Economy

China Regulators Investigate Liquidity Stress Leading to Record 50% Rates

China Investigates Liquidity Crisis Amid Surging Short-Term Rates

Authorities in China are probing a recent liquidity crunch that led short-term money rates to spike to as high as 50%. Financial regulators are seeking explanations from certain institutions regarding their borrowing at such elevated rates, according to multiple sources familiar with the situation.

On October 31, the overnight rate for pledged repurchase agreements—an essential short-term financing tool—surged to a record 50%. This increase was attributed to a month-end scramble for liquidity, exacerbated by a significant influx of government bond sales that strained the money markets.

The China Foreign Exchange Trade System, a central bank affiliate managing the interbank market, has requested that institutions involved in trades at the 50% rate provide clarifications. Sources indicate that any institution borrowing at these high rates will need to justify their decision-making and bidding practices to regulators.

Analysts attribute the liquidity stress to a rising supply of government bonds and a recent approval for a 1-trillion-yuan sovereign bond issuance, which has intensified the situation as banks work to balance their books in compliance with month-end regulatory requirements.

It is believed that the authorities may have also aimed to maintain tight liquidity in the yuan market to mitigate the currency’s decline against the U.S. dollar. A trader noted that several fund managers, brokerages, and trust firms were urgently seeking loans to avert defaults, as major banks appeared hesitant to extend credit.

"The demand for cash significantly outstripped supply, causing a sharp rise in short-term rates," the trader remarked, adding that the borrowing decisions were logical from the perspective of individual institutions.

Nonetheless, during a recent meeting, regulators advised certain institutions to avoid overreacting to the situation and stay calm.

The financial landscape remains tense, with stakeholders preparing to ensure adequate liquidity is maintained moving forward.

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