Flemming J. Nielsen
Danske Bank A/S
Most of our indicators for credit risk including the swap-government bond spread, the spread between onshore and offshore money market rates and CDS-premiums for Chinese banks have all edged higher in the past month. However, most of our measures for the perceived credit risk remain substantially below the levels that China experienced in connection with the money market stress in June last year. The levels of the money market rates appear less stressed with the important 7-day repo rate fixing currently markedly lower than in June and December last year and the O/N SHIBOR fixing also markedly lower than in June and December last year.
Data released until December 2013 suggest that the People’s Bank of China (PBoC) continued to tighten monetary policy in late 2013 by continuing to drain liquidity from the interbank market through its open market operations. New credit also appears to be slowing, with both corporate bond issuance and loans from trust companies slowing markedly through H2 13. However, in the past two week there have been signs that PBoC could be moving towards a slight easing bias as PBoC added liquidity in connection with its money market operations on both 21 and 28 January and 2-year government bond yields and 2-year swap rates have started to decline after moving markedly higher through H2 13.
Several factors have added to the most recent stress in the money market. Liquidity in general is usually tight in connection with the Chinese New Year public holiday that starts on 31 January. Recent data has also suggested that the Chinese economy is again slowing and finally the possibility of a default on a trust product issued by China Credit Trust has also added to the nervousness in the money market. China Credit Trust on 27 January announced that the trust product would be restructured with only a minor haircut to investors, meaning that this major uncertainty has been removed in the short run, see Flash Comment: China - orderly default of trustproduct kicks the can ahead – 27 January 2014.
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