Commentary on Political Economy

Tuesday, 1 December 2020



Cash Squeeze at Small China Banks Is Warning Sign for Market

Tian Chen
Updated on 
  • Cost of one-year interbank debt has doubled since April low
  • Smaller lenders don’t have access to central bank liquidity

Some of China’s smaller banks are finding it increasingly difficult to borrow from each other, another sign that rising corporate defaults are starting to infect the financial system.

The cost of one-year interbank debt -- a lifeline for small and medium lenders -- was at 3.34% on Monday, or about twice what it was in April. The yield is now 39 basis points higher than the rate offered by the People’s Bank of China on its medium-term loans, the widest gap since July 2018.

China’s smaller lenders rely on cash from other banks because they don’t have direct access to liquidity offered by the central bank. A series of high-profile credit defaults have recently made China’s larger lenders more cautious in handing out funds. Brokerages and insurers are also grappling with a volatile market for short-term borrowing.

Interest-rate gap between one-year NCDs and MLF is widest since 2018

Another concern is that the People’s Bank of China may soon pull back on the emergency stimulus measures it deployed to support the economy during the virus pandemic. Recent economic data seem to endorse such a move, with an official gauge of factory activity climbing faster than expected in November. PBOC Vice Governor Liu Guoqiang said last month that tapering easing policies “is a matter of time and it is also necessary.”

It all means that even though the PBOC injected $30 billion with medium-term lending facility into the financial system on Monday -- after adding short-term cash every day last week -- those funds aren’t trickling down to some of the most vulnerable parts of China’s financial system.

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