China's credit bubble reaching its limits

This is a very interesting report published by Bloomberg on Friday: China Fails to Complete Bill Sale for Second Time in One Month (thanks blbl).

It looks like China will either have to unpeg the Yuan or to deflate. And, contrary to what most people think, the current situations shows that unpegging the Yuan might actually cause it to fall in value against the USD, and not rise...
Dec. 24 (Bloomberg) -- China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.

The finance ministry sold 16.76 billion yuan ($2.53 billion) of 91-day securities, falling short of the planned 20 billion yuan target, according to traders at the lead underwriters of government debt, who asked not to be identified. The average winning yield was 3.68 percent, higher than the 3.22 percent rate for similar-maturity debt in the secondary market yesterday.

The market is desperate for cash,” said Chen Liang, a bond analyst at Guohai Securities Co. in Shenzhen. “It’s too costly to park money with the debt at such a price given the seven-day repo rate has risen above 5 percent.”

Policy makers on Dec. 10 ordered lenders to set aside more money as reserves for the third time in five weeks to contain inflation. The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and yesterday reached a three-year high of 5.67 percent, according to daily fixings published at 11 a.m. by the National Interbank Funding Center. The rate slid seven basis points today to 5.60 percent.

The cash shortage has also sapped demand for bills sold by the People’s Bank of China. The monetary authority has sold 1 billion yuan of one-year bills at each of its last four weekly auctions, the lowest sales amounts since October 2007.

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