FT on China cash crunch
The Financial Times writes, "Shadow bank crackdown prompts China cash crunch." Their article explains, "China's financial system suffered a cash crunch this week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt. Analysts have warned of rising risks from banks' increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5 per cent on Tuesday, versus an average of below 3 per cent since the beginning of 2014. Local media reported that several small rural lenders had defaulted on money market loans on Tuesday, prompting the central bank to offer them emergency funding. Central bank cash injections have since eased the problem, but the seven-day rate still hit 5.4 per cent on Thursday." The piece adds, "The latest liquidity squeeze is not as severe as the panic that swept money markets in June 2013, when a key short-term borrowing rate briefly hit 28 per cent. But the latest market shock is similar in that it is partly a result of intentional action by the central bank." No word yet of any impact on China's money fund industry, the world's second largest with approximately $664 billion.
