Jun 24, 2013

    China reins in shadow banking with cash squeeze

    THERE is ample liquidity in China and the latest spike in money-market rates was a result of market distortions caused by widespread speculative trading and shadow financing, state news agency Xinhua said in a commentary yesterday.

    China's central bank faced down the country's cash-hungry banks last Friday, letting interest rates spike again to extraordinary levels of some 25 per cent for some banks.

    Comments from Xinhua confirm analysts' suspicions that the central bank's funding squeeze was aimed at reducing non-bank lending, or shadow banking, which has boomed in recent years.

    The cash crunch engineered by the central bank was intended as a warning to overextended banks, but it has also fed fears that a miscalculation could trigger a full-blown crisis.

    Xinhua said there was sufficient liquidity in the market, with data showing that M2 money supply rose 15.8 per cent last month from a year earlier. The total social-financing aggregate, a broad measure of liquidity in the economy, was more than 1 trillion yuan (S$206 billion).

    "The banks are short on cash, the stock market and small and medium-sized enterprises are short on cash, but there is ample money supply in the market," it said in the commentary.

    The central bank's refusal to inject cash into the system, despite a spike in short-term lending rates, suggests its monetary policy has begun to shift from one focusing on quantity to quality of market liquidity, Xinhua said.