Interbank interest rates: Leading indicator of economic growth
The dry bulk shipping industry relies heavily on China’s demand for iron ore, coal, and grain, which depend strongly on the country’s industrial output and economic activity. One early or coincident indicator that may give investors a clue to the future outlook of a country’s economic growth rate is the interbank repo rates. Rising or high repo rates often spell problems within the financial sector, which is a vital part of the economy that moves money between savers, lenders, and borrowers. If the financial sector collapses, it can limit loan growth. So it can also mean a negative implication on demand growth for dry bulk shipments.
An elevated interest rate
Following the PBOC (People’s Bank of China)’s public announcement to calm the market down and to inject liquidity (money) into banks, China’s three months interbank repo rate, expressed in annual terms, has fallen from a record 13% on June 20, which has relieved some investors. However, it still remains higher than the average of 4.0% earlier this year, standing at 5.3% on July 30.1. High or rising rates are generally negative, as they reflect a cash squeeze or cash crunch—a condition of high demand or low supply of cash available in the financial system—just like when people in the United States weren’t able to find money to pay off record interest on their mortgage debt when the housing bubble began collapsing in the late 2000s.
Economic growth risk
As we’ve seen, rising repo rates also present a risk for the economy because they often mean not enough money’s available to flow through the financial system. Without the flow of money, nothing can be done. Companies that rely on banks to run their daily operations—such as paying suppliers and workers as well as purchasing new equipment—will not be able to use banks’ services as usual. As these bills go unpaid and purchases are postponed, the economy will fall into a recession or weaker growth. This happened back in 2008 in the United States.
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- Repo rates are a form of short-term borrowing that use government securities as collateral ↩
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