Recent China interbank rates spike – Is this going to be a recurring trend going forward?

According to various news wires reports, including Thomson Reuters, and Bloomberg, etc., China’s interbank rates, shot up by 47.0 basis points (bps).This is based on the reading of the seven-day repurchase agreement (repo) rates on October 23, 2013 which indicated that rates spiked up to an intraday day high of 4.55 percent before retreating back to 3.78 percent at the end of the market trading session, indicating a heightened fear among traders over possible announcement by the country’s central bank, People’s Bank of China (PBOC) that it might be tightening the cash conditions in the financial system to address inflation risks. The news was disclosed to one of the journalists at Reuters on October 22, 2013 by an unnamed source with the central bank.

Based on the latest Shanghai Interbank Overnight Rate (SHIBOR) rate information provided by Thomson Reuters, it indicated that interbank lending rates have been fluctuating during the month of October 2013 with a low of 4.16 percent as of October 16, 2013 to a high of 4.30 percent on September 23, 2013. The October 23, 2013 intraday bid/ask spreads are approximately 10.0 bps, which indicates the extent of the tight liquidity conditions in the Chinese money markets, and it is quite a huge spread, taking into consideration that the widening of the spreads occur over a span of the past week or so. If readers might recall, during the early summer months of 2013 (Late June/early July), the benchmark SHIBOR rates rose as much as 14.0 percent, before the PBOC stepped in through its injection of liquidity, thus bringing the overall rates down to approximately 3.0 percent. However, the latest spike in the Chinese interbank rates raises the spectre of additional volatility that is expected to return to the Chinese financial markets.

The following is a 2-year daily price chart illustration indicating the degree of market nervousness in China being expressed through the fluctuations seen by the Chinese interbank rate moves:

 

Source: Thomson Reuters MetaStock.com

Taking a closer look at the 2-year daily SHIBOR price chart, readers might have noticed there have been several episodes of rate spikes occurring during the period, twice in January 2011 (8.0 percent), and July 2011 (8.0 percent); once in January 2012 (8.0 percent); June/July 2013 (approximately 13.0 to 14.0 percent). The interbank rate rises during the past two years have indicated somewhat of a widespread market fears among traders over policies which were rarely been expected by the financial market participants, as seen by the chart illustration. The latest spike in rates is also displaying the level of anxieties expressed by many traders over the lack of transparency over the policy making activities that the Chinese government intends to carry out. In addition, some of the market inefficiencies including contracts settlement procedures resulting in delayed reaction to the moves by the central bank, which resulted in the latest episode of interbank lending rate spike.

Despite the recent spike of the SHIBOR rates in China, it is quite clear that inflationary pressures are mounting gradually for the past one month, as shown by the latest data release by the government on October 22, 2013 indicating that Chinese property sale prices rose the most to as much as 20.0 percent during the month of September 2013, with some cities recording multi-year highs in key Chinese cities, including Shanghai (17.0 percent), Beijing (16.0 percent), etc. In reaction to the data release, the Shanghai Composite Index fell on speculation that the government led by Premier Li Keqiang is expected to announce policy measures to curb excessive speculation as part of the overall efforts to limit the risks of not achieving the official government’s target of 7.5 percent annualised Gross Domestic Product (GDP) growth.

Given the recent spike up in the Chinese interbank rates, I believe that the PBOC should step in soon to inject liquidity into the financial system. Traders are keenly watching and expecting that the central bank to intervene in the markets through the injection of funds, expand its lending programme through its discount window that provides banks with the necessary liquidity to manage the tight credit conditions, and other policy measures that will calm down the markets. These moves will likely cause interbank rates to decline. However, the expected announcement of the any monetary policy moves by the PBOC officials are still not entirely clear as of early Asian market trading hours on October 24, 2013.

The successive spikes in the overall interbank rates during the past two years have indicated the extent of the volatility being expressed by the Chinese financial market participants. The Chinese financial market system is quite dependent on the PBOC for liquidity, and this represents a risk that has always not been anticipated by the market participants given the various successive interbank lending rate spikes upwards during the past two years. It is no wonder that traders are expressing their anxieties over the timing and extent of the various policy moves by the government and monetary officials.

In conclusion, I believe that it will be a timely move for the PBOC, together with the various Chinese government officials to look into how to minimise the extent of the volatilities and uncertainties being shown throughout various interbank rates spikes, and address the issues before it gets out of hand. This should form be part of the long-term objectives of maintaining the soundness, and transparency of the financial system in China The PBOC is responsible to conduct monetary policy using all measures available to provide liquidity to banks and financial institutions, however, the central bank did not intervene in the markets during a one-week period of June/July 2013 with the thinking of ‘punishing’ errant banks for not following procedures, and continue to expand shadow banking activities. The delayed moves by the PBOC backfired somewhat with the sudden spike interest rates during that one-week period, causing global market chaos. PBOC was criticised by many market participants that it risked itself by nearly jeopardising the entire Chinese financial market, and as well as the global financial markets. It nearly resulted in a widespread slowdown in trade and investments across the globe. The level of responsibility has to extend beyond just the regular policy making activities, as without the necessary intervention, and most important of all, the timing of the moves, it might not be able to have the necessary trust needed by investors to restore market confidence and to ensure the overall smooth running of the global financial system.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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