Here's why everyone is panicking about SHIBOR spike

Is China imposing moral hazard?

According to Bernstein Research, while spikes in SHIBOR have been observed many times in the past, what has caused the panic this time is the central bank's unwillingness to ease the tightness either through a RRR cut or via open market operations.

"We believe this is a signal that the central bank is beginning to impose moral hazard and eventually market discipline on the banking sector," it said.

Here's more:

We believe the tight interbank liquidity environment has been the key driver of the weak bank share prices over the past month.

We believe the tightness in the interbank market has been driven by a confluence of events including 1) a sharp decline in FX inflows, 2) a three-day holiday last week which led to the banks boosting their cash reserves beforehand, 3) the typical quarter-end posturing (i.e., window dressing) of the banks' balance sheets and 4) media reports of a bank having difficulty repaying an interbank loan.

This has led to elevated interbank SHIBOR interest rates in China. Overnight SHIBOR peaked at levels between 8-14% in recent weeks, a sharp rise from the levels of 2%-4% reported at the start of May.