China's credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds. The spread between the two-year sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, just reached 121 basis points, the widest in Bloomberg data going back to 2007. The cost to lock in the three-month Shanghai interbank offered rate for one year has reached an eight-month high of 94 basis points over similar contracts based on repurchase agreements. Billionaire investors George Soros and Bill Gross have drawn parallels between the situation in China now and that in the U.S. before the 2008 financial crisis, when traders gauged lending appetite by monitoring the difference between the LIBOR and the overnight indexed swap. Efforts to curb leverage in China need to be handled carefully to avoid wrecking confidence in the financial system. (VIEW LINK)
On China, the latest currency trading band range changes took many traders by surprise. I think credit woes will be one of the issues that needs to be urgently tackled in the upcoming March 05 National Peoples' Congress. It is nerve wrecking for many investors to see Chinese trust companies going or about to go bust each day. Bloomberg News sure has the knack of the China story when it comes to credit issues and PBOC thinking. I think Chinese policy makers need to reassure the markets on their state of credit markets. Thanks.
This is a much bigger story than the market seems to realise I think. China has a very fine line to tread.