China bank stress encourages U.S.-China trade war negotiations

November 19, 2018 By Chriss Street

With spiking dramatically higher due to collateral stress in its banking sector, Chinese Vice Premier Liu just announced he will meet with U.S. Treasury Secretary Steven Mnuchin to prepare for a trade dispute resolution summit between President Trump and Chinese President Xi Jinping in late November.

Although the financial press tended to focus on last week’s -2.3 percent plunge in the U.S. Dow Jones Indiustrial Index and the -0.73 percent drop for the Asia Index as signs of the risks from the U.S.-China Trade War, the most important financial story may be the little watched, but hugely important, action in the the Shanghai Interbank Offered Rate (SHIBOR) wholesale interbank overnight lending rates that spiked from 1.98 percent on Thursday to 2.47 on Tuesday morning.

The extraordianarily large 25 percent increase in the cost for immediate cash is seen as a sign of banking stress as large Chinese banks are tightening down and/or restricting loans to smaller banks by demanding dramatically higher interest rates.

China’s banking system was already the most leveraged in the world before the People’s Bank of China cut the reserve requirement ratios (RRRs) for both large and small banks from 15.5 percent to 13.5 percent on October 15. The government-driven encouragement for banks to increase lending capacity means that Chinese banks, instead of being able to loan about 6.4 yuan for every yuan in customer deposits, can now loan about 7.45 yuan for every yuan in customer deposits............To Read More......