| inbluevt | Date: Saturday, 2013/07/13, 10:03 PM | Message # 1 | DMCA |
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LAST month some Chinese banks found it excruciatingly difficult to borrow the money they required from their fellow banks. The interest rate for an overnight loan from one bank to another briefly hit 30% on
June 20th, compared with a typical rate of about 2.5% earlier in the year. This cash crunch or “Shibor shock” (Shibor stands for Shanghai Interbank Offered Rate, a benchmark interest rate) raised immediate fears of bank defaults. It also highlighted broader concerns about financial excesses in China, where the supply of credit has been growing faster than the economy. What caused the sudden cash crunch?
Banks keep cash in reserve both to satisfy regulatory requirements and to meet their obligations to customers, creditors and each other. If a bank runs short of money, it typically borrows cash from other banks that have more than they need. Although banks can run out of money, China cannot. Its central bank, the People’s Bank of China (PBOC), can “print” all the yuan it needs. It transfers this freshly created money to the banks by buying something from them, such as foreign currency, bonds or
other safe financial assets. It can also lend it to them. But when China’s banks ran short of cash last month, the central bank surprised everyone by refusing to help. Instead of adding more money to the
banking system it sat on its hands, causing the crunch. Exactly why it did so is still in dispute.
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Message edited by inbluevt - Saturday, 2013/07/13, 10:05 PM |
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