While all the attention of the world’s investing public – focused on the short-term repo markets in China – has been ameliorated by the PBOC’s ‘fold’ thanks to ~CNY600bn in liquidity provision (or an equivalent 65bp RRR cut), liquidity concerns remain high (and not so hidden if one knows where to look). Not only has there been a surge in copper imports – based on the cash-for-copper deals replacing short-term funding but concerns raised by investors and the PBOC over duration mismatches (exposed by the recent crisis) has forced Chinese banks to seek longer-term funding. Banks are now raising longer-term deposit rates in order to attract stickier term-deposits and this is causing medium-term Chinese bond yields to surge.
While inflation remains ‘under control’ (if one looks at the official data – as opposed to reality), growth hopes and inflation fears may also be impacting Chinese bonds though the timing suggests this remains evidence of a Chinese banking system in distress. And so, in a vicious circular manner, the cost of funding for Chinese firms is rising rapidly; implying (all things being equal) that end-users’ pocket books will be pressured as firms are forced to raise prices (raising inflationary expectations) and driving interest-rates up still further.
The margin compression that banks alone will suffer will also mean more PBOC liquidity will be needed as capital floods out on risk-aversion.