Chinese Interbank Liquidity Freeze Continues For Third Day, Will Persist As Inflation Expected To Rise Over 5.5%

Three days ago we first reported that not all is well in the Chinese unsecured lending market as indicated by the country's interbank lending (SHIBOR) and repo rates. Subsequent to this, the PBoC attempted to restore some sense of normalcy to the market by conducting an emergency reverse repo for CNY50 billion on Monday night, which however as expected, did nothing at all. Alas, as a quick check of the most recent 1 week SHIBOR confirms, the liquidity lock up continues as the market is scrambling over the implications of what ongoing PBoC tightening implies for the market: 7 Day SHIBOR has once again risen overnight, this time by 51 bps, to a nosebleed inducing 8.83%, doubling from a week ago. This means that it costs banks nearly 10% to borrow one week cash from one another, and confirms there is absolutely no excess liquidity in the market. Looking forward, don't look for this number to go down notably any time soon: as Market News reports: "China's economic planning agency said Wednesday that efforts to control prices are having an impact, and that monetary conditions have improved, but warned that consumer inflation this month will likely exceed May's 5.5% y/y." Which means that the only recourse the PBoC will have after reporting a 5.5% CPI will be more RRR and Interest Rate hikes, which means more liquidity extraction, which means that the 1 week SHIBOR will likely pass 10% in the next few days. It is ironic that Europe's fate now rests with China whose interbank lending market is about 8 times more tight than the comparable one in Europe. Will Europe be forced to provide China with unsecured liquidity in exchange for China buying PIIGS bonds? Ah the wonders of a ponzi scheme.

One week SHIBOR:

And a quick glance at Chinese inflation:

The People's Bank of China raised the reserve requirement for a sixth time this year on Monday, despite signs of opposition from the banking sector, industry and some economists within the government.

A senior government source told Market News International earlier this week that the reserve ratio could continue climbing, dismissing complaints about a liquidity shortage and arguing that inflation remains a threat.

Concerns about resurgent price pressures have risen in response firstly to droughts, and now, severe flooding along China's Yangtze river. Food prices -- the swing factor in Chinese inflation trends -- rose 11.7% y/y in May, the highest so far this year, while weekly data compiled by the Ministry of Commerce suggests pork and egg prices are climbing rapidly.

The NDRC acknowledged that pork prices could continue rising in the months ahead, but said the impact of natural disasters will be only limited and that this summer's grain harvest is expected to be a good one.

"There is a very small likelihood of rapid rises in food prices," the NDRC said.

Although China's battle against inflation is lasting longer than was expected at the start of this year, the NDRC continues to maintain that price pressures will ease in the second half of the year.

"Due to rapid decline in carry-over effects in the second half of the year and new factors being continuously curbed, the y/y CPI growth will moderate in the second half and the full-year prices will be within a controllable range," it said.

The government is still expected to raise benchmark interest rates for what would be a fifth time in the current cycle at the end of this month or in early July, some analysts believe.