China’s Banking Crisis Coming to an End?

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Jul. 1 – China’s cash liquidity crisis has caused concern in the country after initially starting off in May and culminating with the overnight Shanghai Interbank Offered Rate (SHIBOR) reaching a historic high of 13.44 percent and transaction rates spiking to 30 percent on June 20.

According to the People’s Bank of China (PBOC) – China’s central bank – a liquid cash shortage sparked the crisis, with the shortage attributed to rapidly growing loans, the June corporate income tax deadline, changes in the foreign exchange market, cash demand during China’s Dragon Boat Festival, and the payment of additional legal reserve funds. To make matters worse, rumors of Chinese banks defaulting on deals due to the shortage of liquid cash were widely dispersed, which drove the Chinese stock market to its lowest levels since 2009.

In contrast to the panic spreading throughout the country’s financial markets, the PBOC has presented a largely calm demeanor to the public throughout this ordeal. It released a letter on June 24 (about a month after the cash shortage began) stating that the overall liquidity of China’s banking system is still at a reasonable level. The letter also suggested that commercial banks should pay closer attention to the status of the financial market, enhance their analyses and predictions of the influencing factors on liquidity, and make liquidity plans so as to mitigate the risks of such a shortage happening in the future.

The PBOC further reiterated that commercial banks should continue to strengthen their management of liability and control over lending risks.

“Banks need to change their expectations that liquidity will always be loose,” added PBOC Head of Monetary Policy Development Zhang Xiaohui. “They should enhance their analysis and judgment on all kinds of influencing factors, and improve their own management on liquidity.”

The PBOC also released another statement to help pacify the market by mentioning that it will offer support to certain financial institutions that have “met the macro-prudent requirements.”

With the PBOC coming to the rescue, China’s banking crisis seems to have eased up considerably over the past several days, with the overnight SHIBOR falling to 4.941 percent as of this morning.

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