Wednesday, July 3, 2013

Chinese interbank lending rate spike

The rise in what is now referred to as Shibor – the Shanghai Interbank Offered Rate – is a shot across the bow by the People's Bank of China and by the new administration in China to say to real estate developers, real estate speculators, even stock market speculators, "Hey, we're not always going to be here to bail you out." Historically, the People's Bank of China has always allowed interest rates to rise in the day or two before any major holiday. It's not unusual for this to occur.

What is unusual is that the bank didn't come in after the holiday to re-liquefy the system. I think this was a brilliant move on the Bank of China's part to tell the markets, "Look, we're not going to be here to backstop you. You probably have got yourself overextended. Better get your house in order." It got everybody's attention. And my guess is that those who are a bit overextended are going to do what they can to become underextended.