Jump in China's interbank loan rates reflects PBoC's squeeze

   S&P Global Ratings said today that this week's jump in China's interbank loan rates is mainly a result of tightening measures that may have caught out some banks.
  "We do not see rising interbank loan rates as indicative of system-wide funding stress because the People's Bank of China [PBoC] has been intentionally tightening market liquidity to rein in trading activities in the shadow banking sector," said S&P Global Ratings credit analyst Qiang Liao.
  "The PBoC can fine-tune or reverse its monetary operations quickly if there are signs of overshooting." he added.
  The central bank made an estimated net liquidity injection of RMB110 billion (US$15.9 billion) into the interbank market from 20-22 March 2017, while overnight repo rates spiked as high as 9.5% on Monday, compared with yesterday's fixing at 2.6%.
  The market dislocations followed a string of recent monetary policy hikes, including one on 16 March, as well as increased regulatory monitoring of shadow banking activities.
  Nervous sentiment could also be weighing on the market following unconfirmed press reports that some small Chinese banks missed repo payments on 20 March 2017.
  S&P Global Ratings believes many smaller banks and those with weak liquidity management would be more vulnerable to policy-induced liquidity tightening. The PBoC has been adjusting policy to discourage carry trades in which banks borrow in the interbank market to invest in higher-yielding notes or bonds. Such trades enhance the returns that have been attracting retails to wealth management products (WMP).
  Besides tightening short-term money supply, authorities recently announced new rules to increase scrutiny of banks' WMP-related borrowing and lending.
  "We believe the PBoC will maintain a slightly tight policy stance on interbank liquidity to discourage carry trades while keeping benchmark lending rates relatively low to facilitate the government's economic growth targets," said Liao.