China's troubles with cowboy lending and falling liquidity

ON CHINA

Cowboy lending and falling liquidity have been setting the stage for macro tremors in China's markets.

As such, the recent spike in the Shanghai Interbank Offered Rate (SHIBOR), caused by a refusal to supply liquidity to the interbank market by the central bank, the People’s Bank of China (PBOC), should not have come as a complete surprise to investors. The government has instructed the banks to delever.  This will take some months, as interbank assets of RMB10trn ($1.6trn) are huge. The PBOC’s subsequent emergency capital infusion does nothing to change this deleveraging imperative. Deleveraging will be positive in the long term, but painful in the short term. Although the short en...