In response to the recent "money shortage" in the interbank market, the People's Bank of China (PBOC) stated on the 24th that the overall liquidity in China’s banking system remains at a reasonable level. The central bank urged financial institutions to enhance their liquidity management and work toward maintaining a stable monetary environment.
The "money shortage" that persisted for nearly a month starting late May drew widespread attention. Analysts suggest that this phenomenon highlights the issue of idle funds within the banking system and reflects the policy intent of channeling more capital into the real economy.
**The Central Bank Stands Firm: The Final Push Behind the "Money Shortage"**
June 20 may be a day that many bank traders will remember for years. On that day, the overnight repo rate spiked to 30%, while the Shanghai Interbank Offered Rate (Shibor) for overnight lending jumped by 578 basis points to 13.44%, hitting a yearly high.
"In history, there have only been four periods where the overnight repo rate exceeded 6%, but none of those saw such a sharp rise or prolonged duration," said Peng Wensheng, chief economist at CICC.
Experts note that unlike previous liquidity crunches, this round of "money shortage" doesn’t have a single clear cause. Instead, it results from a complex interaction of multiple factors, with the central bank's "non-intervention" acting as the final trigger.
"The reasons include external factors like the Fed's shift in monetary policy, internal issues like poor liquidity management by banks, and timing-related elements such as regulatory tightening and end-of-quarter evaluations," said Lian Ping, chief economist at Bank of Communications.
If these factors were predictable, the new liquidity regulations introduced by the central bank caught many institutions off guard, pushing the situation to its peak.
"Many banks expected the PBOC to ease monetary conditions through reverse repos or even cut reserve requirements. As a result, some banks extended excessive credit in June, which worsened the liquidity crunch," Lian added.
**Idle Capital: The Financial Alienation Behind the "Money Shortage"**
The PBOC’s non-action ultimately points to the widespread practice of "funding of funds" in the interbank market.
What many find confusing is that the "money shortage" observed over the past few weeks actually occurred in a country with the largest global money supply. According to PBOC data, total social financing in the first five months of the year reached 9.11 trillion yuan, up 3.12 trillion yuan from the same period last year, and broad money supply (M2) hit 104 trillion yuan.
"In a country with such a high savings rate, banks running short of money can only mean it’s not a total shortage," said Guo Tianyong, a finance professor at the Central University of Finance and Economics.
Zhao Qingming, a financial expert, believes the core issue lies in the growing amount of idle capital that regulators are no longer willing to tolerate.
"This year, both loans and social financing have grown significantly, yet the real economy remains sluggish, showing signs of financial ischemia. This indicates that much of the capital is circulating within the financial sector rather than reaching the real economy," Zhao explained.
Lian Ping noted that some large companies, easily accessing bank loans, divert funds to the trust market for higher returns, which then flows into local government financing platforms and the real estate sector. This has led to rising capital costs and increased difficulty in securing financing for manufacturing.
Behind the "money shortage" lies a deeper issue: the financial system's alienation from the real economy. Funds that should support industry end up being funneled between financial institutions, turning finance into a game of "making money from money." Under the widespread panic in the banking system, the real economy continues to bleed.
**Redemption of the Real Economy: Policy Intentions Behind the "Money Shortage"**
Experts argue that the PBOC’s non-intervention during this period is not passive, but an active strategic move. By allowing the market to adjust, the central bank aims to prevent bubbles and ensure long-term financial stability.
"In a way, this is an active policy adjustment, rather than waiting for a crisis to force change. It helps reduce the burden on real estate and local government financing platforms, freeing up capital for the real economy," Peng Wensheng said.
Despite current economic stability, China still faces numerous challenges. With the U.S. economy recovering and the Fed gradually phasing out quantitative easing, global deleveraging is accelerating. In this context, the PBOC’s decision not to inject liquidity signals a shift toward supporting the real economy rather than bailing out financial institutions.
"During the structural adjustment phase, blind monetary expansion could disrupt de-capacity and de-leverage efforts. A loose monetary environment weakens the market's ability to self-correct," said Ba Shusong, deputy director of the State Council’s Development Research Center.
Optimizing financial resource allocation and strengthening support for the real economy is a key goal of the current government. Premier Li Keqiang recently emphasized the need to "activate currency and credit stocks," highlighting the shift away from expansionary policies and toward more effective financial support for the real economy.
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