‘China’s liquidity crisis has just begun’

'China's liquidity crisis has just begun' 2

A spike in interbank interest rates last month caused the Chinese stock market to plummet.

However, according to analysts, China’s intention to float interest rates and exchange rates will cause banks to face even more challenges in risk management.

China intends to liberalize interest rates and relax capital controls.

China’s State Council announced that it wants to speed up the pace of floating interest rates.

However, this untethering may cause credit institutions to compete fiercely for customer deposits.

Last month’s crisis was caused by the PBOC itself, when it refused to pump more money into the market to curb credit growth.

Huang Jinlao – Vice President of Hua Xin Bank said in the famous Chinese financial magazine – Caixin: `Floating interest rates will definitely cause deposit interest rates to skyrocket. Credit institutions can face great risks.`

However, some analysts view this issue relatively optimistically.

And Richard Jerram, chief economist at Bank of Singapore, said a float could threaten banks.

However, even when controlled, investment capital in China was still partially withdrawn in 2012, when the world feared the country would have a hard landing and GDP growth last year was the lowest since 1999. Sheng Songcheng, Director

Despite such a statement, recent policies show that Chinese leaders are also aware of the risk of sudden capital outflows.

He revealed: `In the short term, we will encourage companies to expand abroad. In the medium term, trade credit controls can be relaxed, based on the real business of products and services.

In addition to causing interest rates to rise and capital to flee, running out of cash also highlights risks from weak financial institutions in China.

Lu Ting, chief China economist at Bank of America-Merrill Lynch Hong Kong (China), said: `Tackling banks that violate regulations should be done with prudent regulations, rather than causing trouble.`

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