Interbank lending rates in China are rising and have been for months. One reason for the increase is market volatility. Back in June rates spiked after a rumor of two mid-size banks defaulting on their loans. In recent months rates have inched up as cash reserves dry up as the PBOC attempts to reduce the debt risks (for more information, refer to my previous post on Prof. Smitka’s Macroeconomics Issues blog).
“Over the last five years, debt levels in China have increased by 71 percentage points. Looking back over the past 50 years, there are about 33 cases of countries with similar debt run-ups—22 of them plunged into a credit crisis, and all suffered a major economic slowdown” (Time).
The rising rates for interbank loans have instilled fears of a financial collapse much like the collapse of Bear Stearns in 2008. These fears have been perpetuated with rumors and financial deals that have been kept for the most part out of the public eye. Recently a report by a Merrill Lynch economist in China discussed the restructuring of debt at the China Credit Trust Co. a major financial institution. The company, which had been in danger of defaulting, was able to find an investor–although for now the identity of the investor is unknown. While money is still loose enough for the bank to find a way to avoid a catastrophe, the story perpetuates fears that as money tightens financial institutions will be more likely to default.