More Defaults in China Are Likely; Banks Meet Liquidity Requirements

by on April 4, 2014 6:48 am BST

There is still a high probability of more defaults within China, according to Alfred Schipke, the International Monetary Fund (IMF) senior rep. for China. There is still growing concern over the enormous debts, both at local and federal levels. The People’s Bank of China (PBOC) is aiming to restrict the amount of easy money available in the financial system, but the declining growth prospects cover put a damper on that.

The seven-day repurchase rate, China’s benchmark money-market rate, is set for the largest weekly drop in five months with banks meeting capital requirements for the end of the quarter. The seven-day rate fell 124 bps to 2.98 percent, including a 111 bps drop yesterday. “The seven-day repo has a strong seasonality and early April usually sees rates stable and low. We expect the central bank to continue to drain funds through repos,” said Huang Wentao, an analyst at China Securities Co.

This week, the PBOC took 62 billion yuan out of the markets via repurchase agreements, but this was less than the 98 billion yuan withdrawal in the last week of March, according to data provided by Bloomberg.

In a Bloomberg News survey, the combined ratio of government, corporate and household debt-to-gross domestic product is going to climb to 236.5 percent in 2016. As debt expands and growth contracts, the second-largest economy is growing to push the bounds on credit-driven growth that exceeded imbalances in Japan prior to their lost decade.

Credit Agricole’s economist Dariusz Kowalczyk said that China’s growth potential is a pedestrian six percent, suggesting that China’s growth target of 7.5 percent is unattainable without stimulus. Due to the economical contractions over recent months, China is on the path to its lowest GDP since 1992.