Courtesy of Mish.
As noted on December 23, China Interest Rate Crisis Continues: China Bans Words “Cash Crunch”, the 7-Day Interest Rate Doubled to 10%. The doubling of rates took about a week.
Then, on December 24, China injected 29 billion RMB (Yuan), about $4.8 billion.
For the size of China’s RMB 130 trillion economy (about $2.14 trillion), that $4.8 billion is a trivial amount. Nonetheless, the 7-day repo rate crashed back down to about 5.33%.
Mission accomplished?
It’s a lot more complicated than “mission accomplished” as the following discussion shows.
China’s Move to Market-Set Rates
Let’s step back to December 8 and look at China Relaxes Grip on Interest Rates
China is relaxing its grip on interest rates with the launch of a financial instrument that allows banks to trade deposits with each other at market-determined prices.
The certificates of deposits will push banks closer to an operating environment in which rates are deregulated and are also aimed at improving the circulation of cash in the country’s interbank market.
Beijing used to fix deposit and lending rates, limiting competition between banks and in effect transferring cash from savers to borrowers because of the artificially low rates. But over the past two years, the government has rolled back its controls, lifting all restrictions on lending rates and giving banks more freedom to determine deposit rates.
Under the changes – which come into effect on Monday – individual CDs will have to be at least Rmb50m ($8.2m) in size and issuers will have to inform the central bank in advance how much they plan to issue in a year. Banks, fund managers and other institutions in the interbank market will be able to trade the CDs, but non-financial companies and retail investors will be barred.
The liberalisation is seen as a necessary part of China’s efforts to reduce its reliance on investment and boost consumption as well as to integrate itself more fully in the global financial system with lighter capital controls.
China’s Central Bank Discusses Deposit Insurance …
