Two Week SHIBOR Up 1% Since Yesterday

Chinese interest rates are becoming news again.

Here is some background.

From July: China OKs plan to liberalise rates on insurance products
China sets many restrictions on interest rates on insurance products, including a 2.5 percent upper limit on pre-determined rates for life insurance products.

August: China insurance price war looms as rate cap goes
Analysts expect policyholders to be more keen to withdraw from existing insurance policies and seek higher returns from newly issued policies, pressing insurers to cut prices and diversify products in an effort to keep existing clients.

Li said the withdrawal rate would increase significantly in the first few years after the interest rate cap was removed.

Ping An Securities estimates that prices of insurance polices will be cut by 30 per cent when the predetermined rate is set at 3.5 per cent, while the value of new business, a measure of the present value of future business, will decline by 60 to 70 per cent.

Today: Market rates insurance firms battlePredetermined interest rate of 3.5% exceeded 4% of straight (险企激战费率市场化)
October 15, Ping An Life Insurance launched the company's first market-based rates for new "flat Anfu", a product that directly across the predetermined interest rate of 3.5%, is set to 4%, higher than the same kind on the market today products.
So what is the drop off in present value at 4%?

These are just the insurance companies.

From September: China unveils new steps to free up interest rates
The central bank will expand market-oriented benchmark rates from the money market to credit markets and organize big banks to offer lending rates to their high-quality clients to set the benchmark borrowing costs for the industry.

In July, the PBOC scrapped the floor on lending rates but banks still price their loans based on the benchmark rates when they make loans. The one-year official rate stands at 6 percent.

The decision to remove the floor on bank lending rates was seen as a largely symbolic prelude to eventually removing caps on deposit rates, a much more difficult task that will take time.

The issuance of certificates of deposit on the interbank market and expansion of market-based pricing of debt products, will "create conditions for steady and orderly liberalization of deposit rates", Hu said.

The central bank, under the helm of reform-minded Zhou Xiaochuan, has been trying to promote the role of the Shanghai interbank offered rate (SHIBOR) as the benchmark for short-term borrowing costs, now that money-market rate are largely determined by market supply and demand.
Note the headline. SHIBOR can be volatile.

Last month I wrote: Chinese Cash Crunch Could Return in September; Why Not Spend ¥8 million to Avoid a ¥10 million Fine?

The cash crunch didn't materialize, but rates are moving higher now and the same concerns are surfacing.

Also from September, this ZeroHedge article: China: No Leverage, No Growth
That is also the reason why in early summer, China tried to conduct a mini-taper of its own to streamline its monetary pipeline which had been so filled with bad and non-performing credit, that the PBOC effectively pulled the switch on new liquidity for over a month.

What happened almost immediately after, when rates on ultra short term funding soared to 20%+, nearly destroyed the domestic banking system and resulted in a major slowdown in the Chinese economy. "Luckily" for China, its close encounter with the taper was brief, if quite painful, and following a period of shock, the Chinese central bank had no choice but to resume injecting banks with their daily dose of monetary morphine all over again.
The spurt in growth in August and September was a result of fiscal policies in July aimed at papering over this mini crisis. Now that is over. Exports fell in September and the stimulus has faded.

Also, the renminbi continues to move higher.

Fake invoicing of exports and other arbitrage tricks sent the renminbi higher in April and May and was a contributing factor to the central bank's move to tighten monetary policy. Now the renminbi is ticking higher again after export sank in September, are firms on the verge up to their old tricks? In any event, higher interest rates and a stronger renminbi are a double dose of poison for exporters and marginal producers in the Chinese economy.

Investors should keep a close eye on China in the coming weeks. It may all amount to nothing, but if there's another cash crunch, global assets are priced for a drop.

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