Some Chinese Institutions Borrow at 50% Rate as Liquidity Tightens – Reuters

Shanghai – Overnight borrowing costs for some Chinese financial institutions surged to as high as 50% on Tuesday, driven by a month-end cash scramble that tightened liquidity and stressed money markets.

Seasonal factors contributed to the cash crunch, but it was also linked to a significant upcoming issuance of government bonds. Traders noted that there were growing concerns about potential defaults from financially strained institutions.

The highest overnight rate for pledged repurchase agreements—a form of short-term financing—reached 50% on Tuesday, based on interbank data, though the average rate remained relatively low at around 3.6%. Two-day repo rates soared as high as 30%, and the top rate for seven-day repos hit 12%.

"The liquidity tightness caught me off guard; the prices suddenly spiked," remarked a trader at a brokerage.

This surge in rates evoked memories of a cash crunch in June 2013, when the overnight repo rate climbed to a historic 30%, an event that disrupted global markets. Rocky Fan, an economist at Guolian Securities, pointed out that while the 2013 episode stemmed from a crackdown on shadow banking, the current strain appears to be fueled by high levels of leveraged trading in the money market.

Several traders from smaller lenders were still attempting to secure loans later in the afternoon. Concerns about defaults in the market were also expressed, though details were not provided.

"Liquidity is extremely tight today," noted Caitong Securities in a communication to clients. They attributed the cash shortage to a "record supply" of government bonds, along with limited borrowing options for banks.

Last week, China approved the issuance of 1 trillion yuan (approximately $136.67 billion) in sovereign bonds to stimulate economic growth, while local governments are hurrying to issue refinancing bonds to settle existing debts.

Analysts at Caitong believe that the tight liquidity situation will compel authorities to accelerate monetary easing measures.

Ming Ming, chief economist at Citic Securities, anticipates that repo rates will decline in November as the central bank is likely to maintain loose monetary conditions, with a potential cut in banks’ required reserve ratio on the horizon.

Despite the recent spikes, the average seven-day repo rate—a key indicator of short-term borrowing costs in China—remained modest at 2.0765% on Tuesday, indicating that many institutions can still access funds at relatively low rates.