The business community in China has become increasingly concerned recently about a potential credit squeeze in China. Traditionally, banks have tended to try to ensure that they have cash on hand at the end of the year to make their balance sheets look more presentable – a tradition known as “window dressing”. Window dressing reduces the availability of credit towards the end of the year and this has combined with other factors to create a credit squeeze in the mind of some over recent months.
The interest rate on seven day (very short term) bonds had climbed to 8.93% before the Central Bank acted to ease the credit fears with the injection of a relatively modest sum of $5 billion into the banking system. The move caused the interest on the seven day bonds to relax back to 6.56%.
The Chinese authorities have been concerned to avert a property bubble and one of the tools that they have been using is to change the level of liquidity that banks must hold, thereby choking off credit and, they hope, reining in property speculation which is driven by borrowed cash.
Speaking to the BBC, market strategist Jeremy Stretch at CIBC said: "The banks are being forced to adapt to regulatory changes - so they are being forced to hold additional capital. Banks that have been used to operating on very easy and loose conditions are now finding that those conditions are starting tighten. Authorities are fearing that this is causing a scramble for cash and that is pushing up the rates and so they are being forced to inject some money into the system."
The Chinese face a dilemma since businesses need access to finance to be able to expand, pushing up growth, but the bursting of an over-inflated property bubble could have disastrous consequences as the Spanish and Irish people can tell you.