China’s recent attempt to boost economic growth through a stimulus package has inadvertently triggered widespread financial turmoil, with short-term interest rates soaring to 50%, according to a report by Bloomberg.
In an unusual move, Beijing approved a mid-year budget adjustment last month, allowing the issuance of a record $137 billion in sovereign bonds. The intention was to alleviate debt pressures on local governments and provide stimulus amidst economic challenges.
However, the surge in bond sales, including those by local governments, absorbed a substantial amount of liquidity. As a result, onshore lenders found themselves in a cash crunch, prompting a frenzied scramble to raise funds.
This week, banks ramped up the issuance of short-term debt at an unprecedented pace. The sale of negotiable certificates of deposit, a form of short-term debt, doubled to over 1 trillion yuan (approximately $137 billion), as reported by Bloomberg. Even the state-backed Industrial & Commercial Bank of China issued a six-month note at the highest yield of the year.
The liquidity squeeze hit smaller banks particularly hard, forcing some to borrow cash at a staggering 50% short-term rate on October 31. This spike coincided with the month-end book squaring requirements for banks, as reported by Reuters.
In response to the crisis, the People’s Bank of China has indicated plans to address liquidity challenges through various monetary measures. Proposed strategies include reducing lender reserve requirements and injecting cash through open market operations.
The liquidity concerns compound the myriad issues already affecting China’s financial markets this year, including sluggish growth, a real estate downturn, mounting debt, and the departure of foreign investors’ capital since the easing of pandemic restrictions a year ago.
