Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



This Central Bank Could Spark a Credit Crisis

Last week's challenging environment for stocks looks set to continue today, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) plummeting 1.8% and 1.6%, respectively, at 10 a.m. EDT.

A central bank pulls back
Last week, a central bank that is steering a massive economy critical to global economic growth proved that there are limits to its monetary largesse, pulling back from the financial accommodation it has provided since the start of the financial crisis. Naturally, this had a dampening effect on global markets.

I'm not referring to the Federal Reserve here -- that story garnered the lion's share of media attention last week -- but rather to the People's Bank of China, the Chinese central bank.

Indeed, the Chinese banking system experienced a liquidity crunch last week. The seven-day repurchase agreement rate -- a benchmark for interbank borrowing costs -- spiked upward, reaching 28% last Tuesday. For reference, the overnight U.S. dollar London Interbank Offered Rate hit an all-time high of 6.875% on Sept. 30, 2008, at the height of the credit crisis.

Despite this, the PBoC offered no liquidity support; in fact, it didn't even address the matter publicly until today, when the bank released a statement (dated June 17) exhorting banks to "pay close attention to the liquidity situation in the market" and to "play an active role in using their advantages to support the central bank in stabilizing the market." The market began to stabilize after the PBoC ordered banks to lend to each other (a literal illustration of a "command" economy).

Under normal circumstances, this would have been the top story in every financial program and daily, but everyone was too busy watching the Fed. The PBoC has fueled a massive expansion of credit since the onset of the global financial crisis in order to maintain the clip of China's growth. This is a risk factor for China -- and, given its new prominence in the global economy, the rest of the world, as well. For U.S. investors, there is no need to panic. Know that this is a risk and know what you own; that's a good start under any circumstances.

Are you prepated to invest based on fundamentals? The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2505390, ~/Articles/ArticleHandler.aspx, 9/30/2016 11:19:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,299.59 156.14 0.86%
S&P 500 2,166.66 15.53 0.72%
NASD 5,304.41 35.25 0.67%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 10:54 AM
^DJI $18258.02 Up +114.57 +0.63%
^GSPC $2163.99 Up +12.86 +0.60%
S&P 500 INDEX CAPS Rating: No stars