Cash Crunch in China, Government Bill Sale Canceled, 7-Day Repro Rate Hits 8.81%

Bloomberg reports China Money Rate Reaches Three-Year High as Bill Sale Suspended

China?s money-market rate climbed to the highest level in more than three years as a worsening cash crunch prompted the central bank to suspend a bill sale.

The seven-day repurchase rate, which measures interbank funding availability, has more than doubled since June 14, when the People?s Bank of China ordered lenders to set aside more money as reserves for a sixth time this year. The central bank suspended a sale of bills tomorrow, according to a statement on its website today.

?Banks have to hoard cash to meet the regulator?s capital or loan-to-deposit requirements by the end of every quarter,? said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation?s sixth-largest lender. ?So we won?t see the shortage easing.?

The seven-day repo rate gained 47 basis points, or 0.47 percentage point, to 8.81 percent as of the 4:30 p.m. close in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It touched 8.93 percent, the highest level since October 2007.

The yield on the 2.77 percent government bond due May 2012 gained two basis points to 3.63 percent, according to the Interbank Funding Center.

Shibor Rates - Overnight to 1 Year as of 2011-06-22



Here is a link to Shibor, Shanghai Interbank Offered Rates

Shibor (Shanghai Interbank Offered Rate) is calculated, announced and named on the technological platform of the National Interbank Funding Center in Shanghai. It is a simple, no-guarantee, wholesale interest rate calculated by arithmetically averaging all the interbank RMB lending rates offered by the price quotation group of banks with a high credit rating. Currently, the Shibor consists of eight maturities: overnight, 1-week, 2-week, 1-month, 3-month, 6-month, 9-month and 1-year.

The price quotation group of Shibor consists of 16 commercial banks. These quoting banks are primary dealers of open market operation or market makers in the FX market, with sound information disclosure and active RMB transactions in China's money market.

Soaring short-term rates is a sign of lack of credit stress and lack of liquidity.

Mike "Mish" Shedlock
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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