The cash shortage in China in the past two weeks have tested the management acumen of the new leadership of the Communist Party in addressing the attendant risks associated with record expansion of credit inherited from their predecessors.
The 13.91% one day repurchase rate recorded yesterday had prompted speculation of the Chinese Central Bank's actions to pump liquidity and its subsequent dive today which is the largest since 2007. This though has been addressed quickly through a June 19 State Council communique stating that banks need to better use existing credit and increase efforts in avoiding financial risks. This was accompanied by Premier Li Keqiang's directives to eradicate speculation fueled by cheap money.
Should an extended constriction of liquidity risks foster a greater credit contraction, this would only result in a further depression of the Chinese economy that is slowly contracting and slowing down. This is further compounded by the prospect that the Federal Reserve Bank would be reducing its investments in stimulus packages to boost the US economy.
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