Gold and silver are up sharply with bank auction failures in China and Europe today. Interbank lending rates in China doubled in a week and hit a three-year high of 5.67% vs. the failed auction on 91-day securities yielding 3.68%. This was the Second China Failure This Month To Complete Bill Sale.

China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.

The finance ministry sold 16.76 billion yuan ($2.53 billion) of 91-day securities, falling short of the planned 20 billion yuan target, according to a statement on the website of Chinabond, the nation’s biggest debt-clearing house. The average winning yield was 3.68 percent, higher than the 3.22 percent rate for similar-maturity debt in the secondary market yesterday.

“Banks are badly short of cash,” said Qu Qing, a bond analyst at Shenyin Wanguo Securities Co. in Shanghai. “Given the cash squeeze, the central bank probably won’t announce any tightening measure by the end of this year.”

The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and yesterday reached a three-year high of 5.67 percent, according to daily fixings published at 11 a.m. by the National Interbank Funding Center.

“The market is desperate for cash,” said Chen Liang, a bond analyst at Guohai Securities Co. in Shenzhen. “It’s too costly to park money with debt at such a price given the seven- day repo rate has risen above 5 percent.”

“Some banks may be buying the local currency in the foreign-exchange market because it’s hard to borrow money in the fixed income,” said Li Tao, a foreign exchange trader at Shenzhen Development Bank Co. in Shenzhen. “There is also concern the appreciation may get quicker before President Hu’s visit.”

The auction was for 20 billion Yuan which is a mere 3.2 billion US dollars and it could not find bidders for that paltry amount. Is this a “year-end” thing or the start of a cash crunch? Regardless, watch what happens when China’s property bubble takes a big nosedive.

ECB Monetizes Bond Purchases

Meanwhile in Europe, the ECB fails to fully offset government bond buys, thereby monetizing 13.5 billion euros in government bond purchases.

The European Central Bank failed to attract the 73.5 billion euros from banks on Tuesday needed to offset its seven-month run of euro zone government bond purchases, instead managing to draw just over 60 billion.

“It has happened before but I wouldn’t make too much of a big deal out of it,” said ING economist Martin Van Vliet.

“The end of year is typically a quiet period and banks books are closed so it shouldn’t be seen as a sign that tensions are returning to interbank markets.”

Once again we ponder the question “Is this a year-end phenomenon or the start of something more significant?” Right now I suggest China is the real deal. I do not know about the ECB failure but it sure does not look pretty, regardless of the reason.

$SSEC – Shanghai Index Drops 1.74%

click on chart for sharper image

The Shanghai Stock Index is where it was in June 2009. The rally that fueled US equities (Bernanke’s printing press), did not do the same for the $SSEC in spite of rampant price inflation and a massive expansion of credit and money supply in China.


The entire metals futures market is up today, with gold up nearly $22 to $1405 and silver up nearly a buck to $30.20. Copper futures hit a new all-time high of $4.30 a pound. In contrast, oil is nearly flat, up 38 cents to $91.38.

Mike “Mish” Shedlock
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