China Center Chart Dive: Appraising the Q4 Liquidity Squeeze by the PBoC

A “liquidity squeeze” engineered by the People's Bank of China quickly pushed up short-term borrowing costs in China’s money markets in Q4. The squeeze was designed to cautiously tamp down on risky leverage in the bond market, where too much short-term money was (and still is) supporting debt servicing by corporates and financial product providers. 

Increasing corporate loans and Wealth Management Product defaults are imminent in 2017 if the PBoC continues its squeeze, and current policy statements suggest it intends to. However, growth and stability maintenance in the lead-up to the 19th Party Congress later this year will certainly come into play, and we will probably see liquidity support expand once again. It will be important for MNCs to keep an eye on China money market dynamics and appraise the potential impacts of tightening conditions on suppliers, channel partners, and customers.