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Is China’s Cash Crunch Returning?

August 28, 2013, 7:00 PM

Is China’s Cash Crunch Returning?

Is it time for a return of China’s cash crunch?

A spike in money-market rates in June raised fears about the stability of China’s financial sector, pushed equity markets sharply lower, and had investors running for cover. A peek at the overlooked role of China’s Ministry of Finance in the money markets suggests another scare might not be far away. The People’s Bank of China has the lead role in managing funds in China’s financial market, but the movement of tens of billions of yuan in tax receipts and public spending in and out of the financial system also has a major impact, and sometimes pulls in the opposite direction of the central bank.Take June’s cash crunch. With interbank rates spiking, fiscal deposits fell to the tune of 121.9 billion yuan ($20 billion) – exacerbating banks’ cash shortage.

The central bank was working to ease conditions, injecting 305 billion yuan into the markets over the course of the month. The drain on fiscal deposits offset nearly half the impact of the central bank’s move – contributing to sustained high rates.

That’s not the end of the story.

The spend-down of fiscal deposits is a regular feature during the last month of the quarter. On average in the last three years, September has seen a 987 billion yuan fall in fiscal deposits. A repeat performance in the month ahead, potentially combined with more capital outflows as funds leave emerging markets, could be a volatile combination.

China’s short-term rates have fallen to an average of 3.3% so far in August, compared with 6.6% in June.

Big banks have said they are prepared for any emergencies. “An interbank liquidity crunch like the one in June is unlikely to happen in the future,” Bank of Communications Co. Chief Financial Officer Yu Yali said at a briefing last week, adding that the bank has set up a contingency plan for rainy days.

But in a recent interview with state broadcaster China Central Television, People’s Bank of China Gov. Zhou Xiaochuan dodged the question of whether China will see another credit crunch in September or December, saying instead that the nation’s overall liquidity conditions remain ample.

If China’s central bank governor isn’t certain another cash crunch will be avoided, investors should take a cautious approach too.

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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