Overnight borrowing costs for some Chinese financial institutions jumped to as high as 50% on Tuesday, as a month-end scramble for cash squeezed liquidity and stressed money markets.
In addition to seasonal factors, the cash shortage was caused by an upcoming flood of government bond issuance, and traders also pointed to market fears of default by cash-strapped institutions.
The highest overnight rate for pledged repo – a short-term financing business – hit 50% on Tuesday, according to official interbank data, although the average rate remains modest at roughly 3.6%.
Two-day repo rates jumped to as high as 30%, and the highest rate for seven-day repos was 12%.
“The liquidity tightness caught me off the guard, the price suddenly shot up,” said a trader at a brokerage.
The jump in rates stirred memories of a June 2013 cash crunch when the overnight repo rate leapt to a historic high of 30% in an event that roiled global markets.
Rocky Fan, economist at Guolian Securities, said that while the 2013 crisis had resulted from China’s crackdown on shadow banking, the current stress was likely due to a high level of leveraged trades in the money market.
Several traders at small lenders were still seeking to borrow money in later afternoon trading when contacted by Reuters. Some also expressed concern over default in the market, without giving details.
“Liquidity is extremely tight today,” Caitong Securities wrote in a note to clients.
The brokerage attributed the cash shortage to a “record supply” of government bonds, as well as restricted channels for banks to borrow money.
China last week approved 1 trillion yuan ($136.67 billion) of sovereign bond sales to stimulate economic growth while local governments are rushing to issue refinancing bonds to repay existing debts.
“We expect tight liquidity to force authorities to speed up the rollout of monetary easing measures,” Caitong analysts wrote.
Ming Ming, chief economist at Citic Securities, expects repo rates to fall back in November as the central bank will likely maintain loose monetary conditions, with a cut in banks’ required reserve ratio possible.
The average seven-day repo rate – a widely watched indictor of short-term borrowing costs in China – remained modest at 2.0765% on Tuesday, meaning many institutions can still borrow money at relatively low rates.