SHIBOR, the Shanghai Interbank Offered Rate, which quotes overnight to 1-year loan rates between Chinese banks, and repo rates (repurchase agreements) all spiked yesterday in China (charts below). These rates measure the price of liquidity (liquidity risk) in the banking system. If these rates spike dramatically, banks are hoarding cash and/or are reluctant to lend to each other because of heightened credit and/or counterparty risk in the system. In 2008, The Federal Reserve had to inject $100s of billions into the banking system to prevent a systemic collapse ("Overnight LIBOR rate drops 51% to 2.469%, It's a Start!", October 10, 2008). After delaying action, the PBoC finally injected 50 billion yuan into the banking system today.
"The People’s Bank of China added 50 billion yuan ($8.2 billion) to the financial system today after a cash squeeze drove money-market rates to record highs, said Hao Hong, chief China strategist at Bank of Communications Co.
The sum was supplied to a single lender, likely Industrial & Commercial Bank of China Ltd. (601398), through “targeted liquidity operations” and more banks were in talks to obtain financing, Hong said in a phone interview."
Overnight to 9-month SHIBOR rates go parabolic (source: shibor.org)
Daily activity in 'Interbank Lending' market (look at the high %) (source: chinamoney.cn)
Daily activity in the 'Pledged Repo' market (look at the high %)
Daily activity in the 'Outright Repo' market (look at high %)
And to make things worse, China's economy keeps contracting. According to Reuters,
"The flash HSBC Purchasing Managers' Index fell to 48.3 in June from May's final reading of 49.2, drifting further away from the 50-point level demarcating expansion from contraction. It was the weakest level since September."
This was expected, and loan growth in the banking system was already declining (or missing estimates).The Shanghai Stock Exchange Composite fell 2.76% to 2,084.
China Interbank Market Freezes As Overnight Repo Explodes To 25% (Zero Hedge)
China's central bank's inaction can have dire consequences - this is not a game (Sober Look)
The Mechanism That Holds Chinese Banks Together Is Falling Apart (Business Insider)
China's money rates hit record, PBOC squares off with market players (Reuters)
Chinese Govt Says Financial System Must Support Economy (Bloomberg)