Why tightening in China’s money markets will have ramifications for MNCs

PBOC benchmark rate

Against a backdrop of expansionary monetary policy, there has been a growing trend over the last couple of years for China’s smaller financial intuitions to borrow heavily from the money markets to make big leveraged bets on speculative investments, fuelling asset bubbles. The asset-liability mismatch that this causes has been an issue as increasing borrowing costs and/or decreasing returns on these investments force institutions back to the money markets to cover old liabilities.

As Beijing has set its sights on China’s ballooning credit and high leverage in financial markets, the People’s Bank of China (PBOC), China’s central bank, has raised key interest rates twice since early February, its first increases since October 2015. The impact was felt immediately as interbank borrowing rates climbed to their highest levels since April 2015.

Higher interbank rates will have repercussions for MNCs doing business in China, as they feed through to banks’ lending rates (and corporate funding costs) in the months ahead.

The effect will be amplified throughout the supply chain and channel, and has the potential to set off a cascade of defaults or delayed payments.

Volatile short-term rates (Interbank)

Impact on MNCs (Selected)


Suppliers that rely on credit to purchase inputs may struggle to restock should their lending sources dry up. In addition, they may try to pass increased funding costs on to their customers by increasing the prices of their goods. If suppliers are unable to pass on their costs, risks of default will mount as margins are squeezed. Executives should consider diversifying their supplier bases and work closely with key suppliers to offer credit should they run into cashflow problems.


Distributors that rely heavily on credit may start to draw down their inventory holdings and postpone major investments. As with suppliers, they could find themselves in trouble if they are unable to tap credit to purchase new inventory, keep up with their repayments, or roll over old loans. Executives should consider offering more flexible credit terms on purchasing stock, such as allowing for incremental payments spread out over longer time periods. In addition, where critical investments to build footprint are required, MNCs should consider what support they can provide.


MNCs may be faced with delinquent accounts if customers reliant on credit find their interest payments have increased. These clients may have liquidity issues, leading to delayed payments, or solvency problems, leading to default. Executives should work closely with key clients to understand the nature of any cashflow issues that they may be facing and consider offering flexible credit terms to key customers who are experiencing liquidity issues. 

Looking Ahead

Barring a deterioration in growth prospects, the PBOC will likely maintain short-term borrowing costs at elevated levels for the foreseeable future, because dealing with financial risks has become this year’s top economic priority. MNCs should prepare for this shift and evaluate where they might be exposed to counterparty risk as higher rates feed through the economy.

Written by: Josef Jelinek, Senior China Analyst

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