Overnight repo rates are spiking once again in early trading as the typically smaller banks that are more desperate bid aggressively for whetever liquidity they can find. 5Y Chinese swap rates have also reached a record high as the Yuan reaches its highest since Feb 2005. Chinese authorities are clearly stepping up the rhetoric:
- *CHINA SHADOW-FINANCE RISKS WILL SPREAD TO BANKS, FANG SAYS
- *VERY BIG CHANCE ONE OR TWO SMALL CHINA BANKS WILL FAIL: FANG
- *SOME CHINA TRUST INVESTMENT FIRMS MAY FAIL, SELL ASSETS: FANG
- *CHINA MUST PLAN FOR BANK-FAIL SCENARIOS TO MANAGE RISKS: FANG
- *CHINA NEEDS TO PAY MORE ATTENTION TO CORPORATE LEVERAGE: HU
The gambit between the PBOC's liqudity provision and the growing dependence on their "spice" is clear - the question is, of course, will banks send a message (via the markets) to the PBOC or will they self-select (on first-mover's advantage) eradicating the weakest.
5Y Chinese Interest Rate Swaps have reached a record high (implying expectations priced into the market of rising interest rates)...
and short-term liquidity is problematic again as overnight repo jumps to 5.00% in early trading..
What everyone is wondering is - with the failure of 1 or 2 banks seemingly guaranteed - how will the contagion be contained? How will the interbank market respond when no one knows who is it? We know what happened in the US in 2008...