PBOC Puts the Squeeze on Shadow Banking System

In China, the overnight interbank lending rate soared to a record high of 13.44% today, according to official daily rates set by the National Interbank Funding Center in Shanghai. That was up from 7.66% on Wednesday and less than 4% last month. The PBOC is allowing this liquidity squeeze with the aim of reining in smaller banks. Many have been tapping the interbank market to invest in higher-yielding bonds, or for speculative off-balance-sheet activities. In an article titled “Credit Tightens as Central Bank Takes a Hard Line,” the NYT reported:

The rise in interbank rates began two weeks ago, before China went on a three-day national holiday. Banks typically face higher demand for cash before public holidays, and the initial uptick in rates was not seen as abnormal.

But as the situation worsened, the central bank refrained from injecting new money into the system. Benchmark seven-day repurchase rates, another measure of borrowing costs, briefly soared as high as 25 percent on Thursday, up from 8.5 percent on Wednesday, before closing at 11.2 percent.

According to the article, China’s central bank is increasingly concerned about excesses in the credit system:

A huge shadow banking operation has emerged in China in recent years, with smaller banks and trust companies borrowing from bigger state-run banks and relending that money at high interest rates to private companies and property developers, a practice that fuels speculation.