SHANGHAI, Jun. 27 (SMM) – The interbank liquidity squeeze in China has attracted wide attention lately, with interbank rate surging to a high of 13.44%. Although the People’s Bank of China (PBOC) said it has injected money to ease the cash crunch and interbank rate fell back to 5.55%, the rate remain above the 3.6% seen last June, which leads Steelease to believe that China’s steel producers will suffer tighter cash flow in the latter half this year.
Home price index for China’s 70 medium and large cities rose on both MoM and YoY basis in May, and with YoY growth hitting a two-year high. This left no reason for the PBOC to ease liquidity. Meanwhile, the surge in interbank rate was seen as a risk test for bank liquidity and an alert to the high risk for rapid expansion in off-balance-sheet business.
Chinese Premier Li Keqiang proposed a series of policies supporting economic restructuring and transformation. These measures include provision of specific loans for consolidation in bloated industries, while new lending for unqualified projects in industries suffering severe overcapacity will be banned. Some steel traders thus turned to private financing given mounting financial pressures, and steel mills highly dependent on bank loans are also badly hit. A large number of SMEs will be eliminated in the next couple of years, leading to further consolidation in steel industry.
The Chinese government kept a tighter grip on loans to enterprises causing heavy pollution and high energy consumption in the past few years. The recent liquidity crunch made it more difficult for these enterprises to obtain loans. Steelease believes more restrictions will be imposed on loan issuance to these heavy polluters following the post-cash-crunch adjustment to banks’ money supply. Rumors circulated recently that president of one steel mill absconded with money. Although later proved false, the news somewhat reflected rising market concerns over liquidity.