Most Western media did not pay attention when China´s central bank entered the interbank market at the end of 2013. Wrong, says financial analyst Michael Justin Lee in ChinaUSFocus. ” It means China continues to ease on down the road to capitalism. It’s a rocky road but the only road we’d want China to be on”.
Michael Justin Lee:
The interbank market is inarguably the freest market in China. Like in any country, banks in China borrow from each other when they are temporarily short of cash. Usually, this cash shortage lasts only overnight. These overnight borrowings don’t come for free of course. The rate that is charged for such borrowings is determined by basic supply and demand for such cash. Thus, this nightly rate provides a gauge for cash needs in China. The more such needs exist, obviously the higher the overnight rate will be.
It was therefore of very great importance that on December 20, it jumped to an annualized rate of 8.2%, the highest level since the previous liquidity shortage over the summer. China’s central bank did what it had when cash is in short supply, it entered into the market. This time it did to the tune of $50 billion in three days. For comparison, remember that Chairman Bernanke has “tapered” down to $75 billion per month.
The primary reason for the two liquidity crunches this year is not hard to determine. Market professionals have long been concerned about the asset quality of China’s banks. This year’s defaults in the Chinese banking system seem to justify those concerns. As a result of those defaults, banks have fewer liquid assets with which to meet depositor needs. It’s as simple as that…
China’s interbank market is doing precisely what it should. It’s having interest rates reflect risk. It’s long overdue but very welcome. It means China continues to ease on down the road to capitalism. It’s a rocky road but the only road we’d want China to be on.