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As if we didn’t have enough to worry about, there are signs of a bank funding crisis in China.
Bank of America Merrill Lynch rates and currency strategists raise the red flag (of warning, not of China) this morning, appending this fairly unnerving chart of the spread between Shibor and the PBoC bill rate, which is the equivalent of our Libor-OIS spread, measuring the anxiety banks feel about lending money to each other in the short term.
BofA analysts write that, since Shibor was born in October 2006, it has largely tracked movements in US dollar Libor. During the relative period of calm that followed the financial crisis of 2008, the three-month Shibor/PCoC bill spread traded at about 30 basis points, roughly matching Libor-OIS.
But in late 2009, the two measures started to part ways, with the Shibor spread rising steadily as a result of heavy demand for capital in China following Beijing’s stimulus package, while Libor-OIS stayed well-behaved.
The Shibor spread continued to rise, and in late 2010 and in June of this year hit heights not seen since the 2008 crisis. Last year’s spike faded, but this one has not, raising the question of whether a funding crisis is brewing in China.
BofA analysts write:
The good news is that little is truly needed in three-month funding. China's banks are primarily deposit funded…. In terms of funding the liquid operations, repo dominates the Shibor based interbank borrowing by a ratio of 2.5 to 1.
Among maturities, the operation heavily gears toward overnight, which accounts for 74% of repo and 80% of Shibor volume.
Since the funding transaction for any term longer than two weeks accounts for only 2-3% of the total transaction volume, the persistent nature of the 3M Shibor/PBoC Bill spread seems to be of little importance.
However, the shortage for cash is real, all over the space. On the aggregate level, the deposit growth has slowed down significantly. As the growth rate comes down, the monthly deposit change has become much more volatile, projecting another level of uncertainty to banks as they fight over deposits. So far this year, there have been two months with deposit drops, which has never happened since 1998.
The problem, BofA analysts surmise, is that Chinese depositors are annoyed with getting negative real interest rates on their bank deposits and so are seeking out other places to put their cash.
So the solution to this funding crisis, if that’s what you want to call it, could be for the PBoC to raise deposit rates, attracting more deposits to the banks. That would also have the effect of mopping up liquidity in the system and fighting inflation. In other words, while the Western funding crisis in 2008 was caused by too little liquidity, China’s funding crisis of 2011 might be caused by too much liquidity.
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Many Chinese are buying real estate by cash, no loan at all. Have you ever based in China? Learn some Chinese before you make a laugh!
THIS IS NEW BUSINESS BANKING BABY! Why earn Spatutsky when you can get 5 x the national average in fortune cookies. There is still probably enough gold in China to buy Poland, so don’t worry.
Hey , are you a Pisces?
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Mark Gongloff spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Mark at mark.gongloff@wsj.com.
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