Some folks missed some payments.

In the wake of the PBoC’s move to implement a second OMO hike in as many months…

…Bloomberg reported overnight that some “smaller financial institutions including rural commercial banks missed payments on interbank borrowing on Monday.”

That’s not a great sign and it prompted the PBoC to inject “hundreds of billions of yuan” into the system as CNY 1-year interest-rate swaps jumped as much as 13bps to 3.77% in earlier trading while the 7-day repo rate climbed to 3.09%, the highest since April 2015. The 14-day repo rate spiked 67bps, the most since late December, to 4.30%

Similarly, the  O/N rate rose to the highest in almost two years at 2.74%. Bloomberg also notes that CNY forward swap points jumped, as two-week contracts saw 95.6 points, the highest since early last month. The cause: well, tight liquidity obviously, due in part to quarter-end regulatory checks, convertible bond sales locking up funds and certificates of deposit maturing. “Liquidity tightening is prompting investors to swap dollar into yuan in the short-end of the curve,” traders remarked.

Ok so look, all of that probably sounds like Greek … err.. Chinese… to you, and that’s fine because the bottom line here is simple: in late November, China embarked on a concerted push to tighten through repo rates versus policy rates. As we noted last week, “Beijing has essentially shelved policy rates in favor of repo rates when it comes to tightening.”

But then, in comments that accompanied this month’s OMO hike, they kind of tried to downplay the extent to which they’re transitioning to repo rates versus policy rates as a means of managing liquidity and financial conditions more generally.

Say whatever you want about that, but at the end of the day that’s a reflection of Beijing trying to walk a tightrope between keeping conditions loose enough to support growth (not to mention the global credit impulse which depends almost entirely on China) and tightening enough to discourage the rampant proliferation of leverage and speculative excess. What happens when these two competing agendas collide against a backdrop where the Fed is hiking, you ask? Well, there’s confusion and turmoil just like we saw in mid-December, when the Chinese bond market seized up after a few entrusted bond deals went bad at the same time the Fed hiked.

So basically, what you’re seeing this week is more confusion around this same narrative. Here’s Goldman to explain:

We know: what-the-f*ck-ever, right? But it really does make sense when you think about it in terms of trying to manage things with what amount to stealth hikes (OMO rates) versus policy rates. It’s all the same narrative: tighten to rein in speculation and leverage while preserving the idea that policy remains accommodative enough to support growth. OMO (stealth) versus policy rates (overt). See?

Why bend over backwards to try and hide the fact that they’re trying to curtail speculation and squeeze leverage out of the system? Well because you do not want to make the rest of the world question whether the Politburo is going to suddenly choke off this…

(Citi)

China is responsible for the entire goddamn global credit impulse. You start aggressively (and overtly) tightening and that goes out the f*cking window.

Ok, so here’s Goldman (again) with more on the Chinese “balancing act” described above:

Got all that? Good (but seriously, just read the bolded and underlined passages and fit them with the simultaneous deleveraging and releveraging narrative).

Note how Goldman mentions “a slow grind higher for default rates.” This seems like an opportune time to remind you of what we said in late January. To wit:

And finally, allow us to demonstrate, with one “simple” graphic, why squeezing out leverage and curbing speculative excess (i.e. why tightening conditions by any means necessary) is important…

(Goldman)

That right there is your Chinese credit creation machine. And it’s a veritable ticking time bomb.