chinese likes their brass-dipped tungsten.  Not quite the store of value as gold but shiny nonetheless.

Fri, 06/14/2013 - 12:13 | 3658337 Panafrican Funk...
Panafrican Funktron Robot's picture

Rapidly approaching zero hour for China.  Some options:

1.  Print a shitload of yuan.

2.  Peg the yuan to its gold holding, which is the same as printing a shitload of yuan, but sets a stable value going forward.

3.  Let the banking system collapse.  Then print a shitload of yuan.  

4.  War.

Fri, 06/14/2013 - 14:10 | 3658881 mkkby
mkkby's picture

The Chinks still have some lessons to learn. Persuade your people to buy bonds, not gold.  I predict that will happen soon -- higher taxes or something to dissuade gold purchases.

Also, if they let foreigners buy more yuan a flood of money will flow in.  Huge line for that too.  Hedge funds with a trillion waiting, waiting...

Fri, 06/14/2013 - 16:23 | 3659306 pashley1411
pashley1411's picture

I think Mkby has hit it on the head.   If the Chinese want great liquidty, open up the country to idiot-hedge-funds-chasing-yield.   They have money to burn, so burn it.

Fri, 06/14/2013 - 08:32 | 3657659 teahouse
teahouse's picture

PBOC joining the PRINT.... MOAR!!!

Fri, 06/14/2013 - 08:44 | 3657682 smlbizman
smlbizman's picture

just put some 12 yr olds it slut ware and call it a day....seems to work across the street from them

Fri, 06/14/2013 - 08:34 | 3657663 ParkAveFlasher
ParkAveFlasher's picture

Riquidity reakage!

Fri, 06/14/2013 - 08:40 | 3657674 swissaustrian
swissaustrian's picture

Chinese CDS are above 100 bps again

Fri, 06/14/2013 - 08:41 | 3657676 CheapBastard
CheapBastard's picture

And yet:


Beijing’s Luxury Home Prices Jump to 17-Month-High




Fri, 06/14/2013 - 08:48 | 3657679 SheepDog-One
SheepDog-One's picture

And rates are getting LAAAARRGER. The Fog Is Getting Thicker... - YouTube

Fri, 06/14/2013 - 08:44 | 3657683 PaperBear
PaperBear's picture

Is this why gold and silver just went up ?

Fri, 06/14/2013 - 08:49 | 3657694 swissaustrian
swissaustrian's picture

It's Friday. They're gonna go down after London closes.

Fri, 06/14/2013 - 08:51 | 3657699 whoknoz
whoknoz's picture

"While gold markets in the US and Europe saw panic selling, China has just seen a surge in gold sales..."

...panic by the gold market riggeratti maybe...

Fri, 06/14/2013 - 09:27 | 3657805 maxblockm
maxblockm's picture

I wonder if this would be a reason/excuse (perhaps allowed/fabricated) for them to stop buying US T bonds...

Fri, 06/14/2013 - 09:55 | 3657845 Schmuck Raker
Schmuck Raker's picture

I'm confused - SHIBOR: 2 week = 7.5220 , 6 month = 4.10001 -

how is there a liquidity crunch, really, if you can borrow longer for less?

Let me rephrase my question: how can short rates EVER be higher than long rates?

Fri, 06/14/2013 - 09:39 | 3657846 orangegeek
orangegeek's picture

China - the global economic engine of the world has a liquidity problem.


That's a shame.

Fri, 06/14/2013 - 09:46 | 3657863 Smuckers
Smuckers's picture

Is that the first superpower queef heard around the world?

Sat, 06/15/2013 - 05:28 | 3660487 Fire Angel
Fire Angel's picture

This is some of the best economic journalism I've ever seen. Thanks, Tyler(s). 

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