SHANGHAI — There is ample liquidity in China and the latest sharp increase in money market rates was a result of market distortions caused by widespread speculative trading and shadow financing, Xinhua, the state-run news agency, said in a commentary Sunday.
China’s central bank faced down the country’s cash-hungry banks Friday, letting interest rates again hit extraordinary levels of about 25 percent for some banks, as it stepped up the pressure to rein in rampant informal lending.
Comments from Xinhua, seen as a government mouthpiece, confirm analysts’ suspicions that the central bank’s funding squeeze was aimed at reducing nonbank lending, or shadow banking, which has boomed in recent years.
Throughout, the central bank has remained silent. Several telephone calls to the bank for comment went unanswered.
The central bank intended the cash crunch to serve as a warning to overextended banks, analysts say, but it has also fed fears that a miscalculation could create a full-blown crisis.
Xinhua said there was sufficient liquidity in the market, with data showing broad money supply rose 15.8 percent in May from a year earlier, and the total social financing aggregate, a broad measure of liquidity in the economy, was more than 1 trillion renminbi, or $163 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.
“Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread.”
These factors showed that the liquidity crunch was not caused by a shortage of funds but by structural issues that kept money from reaching the real economy, it added.
Overall financing in the Chinese economy increased 52 percent in the first five months of 2013 from the corresponding period last year, which analysts say was led by a surge in shadow banking activity and wealth management products that promised investors high returns.
The central bank’s refusal to inject cash into the system, despite a drastic increase 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.
China’s cabinet has vowed to ensure credit growth supports the real economy and to control the flow of new money into industries struggling with overcapacity.
For years, the central bank has made stability its watchword, which for the money markets meant it would always provide liquidity when cash conditions tightened. As the central bank is now standing back while banks scramble for cash, markets are left uncertain whether there has been a fundamental change in policy, analysts say.
In effect, there seems to be a competing policy objective, said Charlene Chu, a senior director at Fitch Ratings.
“The real uncertainty in the market comes down to people not really knowing which of those is more important at which point in time,” she said on the sidelines of a conference in Sydney.
Article source: http://www.nytimes.com/2013/06/24/business/global/shadow-banking-behind-chinas-cash-crunch-xinhua-says.html?partner=rss&emc=rss
