Wow. China’s Banking Liquidity Strains Intensify: HIBOR and SHIBOR Rates Spikes!

Given that global stock markets have basically been levitating higher, including China’s (see upper window in the charts below), it would seem a paradox to see China’s banking system undergoing massive dislocations, as evidenced by continuing spikes in HIBOR and SHIBOR rates.

Since the pinnacle of USD last week, China’s yuan has significantly bounced. As of the moment, the offshore yuan (see lower window above) has rallied by about .8%+.

This could be seen as partly an intuitive oversold reaction. And this could have also partly emanated from substantial interventions by the Chinese government.

State owned banks were reported to have sold US dollars at the onshore market (Daily Mail November 30).

The Chinese government has declared that it would clamp down on foreign investments (CNBC November 29), it would also set limits to overseas loans (Reuters November 30), it will also constrain gold imports (Financial Times December 1) and stringently restrict conversion of the yuan to foreign currencies (Taipei Times December 1).

If these have not been enough proof that the Chinese government has lost control of the yuan, I wouldn't know what would.

As a side note, the claim has been that China would substitute the US as the major “free trade” partner in the Trans Pacific Partnership (BBC, CNN). The TPP is NO FREE TRADE but a POLITICALLY managed trade. Yet just how can the Chinese government take the helm of the US with all the capital and trade restrictions being applied internally to stanch capital flight????

Now to the crux. The yuan’s recent gains, I thought, would have brought about or would be accompanied by some easing of tensions in China’s interbank markets.

But that’s NOT what has happened…yet

To the contrary, as of today (December 1), there has been a massive scramble for interbank short term funds across Hong Kong’s offshore yuan HIBOR AND onshore yuan via the SHIBOR curve that has resulted to a surge in yields across both interbank markets.

In short, surging interbank rates indicates of accelerating LIQUIDITY shortages being experienced by China’s banking and financial system covering both the onshore and offshore yuan portfolios.

It seems like another evidence that the Chinese government may have lost control, not only of the yuan but also the banking system—for these developments to occur.

Of course, the other view could be that the government is TIGHTENING. But again if the yuan should be a measure, then the slew of capital controls tells otherwise

The last time HIBOR rates hit current levels, was in January 2016.

Then, the world markets virtually convulsed from which prompted a coordinated response in central banks through a string of NEGATIVE policy rates and interest rate cuts (or what I call as the Shanghai Accord)

Today, markets have become inured to these evidences of intensifying liquidity risks.

Interesting moments of amplifying divergences.