According to three sources, China’s financial authorities are looking into a month-end liquidity shortage that caused short-term money rates to spike to as high as 50%. They also request explanations from some institutions for why they took out loans at such exorbitant rates.
Due to tension in the money markets induced by a month-end rush for cash and an abundance of sales of government bonds, the overnight rate for pledged repo, a short-term lending company, reached a record high of 50% on October 31.
According to two people with direct information, the central bank affiliate that runs China’s interbank market, the China Foreign Exchange Trade System (CFETS), has requested explanations from institutions that finalized deals on Tuesday at the 50% rate.
“Anyone who borrowed money at very high rates needs to explain to regulators the decision-making and bidding process,” according to a different direct source.
Traders and experts say that a new issuance of sovereign bonds worth $136.63 billion and an increase in the supply of government bonds have caused a lot of liquidity stress when banks need to balance their books to meet regulatory requirements at the end of the month.
According to Becky Liu, head of Standard Chartered’s China macro strategy, authorities may have also desired to maintain restricted yuan liquidity to stop the currency’s decline versus the US dollar in the foreign exchange market.
According to a trader, many fund houses, brokerages, and trust companies were rushing to borrow money during Tuesday’s afternoon session to prevent defaults because central banks were unwilling to lend. The source claimed that “demand for cash far outpaced supply, boosting short-term rates.” “For each institution, it was a rational decision.”
However, at a meeting on Wednesday, authorities advised certain institutions “not to be emotional,” according to a second trading source.
“Everyone still feels a little uneasy right now. Everyone is ready, and there will be plenty of liquidity.”
Comment Template