Chinese government and banks facing massive liquidity squeezes

It looks like the big Ponzi scheme that is the Chinese economy might be on the verge of falling.

Now that inflation has got out of control and that the government is trying to contain it by raising rates and reserve ratios of its banks, the banks face very limited lending power (read: credit creation, read: currency creation) and consequently, the government cannot borrow from the banks anymore:

(Bloomberg) China’s finance ministry failed to draw enough demand at a bill sale for the second time in a month, reflecting a cash squeeze sparked by increases in banks’ reserve-requirement ratios and seasonal demand for funds.

The 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 3.6769 percent, according to the traders. That compared with 3.22 percent on the debt of similar maturity in the secondary market yesterday.

The finance ministry in February published a list of 48 lead underwriters required to bid at its debt sales, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp, Postal Savings Bank of China, Guotai Junan Securities Co, BOC International (China) Ltd.

Courtesy of ZeroHedge:

Both the 7 Day SHIBOR and repo rate, which effectively both show the same thing, i.e., the rates in the unsecured interbank lending market, have jumped to fresh multi-year highs after posting a slight improvement yesterday.

The charts could be quite meaningful as they very much look like the LIBOR charts during the liquidity crisis in 2008.