The People’s Bank of China (PBoC) lifted borrowing costs in step with the Fed overnight. But the real question is: can China’s economy handle this sort of tightening at this stage in its cycle?Diana Choyleva of Enodo Economics (one of the few economists to accurately forecast the yuan’s depreciation) believes it can’t.On one hand the PBoC is lifting rates, on the other, it’s been engaged in the injection of a record amount of liquidity over the last year to prevent market rates from rising organically.China’s version of the Ted spread, meanwhile (the difference between the yield of three-month PBoC bill and the three-month interbank swap rate) has also been widening, implying the only reason market rates haven’t spiked in tandem is probably due to the compensatory liquidity coming into the market from the PBoC.But there are other concerning omens out there too.From Choyleva’s Thursday note:A much bigger danger signal is the surge in interbank borrowing and lending and its dramatically changed composition. In the past two years, non-bank financial institutions (NBFIs) – such as trust and investment companies, leasing firms and asset managers – have increasingly had to fund themselves in the wholesale money markets.NBFIs accounted for 54% of total borrowing in China’s repo market in 2016, up from just 14% three years earlier.
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