China rates spike again as banks scramble for funds

SHANGHAI (Reuters) – Chinese cash rates spiked as high as 25 percent for a second day on Friday as banks scrambled to secure cash, but fears of a broader banking crisis eased on speculation the central bank had quietly added funds to the market.

After the opening spike, rates sank back to under 10 percent on talk of the possible cash injection, but some smaller banks were still paying exorbitant rates. There were also denials from two of the world’s biggest lenders that they had needed emergency funding from the People’s Bank of China (PBOC).

The overnight bond repurchase rate – a measure of the cost of cash – fell to 8.39 percent on a weighted average basis on Friday, down sharply from Thursday’s close of 11.62 percent, but still more than double typical levels.

There has been panic in some parts of the money markets in China this week as the central bank has held back from flooding a tight market with cash, traders said.

Analysts say the PBOC wants to send a stern warning to banks that it believes are using short-term funding for trading rather than lending to support a slowing economy.

“We believe this is a signal that the central bank is beginning to impose moral hazard and eventually market discipline on the banking sector,” Michael Werner, senior banking analyst at Bernstein Research in Hong Kong, said in a note to clients on Friday.

Industrial and Commercial Bank of China (1398.HK )(601398.SS ), the world’s largest bank by assets, and Bank of China (3988.HK )(601988.SS ), China’s fourth-largest lender, both denied rumors that they had received emergency overnight loans shortly before market close on Thursday.

Unlike the squeeze in Western money markets during the 2008 financial crisis, China’s squeeze largely reflects the policy focus of the central bank to rein in some forms of credit.

“With China’s credit-to-GDP ratio at 200 percent, we believe that the PBOC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth,” Barclays economist Yiping Huang and rates strategist Igor Arsenin wrote in a report.

At a regular meeting on Wednesday, China’s cabinet affirmed its commitment to reducing financial risks and ensuring that credit growth supported the real economy.

(Additional reporting by Lu Jianxin and Bi Xiaowen in HONG KONG- Editing by John Mair and Mark Bendeich)