China’s financial system faces liquidity shortage

Debt auction failure will further slow economic growth.

China last week failed to sell all the debt it offered at auction for the first time since July 2011 because of a cash squeeze that threatens to worsen a slowdown in China’s economic growth.

The Ministry of Finance sold US$1.6 billion of 273-day bills, well short of the US$2.4 billion target, according to sources. Agricultural Development Bank of China raised US$1.9 billion in a sale of six-month bills last week, also less than its US$3.3 billion goal.

The seven-day repurchase rate that measures interbank funding availability has more than doubled as banks hoard money to meet quarter-end capital requirements and capital inflows ease.

Analysts said the cash crunch is curbing demand for bonds and might persist if the People’s Bank of China doesn't inject more capital into the financial system. The crunch may affect issuance of both government and corporate bonds if it lasts longer.

It comes at a time when China’s economic outlook is worsening. Growth has remained below 8% for the past four quarters, the first time in 20 years. The World Bank slashed its forecast for China’s growth this year to 7.7% from 8.4%.