Short-sellers trying to spark turbulence, warns China

Staff reporter and Reuters

China's Ministry of State Security has warned that short-sellers or those who spread bearish views on the Chinese economy were trying to spark financial turbulence in China.

The country's top spy agency said in its official WeChat account yesterday that it will closely monitor "national security risks in the financial sector" and combat criminal activities in the sector that jeopardize national security.

This came amid news that China's financial regulators are investigating a month-end liquidity crunch that saw short-term money rates surge to as much as 50 percent, asking some institutions to explain why they borrowed at extremely high rates.

The overnight rate for pledged repo - a short-term financing arrangement - hit a record high of 50 percent on October 31, as a month-end scramble for cash and a flood of government bond sales caused stress in money markets.

The China Foreign Exchange Trade System, a central bank affiliate that operates China's interbank market, has asked institutions that settled trades on Tuesday at the 50 percent rate to submit explanations, according to two sources with direct knowledge.

"Anyone who borrowed money at very high rates needs to explain to regulators the decision-making and bidding process," said another direct source.

Traders and analysts said that an increasing supply of government bonds, and a newly approved sovereign bond issue for 1 trillion yuan (HK$1.06 trillion) had created unusual liquidity stress at a time when banks need to square their books to meet month-end regulatory requirements.