Chapter 9: Credit crunch and liquidity supply in China’s banking sector
China recently experienced the most severe cash crunch since the 2008 financial crisis, which was evidenced by a credit crunch in mid-June 2013. Lenders rushed to raise funds from the market in order to meet capital requirements, pushing the interbank lending rate up to as high as 28%. The sudden cash squeeze shocked the global markets. This chapter tries to understand why the credit crunch took place in 2013 and why China’s central bank, unlike what it has often done through “credit easing”, refused to inject any credit liquidity into the market on this occasion. Sections 1 and 2 offer an overview of the credit crunch in general and in China, respectively. Section 3 explains the reason for no credit crunch in China even in the latest financial crisis. Section 4 focuses on the credit crunch episode in 2013 and unveils the central bank’s no-action policy towards this credit crunch. A discussion of various economic and institutional factors is offered in Section 5 to explain why this no-action strategy is not sustainable in a long run. Section 6 wraps up the chapter by looking into the possible macroeconomic policy change which may affect the central bank’s monetary policymaking.
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