The recent failed debt sale in China – How will it impact overall interest rates in the country?

In a Bloomberg.com news article published on June 14, 2013, it was reported that China’s Finance Ministry failed to sell all the government debt for the first time in 23 months due to a cash squeeze which if not checked, could result in a massive slowdown in the world’s second-largest economy. The impact could be far reaching in terms of accessing business loans, mortgage loans, etc. to finance an already debt-induced country.

In the June 14 Bloomberg news article, it was also reported that the Finance Ministry sold approximately 9.5 billion Chinese Yuan (USD 1.55 billion) of its 273-day bills, less than the 15.0 billion Yuan target. This is according to information obtained from Chinabond, one of the country’s largest bond-clearing house. A week ago, the Agricultural Development Bank of China Co. raised approximately 11.5 billion Yuan in a sale of six-month bills, which is less than the 20.0 billion target.

The latest revelation of one of the causes of the cash crunch was reportedly linked to banks hoarding cash to meet the quarter-end capital requirements just when monetary conditions are relatively loose as a result of the worldwide economic slowdown, along with the US Federal Reserve hinting at possibly withdrawing its so-called ‘punchbowl’ if economic conditions in the country stabilised, in terms of a downward trend on the monthly unemployment figures in the United States, and return to somewhat of an upside trajectory economic growth going forward including production, housing, inflation growth in general, etc.

The cash crunch occurring in China is likely to strengthen the debate over the future projections of China’s growth going forward. In a June 14, 2013 Goldman Sachs research report on China’s growth for the next five years or so, its economists are forecasting average GDP growth of 6.0 percent, followed by a larger than expected slowdown of the economy in 2020 to an average estimate of 4.5 percent. This statistic is quite significant as it points to a much bigger issue over China’s ability to support world growth on a sustainable basis if the worldwide economic slowdown that everyone is facing now will prolong. The rate of US growth is positive, and is expected to average at approximately 2.0 percent to 3.0 percent. For Europe, the World Bank is forecasting negative growth. Other Asian regions including India is also facing a slowing economy, high current account deficits, and a relatively overvalued Indian Rupee currency, which in recent days made significant news regarding the rapidly declining value of the Indian Rupee against the US Dollar.

China’s growth has long been fuelled by the use of leverage, along with its so-called ‘shadow’ banking system. There has been no published statistic that tries to estimate the size of this shadow banking system, but it is estimated to be worth billions of Chinese Yuan, which if in the worst case scenario, were to collapse, is likely cause a massive financial meltdown around the world. The rapid industrialisation, coupled with record home buying by individuals that took place in the years following the Global Financial Crisis in 2008 – 2009 is now facing uncertainties ahead, as the debt induced nation is coming to grips with the realities of a cash crunch occurring.

The cash crunch has also cast some doubts over the future success of its overseas so-called ‘Dim Sum’ Chinese Yuan-denominated fixed income, which recently received some overwhelming response from foreign banks in Singapore (please see my article published on this topic, and available on Timizzer.com). At that time, around late May 2013, companies around the region viewed the issue of Chinese-Yuan denominated debt-raising plans overseas with enthusiasm. As discussed in my previous article, many firms that have business dealings welcomed this move, as capital raising activities will be made much flexible, rather than doing solely in China. If the cash crunch does prolong further, many of these companies that have significant business dealings in China will face higher debt costs, and possibly put off the purchase of these Chinese Yuan denominated bonds, and seek for additional capital raising options including internally-generated working capital.

Other effects of the cash crunch has since resulted in the increase in average yields for short-term bills, which the Bloomberg article pointed the average yield was approximately 3.8 percent, as compared to figures compiled by Chinabond of 3.1 percent on June 13, 2013. Chinese swaps, based on the floating seven-day repurchase (REPO) rate, increased by approximately 13.0 basis points (bps), to 3.8 percent as of 1630 hrs (Shanghai time). Yuan positions at the local lenders currently stands at approximately 66.9 billion during May 2013, which, according the People’s Bank of China (Central Bank), was the smallest gain since November 2012.

In conclusion, the latest news regarding the cash crunch in China is quite destabilising. It does cause massive ripples across the various segments of the Chinese economy. Unless the People’s Bank of China steps in by adding more Chinese Yuan currency into the financial system, the uncertainties that arose from this cash crunch could cause repercussions on not only the domestic economy, but worldwide economic growth as well.

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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