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China's Liquidity Crisis
Brian Trumbore

China’s Shanghai Composite stock market barometer fell 5% on Monday, June 24, amid signs of a cash crunch in the banking system, which has been in the news there recently.

The government sought to reassure investors that there was ample liquidity in the financial system, though at the same time it talked of a crackdown on shadow financing or banking.

Xinhua, the official news agency, said in a commentary, “It is not that there is no money, but the money has been put in the wrong place.”  The People’s Bank of China restated its commitment to moderate credit growth and a prudent monetary policy.

But last week, the government, through the PBOC, allowed short-term money market rates, the rates for lending between banks, to soar to 28% before pulling them back on Friday.  But it has yet to give an explanation for the move.  The shock moment, as it was described by the Financial Times, led to rumors one of China’s biggest banks had defaulted.

The situation wasn’t helped over the weekend when a technical glitch caused by a long-planned software upgrade at Industrial Commercial Bank of China made cash withdrawals impossible for almost one hour at the bank’s ATMs; again triggering fears one of the biggest state lenders was going down.

The PBOC is simply trying to impose more discipline on its banks and reduce their reliance on credit.

One thing is clear.  The Chinese economy is slowing considerably, and the PBOC does not seem interested in any new massive stimulus efforts as was the case in the past.

China’s financial institutions need to get used to this new reality.

Editorial / Global Times...another government mouthpiece...offered without opinion by yours truly:

June 22, 2013

Over the past month, China’s market has seen a rare liquidity squeeze together with rumors that some banks were suffering from monetary defaults.  Some even predicted a Chinese version of the U.S. “sub-prime mortgage crisis” and claimed economic problems in China would worsen.

China’s economic development has seen ups and downs in the past three decades.  Every now and then, theories of “China’s economic breakdown” seem to come out of nowhere.  Nonetheless China has survived all these “theories” and achieved unexpected economic success.

We have enough reasons to remain confident about the country’s future.

With China’s influence on the global economy, it is natural that the world pays close attention to the Chinese market and makes optimistic or pessimistic forecasts.  Such forecasts usually involve different special interests at play.

On one hand, it shows that China’s economy has cast a growing influence in the world.  On the other, it reminds us of problems we might have ignored, even though the reminders seem exaggerated.

The liquidity squeeze this month and the worries it has created reflect problems in local government debt levels, shadow banking and excessive liquidity.  The problem does bear certain similarity with the 2008 financial crisis.  Much of it, especially the debt, comes from local governments’ excessive pursuit of GDP growth over the years.  The possibility that a “subprime mortgage crisis” might break out in China is slim.

The Chinese government has stated that its main goal in managing the economy is to keep the economic policy stable, prevent inflation and control risks.  Analysts believe that the central government is well aware of the financial risks in the current market.

From past experience, a financial crisis can often break out unexpectedly.  Before 2008, no one would have dreamed that Wall Street would create such destructive waves.

The IMF released financial crisis warnings to Mexico and Argentina at the time but the crisis broke out elsewhere.  From that perspective, the high alert the Chinese government was on concerning the financial market is the best way to prevent such a crisis.

Many people mistake urgency for pessimism.  Being frightened by a potential breakdown and doing nothing is pessimism.  A sense of urgency, on the other hand, does not avoid problems.  It spots problems through the criticisms of others and actively addresses issues in advance.

The future of China relies largely on today’s choices.  We cannot predict the future but it is sufficient to say that as long as we have faith, a sense of urgency, and work hard, we may keep on a steady path in the country’s future.


Wall Street History returns in two weeks.

Brian Trumbore


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