A look at the increase in the Shanghai Interbank rate

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We mentioned earlier this week that there had been a sharp uptick in the Shanghai Interbank rate in the past month. This peaked last night at about 13%. With the attention, rightly so, that this is getting, it's worth taking a look at the issue and what's involved. 

Interbank offered rate is the interest rate that banks charge each other for interbank loans. The interbank offered rate reflects the funds supply and demand relation in short term. If the fund demand exceeds fund supply, the interbank offered rate will increase, and vice versa.

In the beginning of June, the Chinese interbank offered interest rate (CHIBOR) increased dramatically to 7.7%. However, the interbank offered rate was lower than 3% since May 2012. The Shanghai interbank offered rate (SHIBOR) also climbed to the highest in June (this is the one that was 13% last night).

The recent increase on interbank offered rate indicates a shortage of liquidity in Chinese banks. Banks who have enough funds for lending can make profits from the increased interbank offered rate, but for the banks who have to borrow funds to fulfill customer demand on cash such as small sized regional banks who have smaller capital bases and less liquidity have to pay for the high interbank offered rate for fund demand. The higher rates are expected to be a temporary phenomenon, but it can be considered as a warning sign leading to a liquidity risk if the tight liquidity continues.

 

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