Repo Rates Soar: Chinese Banks Navigate Unprecedented Debt Issuance Amidst PBOC’s Conflicting Signals; Smaller Banks in Distress as Mainstream Narratives Fall Short

The financial landscape is in tumult as repo rates soar, with banks heavily borrowing to address liquidity concerns and a looming specter of potential economic deflation. Adding to the complexity, Chinese banks have entered the scene, issuing an extraordinary volume of short-term debt at penalty rates, coinciding with unusual activities by the Chinese Communist Party (CCP). The situation intensifies as the People’s Bank of China (PBOC) initially pledged liquidity support after the repo spike but later changed its stance, attempting to downplay the significance and boost confidence, which, however, proved ineffective.

Further intricacies emerge in China’s ‘pledge repo’ market, revealing distress among smaller banks that are borrowing at exorbitant rates at the end of October. The mainstream explanation attributes this turmoil to government bond issuance, draining funds from commercial banks. However, this narrative falls short in elucidating the recent behavior of banks, particularly the rush to build liquidity reserves following the supposedly inconsequential repo episode in October.

1/ 🚨 Big moves in China's financial scene!

Repo rates soared, banks are borrowing heavily, and the economy hints at deflation.

What's really going on behind these unprecedented moves?

2/ Chinese banks issued an unprecedented amount of ST debt and at penalty rates, amidst… pic.twitter.com/dJwk3VsS5r

— Jeffrey P. Snider (@JeffSnider_AIP) November 13, 2023

In China, confidence is falling fast.

(Bloomberg) — China’s consumption rebound slowed and private business confidence lost momentum in October, according to independent surveys and alternative data that suggested the economic recovery remains bumpy.

An indicator of Chinese consumer demand for recreation and transport published by Paris-based QuantCube Technology, along with an independent survey of consumer sentiment by US company Morning Consult, both fell in October from the previous month. A poll of private business sentiment from the Cheung Kong Graduate School of Business also declined in the month.