Notes From Underground: SHIBOR, My View On Its Significance

Many want to believe the FED is the responsible party for causing the massive unwinding in all variety of markets. The deleveraging of all assets classes in a zero interest rate environment can and will cause massive pain for those who utilized ultra cheap money  to attain assets that looked so good riding the momentum wave, but the undertow from deleveraging can drowned many swimmers. But is the source of deleveraging Chairman Bernanke? Maybe. But the more important impact may be from the Chinese. The SHIBOR, or overnight lending rate similar to LIBOR in the western capitalist countries, has skyrocketed during the past week, rising to double-digit levels–almost 25% at some point. The impact on the Chinese markets has been devastating but more importantly it has caused fears of a major crisis in the Chinese financial system and a negative impact on the entire fragile global financial system.

One of my Australian readers (CARL) has been sending me regular e-mails about the SHIBOR spike for the last week and I have been watching to see how it plays. Yet it forced me to think why the Chinese authorities would allow the massive imbalance to take place for I believe that China remains a very controlled, top-down system. If the People’s Bank of China wanted to affect the short-term rates it could have poured massive amounts of liquidity into the banking system or cut the reserve ratio to minimize the upward pressure on SHIBOR. Readers of Notes From Underground are aware that I have always been leery of economic data releases from the Chinese. As I have always noted, the Chinese leadership hits its predictive targets almost consistently as Jack Welch when he ran GE.

Recently, the Chinese releases have been consistently below market predictions and that raises a question: WHY DOES THE CHINESE LEADERSHIP ALL OF A SUDDEN WANT TO PAINT A PICTURE OF A WEAKENING CHINESE ECONOMY? I theorize that the Chinese have been unhappy about the policy shift by the G-7 and IMF to promote a weakening YEN. The political dialogue over ABENOMICS is that anything that promotes domestic growth in Japan is ultimately good for the entire global village. So if Japanese exports displace German and Chinese products, it will be for the good of the world … eventually. Developed world support for the Japanese program is an affront to China and the ultimate stick in the eye of China is not being part of the G-8.

The Chinese may be tired of carrying the global growth agenda as its huge growth has supported the world’s consumers and enriched the globe’s natural resource producers and farmers. A slowing China is causing disruptions to the world’s growth story and which nation will fill the void. China has recently told the Europeans that they were not a major global player and the old colonial order was over. A “manufactured” slowdown in China will have negative implications for global growth and heavily levered investments will come under increasing pressure. No room at the G-8’s table for you, where even Italy, Canada, the U.K. have a seat. Well maybe the Italian economy can fill the void left by a slowing China. There is much to ponder in this assessment but nothing is as it seems in the world of Notes From Underground, where 2+2=5 is the order of the day.


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12 Responses to “Notes From Underground: SHIBOR, My View On Its Significance”

  1. rjlafferty Says:

    Wow, Yra, great perspective and thinking. What a big game of chicken the PBOC would be playing if what you speculate is true. Or, would this be considered a temper tantrum? Either way, how big is the risk that the deleveraging they may or may not be causing (but are definitely contributing to) gets beyond their ability to stabilize? Where is the safe haven if this continues?


  2. Rob Says:

    That would be one expensive case of spite. The Economist had a decent article on this today, and they pointed out that not only did the authorities not provide liquidity but they actually held a 3mo bill auction that effectively tightened liquidity even a bit more.

  3. CHT Says:

    Brilliant take Yra!

    I just got a piece through from JPM who say:
    “We see three drivers for the queeze: (1) a crackdown by regulators on illegal bond trading practices by banks (in relation to wealth management products); (2) slowing FX inflows and USD buying by banks for a new NOP rule; (3) seasonal tax payments.”

    Sure there are probably some reasonable arguments as to why SHIBOR has spiked, but I am a little more suspicious than to just accept the above. What concerns me is if there is a legitimate debt problem and liquidity crisis, the CCP has its hands tied because it cannot repatriate it’s US Treasury holdings to buy back the Yuan; so how does it fund any further easing?

    Additionally one should question whether is this an attempt to subsidize speculative inflows? Indeed, that would be a farcical manoeuvre as the PBoC would be suffering a rising sterilization cost given the spread between the yield on FX reserves and the repo rate.

    It’s fairly obvious the data isn’t to be trusted, I was shown recently in a GS presentation that there’s “an increasing discrepancy between China’s exports to HK and HK’s imports from China”. One could arguably assume then that the PMI is overstated due to this overinvoicing.

    Lot’s to think about.

  4. Kevin Says:

    Very interesting Yra – I had focused on domestic politics and viewed the PBoC’s inaction as a sign that the reformists are in firm control v. the SoE/Regional Gov crowd who benefit from the borrow & build status quo. If they want to increase the consumption proportion of GDP, they need to alleviate the financial repression of negative real deposit rates, at huge cost to the SoE/Local Gov faction. If they hold the line on SHIBOR maybe it’s excellent evidence they will follow through on other reforms in due course? Your geopolitical take on the G8 and China is fascinating, and plays perfectly to the Chinese capacity for intrigue and innuendo!

  5. Michael Greenberg Says:

    My take is that they want to rein in all those banks that have been loaning out money willy-nilly. Or wirry-nirry.

  6. yra harris Says:

    Michael–maybe yes but with the Chinese there is always more in play.The final comment is beneath you—

    • Michael Greenberg Says:

      Yra….you’re right. I’m a jerk for writing that. I have a personal rule that if I pause hitting the “send” button because I’m not sure if my email is appropriate….then it’s not. I should have followed my own rule. Sorry again.

  7. Anonymous Says:

    […] On the SHIBOR jump, Yra Harris thinks the CCP apparatchiks are throwing a monkey wrench into the works for the G8 dissing and Yen depreciation. "…Recently, the Chinese releases have been consistently below market predictions and that raises a question: WHY DOES THE CHINESE LEADERSHIP ALL OF A SUDDEN WANT TO PAINT A PICTURE OF A WEAKENING CHINESE ECONOMY? I theorize that the Chinese have been unhappy about the policy shift by the G-7 and IMF to promote a weakening YEN… ." Notes From Underground: SHIBOR, My View On Its Significance | Notes From Underground […]

  8. Nate Says:


    I have seen on different sites, different opinions based on China potentially going to a gold standard/gold-backed currency in some form (maybe not full fledged gold standard). With the Chinese REPORTEDLY backing the proverbial truck up into the gold vaults of the Western Banks, could this be the beginning of cleaning out the shadow “outlier” banks in order to move in that direction?

    The East seems to be working away from the dollar and towards a new form of banking not available in/to the west.

    We are constantly being fed by our politicians the Chinese are manipulating their currency DOWNWARD in order to export more goods to give them a trading advantage. Right now, it seems they are doing quite the OPPOSITE of what our beloved politicians have told us over the last 4-10 years.

    Am I correct, or just dumb?


  9. yra harris Says:

    Nate—you are not dumb–the shift of China from an export driven economy to more balanced with domestic consumption will mean a need to sustain the currency–at what level i don’t know but you see the picture right—for the moment.The transition will not be easy but the rise in SHIBOR is as much international as domestic–the driving down of commodity prices by lowering growth expectations is driving the Bernanke led asset rebalancing to be caught in a difficult situation–especially as some naive investors realize how much leverage has been used to generate the returns of ETF s and other ways of padding the performance–

  10. Hergastul Says:

    Dear Yra,
    Do you expext increasing long term interest rates in the near future in the western world, no matter what the Fed does, and as a result a collapse of real estate prices in such countries as Usa, UK, France, etc…?

  11. yra harris Says:

    Hergastul—my sense is Bernanke is as I have written a ’37 er as he said the FED will not repeat the mistakes of 1937—he evidently wants to see where the market can fall to but he will “jump in” if he thinks the FED and other global forces are working to unleash major deflationary forces—he must presently be thinking this is just a healthy correction to the potential of too much risk being taken on the books—Europe is the greatest source of concern as the banks are teetering on disaster —

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