China blames shadow banks for cash crunch

CHINA’S state news agency Xinhua has claimed there is ample liquidity in China and blamed market distortions caused by widespread speculative trading and shadow financing for the recent spike in interbank lending rates.

The comments from Xinhua, released on Saturday, confirmed analysts’ suspicions that the central bank’s funding squeeze is aimed at reducing non-bank lending, or shadow banking, which has boomed in recent years.

The cash crunch engineered by the central bank was intended as a warning to over-extended banks but has also fed fears that a miscalculation could trigger a full-blown crisis.

Xinhua said there was sufficient liquidity in the market, with data showing broad M2 money supply rose 15.8 per cent in May from a year earlier.

“The banks are short on cash, the stock market and small- and medium-sized enterprises are short on cash, but there is ample money supply in the market,” it said in the commentary.

Its comments came as Bank of England governor Sir Mervyn King said he had signed an agreement with the People’s Bank of China (PBOC) to establish a three-year currency swap line between their countries’ central banks.

There is some level of competition among world financial centres for Chinese business. The Bank of France has suggested a desire to set up a similar swap line, but King’s deal is the first of its kind in Europe.

The swap line is worth 200bn renminbi (£21.14bn), and is designed to provide liquidity to financial institutions, mostly in case of an emergency in which they need quick access to Chinese currency.