Credit markets wary of China crunch

Canberra Times ^ | 06/21/2013 | Philip Wen

[TexGrill]

While the local sharemarket selloff was largely focused on US Federal Reserve chairman Ben Bernanke's comments and the latest in a slew of underwhelming factory data coming out of China, credit markets are engrossed in figuring out whether something altogether more sinister could be lurking around the corner.

Interbank lending rates in China's money market have soared alarmingly to record highs, prompting fears the banking sector's liquidity problems could spiral into a full-blown credit crunch.

The main driver for tightening credit has been the reluctance of the central bank, the People's Bank of China, to pump cash into the market. This has been seen as a tactic to combat another potentially out-of-control problem - the economy's so-called shadow-banking system and the prevalence of dodgy wealth management products, fuelled by punters wanting a better return than the lower-than-inflation interest rates on bank deposits.

Credit ratings agency Fitch this week warned what many had already suspected, that wealth products worth $US2 trillion of lending were in reality a ''hidden second balance sheet'' for banks, allowing them to run rings around efforts by regulators trying to rein in excessively loose lending.

The Chinese government stance can also be seen as a reflection of its determination to wean itself off its addiction to cheap credit, a byproduct of the post-financial crisis stimulus-fuelled growth binge.

[TexGrill]

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