The government of China failed to sell more than a third of new debt it had on the auction block this morning, the first such failure to reach its target in nearly two years. The government offered about $2.45 billion in new debt, but managed to find buyers for only about $1 billion.
The Financial Times attributes the failure to a rise in money market rates caused by the People’s Bank of China’s refusal to inject more liquidity into the country’s economy despite all the signals of stress on the country’s banking system. The government appears to be willing to accept slower growth in order to offset the risks to the economy.
If China’s central government cannot raise funds, who in China can? Regional and local governments have seen their access to China’s shadow banking system curtailed. Combined with the cut to liquidity injections, repurchase rates in the money market have risen to nearly 6.9%, more than double the 3% rate in May.
China’s government famously plays “whack-a-mole” both with fiscal and monetary policy. A liquidity injection is, therefore, just around the corner, and the repo rates will fall, loosening up lending for local governments and businesses. Then the cycle can start again.