China and Japan DANGER AHEAD--What's Really Behind China's Cash Crunch
CNBC.com| Thursday, 20 Jun 2013 |11:30 PMET
When it comes to the economy, China's policy makers have often been criticized for a heavy-handed
approach, stepping in at the first signs of trouble. That makes the reluctance by the central bank to
pump in cash and alleviate a credit squeeze for local lenders highly significant, analysts say.
"There is a sea change taking place in China," said David Mann, the head of regional research for
Asia at Standard Chartered Bank in Singapore. "The reluctance to intervene in the money markets, the
tolerance of a lower rate of growth, it's all part of the same story of China trying to secure a better
long-term outlook for the economy."
A credit squeeze among China's lenders took a turn for the worse on Thursday after overnight
lending rates surged. The seven-day repo rate, which is seen as gauge of confidence to lend in the
interbank market, rose to a record high above 10 percent, before easing back to around 8 percent on
Friday.
The prospect of a liquidity drying up in world's second largest economy rattled markets inside and
outside China, unnerving investors at a time when the U.S. Federal Reserve looks set to start
unwinding some of monetary stimulus it has pumped into the economy in recent years.
"China is the biggest risk at the moment. We've got the interbank rate spike and a growing numbers of
calls for a credit crunch in China," said Stan Shamu, market strategist at trading firm IG.
For some time now, China watchers have argued that Beijing needs to do more to clamp down on the
credit growth among local lenders as well as tolerate a slower level of growth to allow the economy to
rebalance itself away from a dependence on manufacturing and investment towards consumption.
Recent noises from Beijing's policymakers have suggested that they are willing to tolerate a slower
rate of growth even as signs of weakness show up in data.
"The new government is not as concerned about growth or artificial growth as the old government
was," said Shamu. "They have already emphasized they want to see good structural changes in the
domestic economy as opposed to creating an artificial bubble."
The central bank is playing its role in trying to engineer long-term changes that will benefit the
economy long-term, analysts say.
(Read More: Op-Ed: China Is Dealing With an Addiction)
While a sharp slowdown in foreign exchange inflows and seasonal factors have dried up liquidity, the
central bank has not helped by draining funds from the market and deliberately stayed away in a bid to
force local lenders to rein in credit growth which has reached worrying levels.
According to research from Credit Suisse, China's credit-to-GDP ratio surged to more than 170
percent last year from just over 110 percent in 2008. Ratings agency Fitch Ratings has warned that
the scale of credit in the economy was so extreme that it would find it difficult to grow its way out of
the excesses.
In addition to not helping local lenders by providing more liquidity, there has been growing talk that
China's central bank will allow smaller lenders to default on their loans to other banks... |
