China's clashing priorities behind rare money market distress

investing.com:

SHANGHAI/SINGAPORE (Reuters) -China's attempts to keep the yuan from falling contributed to last week's chaos in money markets, sources involved say, pointing to the pressure behind the scenes as Beijing tries to guide its economy and markets through a major slowdown.

Routine month-end demand for cash in China's banking system snowballed into a scramble on Oct. 31 that pushed short-term funding rates as high as 50% in some cases, an incident that authorities are now investigating.

Six participants in the market say a confluence of factors drove fear and confusion across trading rooms in Shanghai and Beijing by late afternoon on that day.

Eventually, the People's Bank of China (PBOC), its affiliated China Foreign Exchange Trade System (CFETS) and bond clearing houses stepped in, directing lenders, extending trading hours and holding meetings with institutions to calm markets.

The contributing factors were the usual month-end demand for liquidity, cash hoarding in the lead up to a big government bond sale and a market where the biggest banks were already reticent to lend because of a mandate to counter pressure on the yuan.

«It was an accident,» said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, calling it an unforeseen consequence of the government's heavy hand in financial markets.

«Banks were grudging in lending, leaving non-banks asking each other for money in afternoon trade,» he said. «Borrowing rates surged as a result, with some willing to take any price.»

The reasons for the spike in interest rates and the ensuing market chaos are detailed here for the first time. Participants say that the vulnerability exposed will stay as long as capital outflows keep the system under pressure.

Most