Monday, December 23, 2013

SHIBOR problems affect PBOC credibility

What is going on in Chinese financial markets? SHIBOR 1 month rates are at the highest levels since June, 7.65%. It seems odd that we would have huge seasonal swings in interest rates at the end of the quarter and end of the year for a sophisticated financial system, yet here we are with the PBOC pumping money into the banking system to stave off a funding crisis for smaller financial institutions as they search for funds to meet end of year rate requirements.

We have to go back to the real bills doctrine and say clearly that the central bank has to meet the needs of the financial system even if they want to tighten bank standards. It does not matter that there are significant excess reserves. The money is not getting to those who need it. We know that the PBOC  wants to form a more market determined rate environment, but the funding inside China is lopsided toward the large state owned institutions.

Once a crisis begins, it may be hard to stop, and it will have credibility issues across global financial markets. If China wants to show that it can be  major financial player, the central bank has to take care of its house. 

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