China Cash Crunch Intensifies as PBOC Declines to Inject Liquidity

China’s worst cash crunch in at least seven years has intensified after its central bank, the People’s Bank of China (PBOC) declined to inject funding into the financial system and intensified the pressure on the country’s overextended lenders.

The PBOC’s policy of inaction has upset the expectations of banks, many of which assumed that Beijing would follow its traditional policy of providing large cash injections. According to credit ratings agency (CRA) Fitch, so-called ‘shadow lending’ has gone awry and a banking crisis could develop in the short term if liquidity remains tight.

State-run newspaper the
China Securities Journal
commented that China had reached a turning point in its monetary policy, indicating that the cash crunch might continue for some time. “We cannot use as fast money supply growth as in the past, or even faster, to promote economic growth,” the newspaper stated. “This means that authorities must control the pace of money supply growth.”

China’s one-year interest rate swap showed the sharpest rise since August 2011, while short-term interbank rates jumped more than 200 basis points to a record high of nearly 8% for loans of one month or less. There are growing concerns that housing costs are rising too quickly in China, with data showing that the prices of new homes rose in 69 0f the 70 cities tracked by the government in May.

Overall credit growth in China has run at around 22% to 23% since the start of 2013, against 20% last year and reflecting a sharp increase in ‘shadow’ lending by trust companies and by banks through off-balance-sheet vehicles.

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