China faces worst liquidity crisis

Beijing: China is facing its worst cash crunch in years with several banks taking short term loans at extremely high rates to stay afloat. The cash shortage is evident in the sharp rise of overnight lending and repo rates.

The liquidity squeeze comes in the wake of a crackdown on shadow banking and the government's decision of not bailing out banks by infusing additional funds. In the past, the central bank has come to the rescue of banks by cutting the reserve ratio requirements but it refuses to do so now as banks have repeatedly ignored its pleas against excessive lending.

Cash-starved banks pushed up the benchmark seven-day repurchase rate to a record 12% on Thursday. China's weighted average overnight repo rate rose to the highest level in a decade hitting 13.1%. However, as the situation worsened, the government is believed to have released $8 billion to improve the liquidity scenario.

Shadow banking networks run by unlicenced entities offer loans to businesses that find it difficult to meet their credit requirements from normal banking channels.