China's Monetary War Against Hedonism and Extravagance

| Thu Jun. 20, 2013 12:04 PM EDT

The interbank lending rate in China has spiked over the past couple of weeks. "China's interbank market is basically frozen — much like credit markets froze in the United States right after Lehman failed," Patrick Chovanec told the New York Times. Is this because China's economy has overheated and its credit bubble is now bursting? Maybe. But the Financial Times says there's more to it:

In the midst of the extreme market stress, a statement issued late Wednesday by the central bank raised the possibility that politics are also playing an important role.

Bankers had been calling for the central bank to ease the pressure and a few investors had even predicted that it might cut interest rates. Instead, the People’s Bank of China ordered a thorough implementation of the new “mass line education” campaign launched this week by President Xi Jinping — a campaign that in its propaganda-style and potential scope carries echoes of the Mao era.

The Communist party cadres that run the central bank were told to attack the “four winds” of “formalism, bureaucracy, hedonism and extravagance”, as demanded by Mr Xi.

....In monetary policy terms, the central bank could certainly be said to be waging war on hedonism and extravagance. The seven-day bond repurchase rate, a key gauge of liquidity in China, surged 270 basis points to more than 10.8 per cent on Thursday — a punitively high rate that could force cash-hungry banks to call in the riskiest of their loans.

Andrew Mellon would be proud! But if this really is what Xi is doing, he'd better be careful. As you may recall, things didn't turn out the way Mellon hoped.

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