China hibor renminbi yuan

How Tight Is Liquidity In China? This Tight

Earlier on Wednesday I highlighted tightening liquidity in China.

For anyone who missed it or for those who don’t read the early morning market wraps (shame on you), here’s a recap:

In yet another testament to how precarious the liquidity situation is, overnight CNH Hibor jumped 8.6 points to 15.18%. That’s the highest since September. Longer tenors rose as well to near 12-month highs (1-week CNH Hibor +4.5ppts to 13.266%, 3-mo. CNH Hibor +66bps to 8.998%). Here’s Bloomberg with some further color:

The first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency. With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away.

The three-month interbank rate known as Shibor rose for a 50th day, its longest streak since 2010, to an 18-month high on Wednesday. The overnight repurchase rate on the Shanghai Stock Exchange jumped to as high as 33 percent the day before, the highest since Sept. 29. As banks become more reluctant to offer cash to other types of institutions, the latter have to turn to the exchange for money, said Xu Hanfei, an analyst at Guotai Junan Securities Co. in Shanghai.

Note the strange thing about yuan HIBOR: it shouldn’t cost more to borrow the currency overnight than it does to borrow it for 3-months! Something is very, very wrong with that picture. Overnight HIBOR versus 12-month HIBOR has flip-flopped in this decidedly perverse manner at least six times this month.

So just how tight is liquidity in Hong Kong, you ask? Well, have a look at the following charts and decide for yourself.

O/N yuan HIBOR:


O/N dollar HIBOR:


3-month dollar HIBOR:


As The South China Morning Post wrote earlier this year, “what we should pay attention to is the interest rate because the interbank rate has risen and shows no signs of retreat.”

Charts: Bloomberg

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