Rise in China interbank rates signals effort to tighten liquidity

HONG KONG - A 100+ basis point rise in China’s interbank rates this rise week has caught the attention of market observers. The 7-day repo rate rose to 4.8% on Thursday from 3.5% last week. BBVA Bank points out that memories are still fresh of the PBoC’s ill-advised liquidity squeeze last June, which was engineered to slow the growth of shadow bank lending. “For the time being, the current rise appears to reflect a combination of seasonal factors and the PBoC’s effort to tighten liquidity and slow credit growth,” BBVA says.

“However, we view this as a only a marginal tightening, and far from the scale of the liquidity squeeze of last June. On the positive side, the authorities’ willingness to tighten, even if only marginally, may also reveal their confidence in the current growth momentum, as evidenced by the pickup in Q3 GDP growth and today’s strong HSBC Flash estimate.” www.bbvaresearch.com (ATI).