It was less than 24 hours after we warned that the Chinese “liquidity shortage” had hit an all time high, as a result of the PBOC’s intransigence to inject liquidity into a financial system roiled by Bernanke’s and Kuroda’s offshore hot-money flows, that things got worse when early in the Chinese trading session we learned that the PBOC experienced its first liquidity drainage failure in 23 months, when the Chinese Finance Ministry failed to sell over 30% of the debt offered at auction – the direct result of a cash squeeze currently ravaging the country’s banks.
The ministry sold 9.53 billion yuan ($1.55 billion) of 273-day bills, less than the 15 billion yuan target, according to Chinabond, the nation’s biggest bond-clearing house. Agricultural Development Bank of China Co. raised 11.51 billion yuan in a sale of six-month bills last week, less than its 20 billion yuan goal.
We explained the reasons for this previously but, once again, here is why China continues to find itself between an inflationary, foreign-liquidity sourced rock, and a contracting and failing credit transmission mechanism hard-place.
Banks are hoarding money to meet quarter-end capital requirements at the same time as capital inflows are easing amid a worsening economic outlook and speculation the Federal Reserve will rein in monetary stimulus. The seven-day repurchase rate, a gauge of interbank funding availability, has more than doubled in the past month and the Hang Seng China Enterprises Index (HSCEI) of shares slid today for a record 12th day in Hong Kong.
“The cash crunch is curbing demand for bonds,” said Chen Ying, a fixed-income analyst at Sealand Securities Co. in Shenzhen. “The crunch may persist if the central bank doesn’t come out to inject more capital into the financial system. If it lasts longer, it may affect issuance of both government and corporate bonds.”
The average yield at today’s bill sale was 3.76 percent, according to two traders who are required to bid at the auctions. That compares with a 3.14 percent rate yesterday for similar-maturity existing securities, according to data compiled by Chinabond. The ministry’s last failed auction was a sale of 182-day bills in July 2011.
The PBOC has been very unwilling to inject any incremental liquidity in a long time, halting reverse-repo based injections in February 7.
The People’s Bank of China added a net 92 billion yuan to the financial system this week, down from 160 billion yuan in the five days through June 7, according to data compiled by Bloomberg. The monetary authority refrained yesterday from draining cash for the first time in three months as money markets reopened after a three-day holiday. The last time it used reverse-repurchase agreements to inject funds was Feb. 7.
“If the central bank doesn’t conduct reverse-repurchase agreements or short-term liquidity operations to inject capital, cash supply will stay tight for the rest of the month,” said Cheng Qingsheng, a bond analyst at Evergrowing Bank Co. in Shanghai.
What is more disturbing is that China also stated that this may not change much any time soon as a result in a downshift in growth (and inflation) strategy, which is always dictated via the monetary, and credit channels. So while we expect that the PBOC may surprise the world with an RRR, or interest rate cut, as we speculated yesterday, whether or not China does this is another matter.
We are confident (or at least hope) the PBOC realizes that the trade-off to a slowing economy is a banking system which is unsustainable if the credit expansion to which the local banks are used, continues to “taper.”
And the flipside is that if and when it finally gives in and resumes injecting liquidity, then the people, well-conditioned from years of inflationary fears, will line up dutifully in calm, cool and collected lines to buy up that old barbarous relic: gold.
Those who wish to keep track of Chinese liquidity first hand, best visualized by various SHIBOR tenors, can do so at the following site. And while ultra-short term liquidity conditions have improved modestly in the past 3 days, SHIBOR beyond a 1 month maturity continues to rise.