China’s Financial Watchdogs Investigate Unprecedented Liquidity Crunch as Short-Term Rates Soar to 50%

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In an unprecedented turn of events, China’s financial watchdogs are delving into a liquidity crisis that occurred at the end of last month, causing short-term money rates to skyrocket to a staggering 50%. The regulators are seeking explanations from certain institutions that borrowed at these exorbitant rates, according to three informed sources.

The pledged repo overnight rate, a measure of short-term financing, reached an all-time high of 50% on October 31. This surge was triggered by a scramble for cash towards the end of the month and a surge in government bond sales, leading to tension in the money markets.

The China Foreign Exchange Trade System (CFETS), an affiliate of the central bank that manages China’s interbank market, has requested institutions that settled trades at the 50% rate on Tuesday to provide explanations. This information comes from two sources with direct knowledge of the matter.

One source stated, “Institutions that borrowed money at such high rates need to justify their decision-making and bidding process to the regulators.”

Market observers and traders attribute this unusual liquidity stress to an increasing supply of government bonds and the newly approved 1-trillion-yuan ($136.63 billion) sovereign bond issue. This occurred at a time when banks were trying to balance their books to meet end-of-month regulatory requirements.

Becky Liu, head of China macro strategy at Standard Chartered, suggested that authorities might have intentionally kept yuan liquidity tight to curb the currency’s depreciation against the U.S. dollar in the foreign exchange market.

A trader reported that a significant number of fund houses, brokerages, and trust firms were in a rush to borrow money on Tuesday afternoon to avoid defaults, as major banks seemed hesitant to lend. “The demand for cash far outstripped the supply, pushing up short-term rates,” the source said. “For each individual institution, it was a rational decision.”

However, regulators advised some institutions in a meeting on Wednesday “not to be emotional,” according to another trader source. The source added, “Everyone is still slightly nervous now. Everyone is prepared and will keep the liquidity ample.”


Disclaimer: The author of this article is not a licensed financial advisor. This article is intended for informational purposes only. It should not be considered financial or investment advice.

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