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Money Market Rates Remain High in China as the Cash Crunch Continues

“SHANGHAI—China’s money-market rates remained stubbornly high Tuesday, suggesting a standoff between the country’s central bank and lenders that is causing stress to the financial system is set to continue.

An interbank benchmark for funding costs called the seven-day repo rate was at 6.82% Tuesday, close to the 6.89% rate at Monday’s close and a record 6.90% on Friday. It had averaged around 3.30% this year before the liquidity crunch began at the end of last month.

In a sign that China’s central bank isn’t going to relax the pressure soon, the People’s Bank of China refrained from adding cash to the financial system Tuesday. It normally conducts so-called open market operations on Tuesdays and Thursdays by adjusting short-term loans to commercial lenders, which controls the supply of credit.

Since they first soared on May 31, interbank lending rates have taken a toll on other financial markets and vexed investors. The benchmark Shanghai Composite Index has fallen 7.1%, while short-dated bond yields have risen more than 40 basis points. The yuan has been flat during the same period as global investors have pulled out money and lowered expectations for further gains.

The tight conditions suggest China’s financial markets will remain under pressure even though some big banks are calling for the central bank to inject more cash into the market by lowering the share of deposits that banks are required to set aside against financial trouble.

Analysts say Beijing may even be taking advantage of the market turmoil to test banks’ capacity for risks. The higher funding costs stress the ability of banks to raise cash and may reveal which lenders have taken on too much risk should they get into trouble…..”

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