Pressure Is Building in China’s Financial Plumbing
Signs of indigestion in China’s money markets are an ominous sign—particularly given shadow-bank troubles and enormous government debt
Plumbing is something most of us take for granted—until there’s a problem, at which point things can get messy fast. Likewise for the “plumbing” of modern financial systems: the money markets, where banks and other financial institutions make short-term loans to each other.
So given the strains China’s economy is already laboring under—including a slow-motion property sector implosion and the “serious” insolvency of Zhongzhi Enterprise Group, a large asset manager, in its own words—it isn’t a great sign that China’s money markets have recently been throwing off little blips of distress too.
There is little sign of an immediate crisis such as the one that erupted in the wake of regulators’ sudden takeover of Baoshang Bank, a midsize lender, in 2019. But unusual rate movements in recent weeks—and, reportedly, actions by authorities behind the scenes to strong-arm lenders—are still worrying. For one, they come in the wake of a big rebound in short-term interbank lending, particularly to nonbank borrowers—a category which includes funds, asset managers and “shadow banking” trusts such as the one owned by Zhongzhi that defaulted on its obligations in August.
Climbing rates after a period of rapidly rising borrowing is always a potentially combustible situation—especially when the real economy is already struggling.
China’s money-market rates often spike at month-end, but the last day of October saw overnight rates briefly rise as high as 50%: a high driven by a scramble for cash by some nonbank financial institutions, according to state media. Both benchmark interbank rates and rates for negotiable certificates of deposit, an important funding instrument for small banks, have marched higher since mid-August. Cash injections by the central bank through its medium-term lending facility have increased—with the outstanding balances rising by 600 billion yuan, equivalent to $84 billion, in November, the most since 2016. And in mid-November regulators asked some lenders to cap rates on an interbank debt instrument, according to Reuters.
The unease appears to be partly the result of massive new debt issuance by the government itself, which is making life difficult for some other borrowers: official government bond debt rose by 3.7 trillion yuan from end-July to end-October, according to figures from data provider CEIC. That was the largest three-month increase since at least early 2016.
But jumpy money markets also come on top of an enormous rebound in short-term money market borrowing through bond repurchase agreements, or repos, since mid-2021—primarily by nonbank financial institutions. On net, such borrowing by nonbank financial institutions, excluding brokerages and insurers, has roughly tripled to around 150 trillion yuan on a quarterly basis since mid-2021, central bank data shows. Moreover, if some of that cash has been used for leveraged bets on bonds to juice returns, then the recent rebound in Chinese rates could be squeezing some borrowers too.
The falling U.S. dollar—and slower capital outflows—could take off some of the pressure in the weeks ahead. But China now finds itself balancing enormous new government obligations, which the bond market needs to finance, against highly leveraged nonbank financial institutions, some of which probably still have significant exposure to the nation’s teetering real-estate sector. No wonder money markets are twitchy.