Counterparties: Smashed China

By Ben Walsh
June 20, 2013

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“China’s interbank market is basically frozen — much like credit markets froze in the United States right after Lehman failed,” Patrick Chovanec of Silvercrest Asset Management tells the NYT today. The Shanghai interbank offered rate (Shibor), the country’s version of Libor, has shot up to 13.44% on Friday from 7.66% on Wednesday, resulting in a cash crunch. (Matt Phillips has a nice chart here.)

China’s central bank isn’t stepping in. Instead, to the surprise of The Economist, it appears to be letting banks figure all this out on their own. Banks generally expect help from central bankers when they need cash. China’s central bank, however, isn’t injecting liquidity, it’s actually pulling money from circulation by selling short-term debt.

Last week, Fitch Ratings warned about the size of the Chinese credit market. Overall, credit in China has jumped from $9 trillion to $23 trillion since the Lehman crisis. Fitch’s Charlene Chu says China has “replicated the entire US commercial banking system in five years”. In the past, Chinese legal authorities have dealt with China’s credit markets harshly. Now monetary policy makers seem to be taking a similarly stringent tack.

In a client note — sorry, no link — UBS analysts warned that China’s central bank was engaging in dangerous “brinksmanship” with its banks. Sober Look thinks China’s central bank is risking a recession by not intervening:

It’s not clear if people fully appreciate the potential impact of this liquidity squeeze – including folks at the PBoC. This is not a game. These tight conditions and high rates over a longer period can easily derail lending activities across the country while potentially putting a number of financial institutions at risk and sending the economy into a tailspin. With the Eurozone still struggling in the aftermath of the crisis, let’s see what a recession in China (12% of world’s GDP) can do for global growth.

China’s economic growth is already slowing, and manufacturing activity is at a nine-month low. Structurally, China may be running out of ways to grow. As Sober Look points out, in that context, even a self-inflicted, temporary increase in the cost of short-term debt could have unintended consequences. — Ben Walsh and Ryan McCarthy

On to today’s links:

New Normal
How shareholders are ruining American business – Justin Fox
America’s broken bootstraps: George Will on the decline of upward mobility – WaPo
“The American Dream isn’t dead. It’s just moved to Denmark” - Matthew O’Brien

Rebuttals
Don’t blame the algobots: human error causes most flash crashes – Reuters HedgeWorld

Easing Ain’t Easy
It’s not a Quarter Pounder, it’s an early indicator of the success of Abenomics – WSJ

Alpha
“Markets are selling off because the US is improving” – A guide to the emerging markets rout – Sid Verma

Right On
A $15 minimum wage is a “powerful and elegant antidote” to the widening wealth gap – Nick Hanauer
“This idea is win-win-win-win-win-win” – Felix

Confessions
Google admits its ridiculous interview questions are ridiculously unhelpful – NYT

Awesome
Recycling GIFs, featuring red hot Snapple bottles – NPR

And, of course, there are many more links at Counterparties.

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