China’s Shock Rate Surge to 50% Triggers Regulatory Probe

A sudden surge in money rates in China – to a record 50% – has triggered a probe with regulators quizzing institutions on why they borrowed at extremely high rates.

The surge in the rate for pledged repo – a short-term financing business – occurred overnight on October 31, as a month-end scramble for cash and a flood of government bond sales caused stress in money markets.

Institutions that settled trades on Tuesday at the 50% rate are to submit explanations to the China Foreign Exchange Trade System (CFETS), a central bank affiliate that operates China’s interbank market, two sources with direct knowledge of the matter said.

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“Anyone who borrowed money at very high rates need to explain to regulators the decision-making and bidding process,” another direct source said.

Traders and analysts said an increasing supply of government bonds, and newly approved 1-trillion-yuan ($137 billion) sovereign bond issue created unusual liquidity stress at a time when banks need to square their books to meet month-end regulatory requirements.

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Authorities also could have wanted to keep yuan liquidity tight to stem the currency’s slide against the US dollar in the foreign exchange market, Becky Liu, head of China macro strategy at Standard Chartered said.

A trader said a large number of fund houses, brokerages and trust firms were scrambling to borrow money in afternoon trade on Tuesday to avoid defaults as big banks appeared reluctant to lend.

“Demand for cash far exceeded supply, boosting short-term rates,” the source said. “For each individual institution, it was a rational decision.”

But regulators on Wednesday told some institutions in a meeting “not to be emotional,” another trader source said.

“Everyone is still slightly nervous now. Everyone is prepared and will keep the liquidity ample.”

Reuters, with additional editing by Vishakha Saxena

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Vishakha Saxena

Vishakha Saxena is the Multimedia and Social Media Editor at Asia Financial. She has worked as a digital journalist since 2013, and is an experienced writer and multimedia producer. As a trader and investor, she is keenly interested in new economy, emerging markets and the intersections of finance and society. You can write to her at [email protected]