Interbank lending hit by liquidity crunch

The liquidity shortage in China's interbank lending market has been under the spotlight recently, as short-term rates last week spiked to record highs. Experts say that's due to capital inflows into longer-term investments. They also say the Chinese central bank is set to pump more money into the real economy while curbing overly fast credit growth in undue places.

The recent liquidity crunch in China's interbank lending market has raised alarm bells across the markets. Experts claim that's a result of capital flows into long-term investments.

A large portion of bank capital have gone to local governments' financing vehicles and the property sector, and are used for long-term investments. That's a major cause for the current liquidity crunch we're seeing in the markets," said Wang Songqi, Deputy Director of CASS Institute of Finance and Economics.

The issue has been put under the spotlight when media reported over the weekend that China's interbank market, where banks lend money to each other to meet daily cash needs, had seen a surge in borrowing costs over the past two weeks.

Last Thursday, interbank lending essentially froze as overnight borrowing costs at one point touched 30 percent. That rate edged down to 6.49 percent today, after the country's central bank said liquidity was ample in the market.

In a recent meeting of the PBOC's monetary policy committee, the Chinese central bank sent a strong message of its determination to maintain a prudent monetary policy, making sure credit does not spread to undue places.

The PBOC has adopted relatively tight measures to contain credit growth. The basic idea is preventing monetary supply from growing too fast, and preventing commercial banks from over expanding credit.

Despite maintaining a relative prudent monetary policy, data from China's central bank shows total social financing, a broader measure of liquidity in the market touched a 3-year high at the end of the first quarter of 2013.

A commentary published Sunday by the official Xinhua News Agency says "it's not that there's no money, but whether the money is put in the right place".