China credit squeeze eases, but 'hot money' worries persist

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China credit squeeze eases, but 'hot money' worries persist

China credit squeeze eases, but 'hot money' worries persist
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Fears of a credit crunch in China’s banking system have eased as short-term interest rates fell, though they do remain elevated.

The central bank – the People’s Bank of China (PBOC) – said there were sufficient funds in the market but that commercial banks needed to do a better job with their cash management and control their lending.

Despite the improvement in funding conditions, share prices fell sharply. The main indexes were down 2.4 percent in Hong Kong and 5.4 percent in Shanghai on Monday, with banks the biggest losers.

Investors remain worried about a sharper-than-expected slowdown in the world’s second-largest economy.

Follow the hot money

Analysts and traders said the PBOC was concerned about various activities including arbitrage, speculation, and underground lending, that it thinks are increasing leverage and financial risk without supporting the real economy.

“It’s much easier to borrow money today, but costs remain high. Our business is apparently affected, but mainly on side business, such as wealth management,” a trader at a mid-sized commercial bank in Shanghai told Reuters.

“Maybe this is what the central bank hopes as the government is calling for more money to be used for real economy.”

A commentary by Xinhua, a state-run news agency, on Sunday said liquidity in the banking system was ample but that funds had been misdirected.

“Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread,” the commentary said.