Interbank Lending on the Rise

Published on Author kuveke


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.

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6 Responses to Interbank Lending on the Rise

  1. Do you think the unknown investor could be the Chinese government? It would be interesting if China is bailing out its major financial institutions like the United States did with TARP in 2008. This potential financial crisis combined with China’s recent economic slowdown and dip in manufacturing could have major global consequences.

  2. Think as well about the challenges of “thin” markets. Publicly traded bonds are few relative to the size of the economy; other margins of adjustment likewise are limited. So to get traction, you as the PBOC may need to employ really big swings in interest rates. Or to put it another way, interest rates are a small tail on a big dog.

  3. I wrote two blog-posts earlier (here and here) about excess borrowing in the Chinese economy, but between local governments and nonbank lenders rather than between banks themselves (the second also about whether China’s currency reserves are thus warranted), so this complements those nicely. In fact, I predicted that China Credit Trust Co., Ltd. would default by the end of the month–I did not foresee an anonymous investor coming to the rescue. In response to Geeker, I too suspect the Chinese government may at least have had some role in preventing its default.
    To Kuveke, I pose these questions: how do you think interbank lending and excess local-government borrowing from nonbank lenders interact, and which do you think poses a greater risk to the economy? Also, do you think China’s USD 3.8 trillion currency reserves are prudent or excessive? Do you predict an Asian crisis on the scale of that of 1996-97, or think warnings are overblown?

    • Asher you can find my response to your question (here)

      In short I think they are too tied together to say one is more dangerous. I would say that the banks are a protective measure against the excessive borrowing so a certain amount of risky borrowing by local governments is expected but the degree to which we have seen is straining the banks and making inter-bank loans risky.

  4. I think it is all about investment. I think Asher pointed out that the Chinese local debt has been increasing. I think that is the general trend in China right now. Debt and loan rates are gradually increasing, which might eventually “pop” later. My concerns are that is China ready for it? Does the government know how to response? and Will this lead to another global economic recession?
    We will see what will happen.

  5. The proximate issue is lending by non-bank lenders, as comments above note. But I think if you all keep reading you’ll find that it’s banks that provide these unregulated lenders with funds. Hence the concern with formal banks.