The Chinese Banking Liquidity Crisis of 2013 was a sudden credit crunch affecting China's commercial banks evidenced by a rapid rise on 20 June 2013 in the
Shanghai interbank overnight lending rates to a high of 30 percent from its usual rate of less than 3%.
The ensuing panic affected gold markets and stock.
China's regulation of the
foreign exchange market had caused a decline in inflow of cash.
On 19 June 2013, instead of injecting additional funds and easing its monetary policy, China's central bank
People's Bank of China
The People's Bank of China (officially PBC or informally PBOC; ) is the central bank of the People's Republic of China, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, as determined by ...
(PBOC) told commercial banks to "make full use of incremental funds and revitalize stock options."
On 24 June 2014 the PBOC told commercial banks to "control the risk associated with credit expansion" effectively increasing the scrutiny of
shadow banks' lending practices. This resulted in a sudden shortfall in the cash market resulting in short term
repo rate
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two pa ...
s in excess of 25%. In effect China was using market forces to manage the economy.
Context
China's 2008 monetary stimulus package contributed to China's subsequent economic boom. By 2011 China's local government debts was already under scrutiny from national regulators. There were concerns even that the "massive, shady trade"
in
over-the-counter
Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
credit could place China's financial security and social stability, at risk.
By 2011 half of the loans in China were in shadow banking with no regulatory scrutiny. In March 2013
Li Keqiang, an economist by training, was elected as
Premier. In 2010 Li Keqiang had called for a global governance structure that was "more reflective of the changes in the global political and economic landscape."
By 2013 China was concerned about shadow banking, which includes
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as s ...
, private financing, trust loans, private funds and other non-bank financial institutions.
A
Bank of America Merrill Lynch Global Research report published in January 2014 cautioned that "local government financing vehicles and shadow banking" remained a concern and if not addressed could lead to costly defaults.
Market Reaction
Following PBOC intervention in June 2013, the loss of liquidity from shadow banks caused the blue-chip Shanghai Composite Index (CSI300) to plummet 5.3% the largest daily decline in nearly 4 years. As result, the credit rating agency
Moody's
Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
issued a warning on Chinese and
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...
debt obligations.
PBOC Reaction
Following the market's reaction, the PBOC refused to inject additional funds to cover the liquidity shortfall implying a dramatic policy change from rapid growth to quality growth. Analysts predict the sudden tightening of lending rates served as a warning to overzealous banks to control their lending practices.
References
{{Financial crises
Banking in China
Banking crises
2013 in China