China's Money Market Troubles

On the first working day of the Year of the Rooster, China's central bank surprised financial markets by raising lending rates to banks, causing some unease in money markets in the following days. This is a taste of much more volatility to come this year.

The net wholesale borrowing of other non-bank financial institutions has exploded. It accounted for over 55% of total borrowing in the repo market in the year to Q3 2016 compared with just 7% two years earlier.

The China Foreign Exchange Trade System publishes the figures for wholesale borrowing, and provides a breakdown for insurance firms, securities firms and other financial institutions and vehicles. It is this last group that has ramped up interbank borrowing. The category includes urban and rural credit cooperatives, finance firms, trust and investment companies, leasing firms, asset managers, wealth management products, etc.

These institutions have overtaken the smaller banks which used to be the main borrowers in China's money market. Smaller banks are less good at managing the risks of maturity transformation than big banks, but non-bank financial institutions are even less adept.

It seems that the authorities have managed to shift China’s fundamental liquidity problem to the most vulnerable part of the financial market. This is an indication that financial stress will intensify. To read more click here.