The immediate reaction, which we pointed out back in May, is that some of the key interbank lending rates - those which banks rely on to obtain critical short-term funds - have moved sharply higher in recent weeks, with the 1 month repo soaring, and almost doubling over the past month.
"Bank failure always causes greater concern given systemic fears," said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group, suggesting greater pressure on the private sector ahead. Naturally, with China growing at the slowest pace in recent history, beset by shadow bank deleveraging, trade war, a shaky transition to a consumer economy and China's first ever current account deficit, these stresses come at a very bad time for the normal functioning of the local economy.
Nonbank borrowing through bond repos and interbank loans skyrocketed since China's central bank began easing monetary policy in early 2018, hitting a net 74 trillion yuan in the first quarter of 2019, according to Enodo Economics, and up nearly 50% from a year earlier.
As we warned as far back as March 2017, problems appear to be migrating from the smallish market for negotiable certificates of deposit, used mostly by small banks, into the vastly greater bond repo market.
Worse, as Bloomberg followed up over the weekend, the interbank market is now also freezing up as a result of counterparty suspicions: one month after Baoshang, Chinese bond traders in China are "Rethinking counterparty risks as shock waves from a government takeover of a bank ripple through the country's financial markets."
In ominous echoes of what happened before, and certainly after the Lehman failure, it has gotten far harder for corporate bonds to be accepted as collateral for repo financing as lenders increasingly demand top quality bonds such as Chinese sovereign bills and policy bank notes as pledges, with Bloomberg noting that "Traders are having second thoughts on taking even AAA rated short-term bank debt as security in the wake of last month's seizure of Baoshang Bank".
While seasonal cash demand ahead of the quarter-end is probably playing a role, the WSJ adds that small banks, squeezed out of the market for NCDs, may also be trying to replace a portion of three or six-month NCD funding in the repo market.
https://www.zerohedge.com/news/2019-06-19/meanwhile-china-echoes-lehman-interbank-market-freezes
"Bank failure always causes greater concern given systemic fears," said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group, suggesting greater pressure on the private sector ahead. Naturally, with China growing at the slowest pace in recent history, beset by shadow bank deleveraging, trade war, a shaky transition to a consumer economy and China's first ever current account deficit, these stresses come at a very bad time for the normal functioning of the local economy.
Nonbank borrowing through bond repos and interbank loans skyrocketed since China's central bank began easing monetary policy in early 2018, hitting a net 74 trillion yuan in the first quarter of 2019, according to Enodo Economics, and up nearly 50% from a year earlier.
As we warned as far back as March 2017, problems appear to be migrating from the smallish market for negotiable certificates of deposit, used mostly by small banks, into the vastly greater bond repo market.
Worse, as Bloomberg followed up over the weekend, the interbank market is now also freezing up as a result of counterparty suspicions: one month after Baoshang, Chinese bond traders in China are "Rethinking counterparty risks as shock waves from a government takeover of a bank ripple through the country's financial markets."
In ominous echoes of what happened before, and certainly after the Lehman failure, it has gotten far harder for corporate bonds to be accepted as collateral for repo financing as lenders increasingly demand top quality bonds such as Chinese sovereign bills and policy bank notes as pledges, with Bloomberg noting that "Traders are having second thoughts on taking even AAA rated short-term bank debt as security in the wake of last month's seizure of Baoshang Bank".
While seasonal cash demand ahead of the quarter-end is probably playing a role, the WSJ adds that small banks, squeezed out of the market for NCDs, may also be trying to replace a portion of three or six-month NCD funding in the repo market.
https://www.zerohedge.com/news/2019-06-19/meanwhile-china-echoes-lehman-interbank-market-freezes
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