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China's credit squeeze needs immediate action

China’s credit squeeze needs immediate action

(27 June 2013 – China) Spectators and investors are awaiting a move by the People's Bank of China (PBoC) to end China's credit squeeze as soon as possible.

According to Bank of America/Merrill Lynch (BofAML) Global Research, China's interbank credit crunch has been getting worse with media speculation about a moratorium on transfers and cash withdrawals even at some of the largest banks.

BofAML also noted that the PBoC must end the credit squeeze soon because of its potential dangers.

"We are cautious at the moment and continue to watch the unfolding situation as we believe the biggest risk comes from the PBoC potentially mishandling the situation," BofAML said.

"In our view, dealing with banks in breach of regulations should be done by improving prudential regulations rather than engineering an interbank credit crunch which could potentially backfire should banks lose mutual trust."

It is believed however, that the PboC and Chinese policymakers will be aware of the potential dangers and take decisive measures to revive the interbank market, to calm investors and to stabilise the economy.

"To clarify, we don't expect cuts of benchmark rates or RRR, but we believe the government will have to end the current interbank credit crunch.

"Though China bears may appear to be finally vindicated, global investors should still keep in mind that Shibor is not Libor, China is not in crisis yet, in our view and a hard landing is still likely to be prevented."

"Markets will likely fall further in the next few days, but we believe this will present opportunities in the market for investors."

Undercurrents are running through the market to determine the motivations behind the PboC's actions, some believe the government is seriously concerned about the overly rapid credit growth facilitated by shadow banking, so it decided to hike Shibor and squeeze interbank lending to slow credit growth.

The other theory is that the PboC squeezed interbank liquidity to punish banks that had aggressively used short-term interbank funding for longer-term investments.

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