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Baoshang Takeover Sets Up June Interbank Squeeze

The takeover of Baoshang Bank is triggering risk aversion and reduced counterparty lending in China’s money market, indicated by a sharp drop in issuance and subscription rates for interbank negotiable certificates of deposit (NCDs). The likely effects of this risk aversion will be slower credit growth in June at the very least, when liquidity conditions typically tighten seasonally. The PBOC will need to ease monetary policy more aggressively to prevent a sharp contraction in NCD issuance that could trigger forced sales of liquid assets by non-bank financial institutions, including government, policy bank, and corporate bonds, raising corporate borrowing rates and credit spreads.

Posted May 30, 2019
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