China Liquidity Crisis Deepens, Spreads Across Asia

Having exposed the deepening liquidity crisis in China previously, tonight's action across AsiaPac money-markets suggests – despite US equity record highs – all is very much not well below the surface of the global financial system. Short-term China repo rates have exploded to 20-month highs, Hong Kong Dollar money-market rates have jumped to the highest since May 2009, and Yen basis swaps are showing the most extreme demand for dollars since Lehman

China liquidty conditions have gone from bad to worse with 14-day repo spiking to 6.00% – the highest in 20 months…

To be clear this means a Chinese bank was willing to pay 6% to ensure liquidty for the next 2 weeks (compared to 2.5% yesterday!)

Also notable is the upward pressure this has put in Offshore Yuan versus the dollar…

 

Pushing Hong Kong Dollar HIBOR up to its highest since May 2009…

 

It appears that Japan is suffering too as USD-JPY basis swaps have crashed to record lows – the most desperate demand for USDollar liquidity since Lehman…

 

Finally, it's not just AsiaPac as our index of global dollar liquidity (BIS' new 'fear' index) is in grave trouble, trumbling to 4-month lows…

 

 

As we noted previously, quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said "tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market."

Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.

Why is all of the above relevant? Because while so far the global capital markets have been immune to the substantial tightening in financial conditions resulting from the sharp rise in the US Dollar and US interest rates, a similar tightening in China – which is now clearly taking place – will be far more difficult for global risk assets to ignore.


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