China's latest stimulus effort unintentionally creates chaos in its financial markets as short-term rates hit 50%

• China's bid to provide stimulus through increased bond issuance has led to a cash crunch, Bloomberg reported.
• This week, banks issued a form of short-term debt at the highest volume on record.
• Last week, some smaller lenders had to borrow short-term cash at a 50% rate.

China's latest effort to support economic growth has unintentionally fueled a massive cash crunch, creating chaos in its financial markets, Bloomberg reported. 

In a rare move, Beijing approved a mid-year budget adjustment last month that enabled the sale of $137 billion in sovereign bonds. The measure was meant to ease debt burdens on the country's local governments and offer stimulus amid economic turmoil.

But the flood of bond sales, including those by local governments, soaked up a huge amount of liquidity, and onshore lenders have since rushed to counteract the crunch by scrambling to raise cash.

This week, banks issued a form of short-term debt at a record pace. Lenders have doubled the sale of these so-called negotiable certificates of deposit to more than 1 trillion yuan, or about $137 billion, according to Bloomberg. 

Even state-backed lender Industrial & Commercial Bank of China sold a six-month note at the highest yield this year. 

And last week, some smaller banks were forced to borrow cash at a short-term rate of 50% on October 31 due to the liquidity squeeze. The spike also came as banks had to square their books before the month ended, Reuters reported.

In response, the People's Bank of China has signaled plans to support liquidity through a number of monetary approaches. Ideas include the reduction of in lender reserve requirements and adding cash through open market operations. 

Cash concerns add to a lengthy list of issues plaguing China's financial markets this year. Low growth, a real estate crash, immense debt, and an exodus of foreign investors' capital have all been running themes since Beijing lifted pandemic restrictions a year ago.