The surge in June's money market rates has created fears of a severe credit crunch for China with substantial negative macroeconomic implications for the country and globally. To monitor this risk closely, we intend to publish this monitor at least once a month depending on market developments. Focus will be on money market stress indicators and credit flows, but some general macroeconomic indicators will be included.
The Chinese money market appears to have shaken off the stress, but it is too early to talk about normalization. So far it appears that the spike in interest rates has been driven mainly by a liquidity crunch rather than a substantially higher perceived default risk in the interbank market. While some credit premium measures temporarily moved markedly higher, credit has normalized relatively quickly.
The People's Bank of China (PBoC) has so far acted relatively cautiously, and avoided across the board liquidity injections through its open market operations, partly because as it believes a large part of liquidity squeeze has been driven seasonally. However, it could start to act more proactively if money market rates stay elevated.
The main risk for China is that the liquidity crunch becomes permanent, and turns into a credit crunch. Looking ahead, we should continue to watch the development in money market rates closely. If money market rates do not continue to decline, China will face an unintended monetary tightening. In addition, the credit data should be watched closely for any signs of substantially slower credit growth. Even if the money markets normalize, we believe that a slowdown in credit growth is unavoidable.
To Read the Entire Report Please Click on the pdf File Below.
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Monitor: The Chinese Credit Crunch
Published 07/02/2013, 12:33 AM
Updated 05/14/2017, 06:45 AM
Monitor: The Chinese Credit Crunch
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