China: China Hit by Liquidity Crunch in June

Consensus Forecasts

Despite sluggish economic activity, overall credit growth has continued to soar in China and anecdotal evidence suggests that bank lending rose strongly at the start of June. Much of the country’s credit boom has been fuelled by financing provided by the shadow banking sector, which consists of wealth management funds, trust companies, offshore vehicles and other informal lenders. Faced with mounting fears that runaway bank lending could lead to a credit bubble which will weaken growth in an already slowing economy, the central bank refrained from pumping more liquidity into the money markets to alleviate last month’s cash crunch. As a result, interbank rates, which have been on the rise since the start of June, surged to record-highs in the latter part of the month. Global fears about a credit crunch in China sent the Shanghai stock market tumbling and roiled financial markets around the globe. The tough stance adopted by Beijing reflects the authorities’ unwillingness to let credit expand too quickly. And it shows that China’s new leaders are prepared to accept lower growth in return for pushing ahead with market reforms to help rebalance the economy. Following the unprecedented spike in interbank rates, funding costs have since come down, although they still remain above their pre-stress levels, and share prices have recovered on the belief that the central bank will act to avert a crisis. Indeed, in a move seen as an attempt to calm investor fears, the authorities subsequently issued a statement pledging to provide support to banks facing funding problems.

Real GDP growth forecasts for 2013 have dipped again this month, underpinning the belief that Beijing is less concerned about growth as it pushes ahead to rebalance the economy.

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