Despite regular assurances to the contrary, all indications are that Chinese banks are experiencing serious liquidity problems. The PBOC has been pumping in large sums of money almost daily via reverse repos and MLF lending so that the RRR cut seems almost expected. The problem again relates to the RMB/$ peg. While RRR cut is designed to give banks more liquidity, there has been a significant correlation between RRR cuts and capital outflows. I am absolutely not saying it is causative, but given the lack of good investment choices within China, declining interest rates, enormous over capacity, economic worries and a collapsing stock market, it is very likely much of this additional liquidity will make its way out of China. That again places downward pressure on the RMB.
That is from Christopher Balding, most of the post is an excellent discussion of where the contagion effects actually lie. And here is your China fact of the day:
With RMB offshore rates in Hong Kong jumping to 16% due to traders looking to short the RMB, it is possible we could see a rapid and large jump in RMB deposit rates for a variety of reasons. Though shorting the RMB is not allowed in China, I’m sure 16% deposit rates in Hong Kong will provide a small amount of competition.
Christopher’s advice: “Watch the deposit rates.”
Here is further context from FTAlphaville.