China's seven day repo rose to a record high of 10.77% in Shanghai, the highest since March 2003, according to Bloomberg*.
Meanwhile, the one-day rate hit a record 12.85%. And Zerohedge reported that overnight repo hit 25%.
The liquidity squeeze in China first began ahead of the Dragon Boat festival earlier this month. Spikes in interbank rates are common right before holidays.
But Diana Choyleva at Lombard Street Research said this is symptomatic of a bigger problem. She said capital flows had "become a more important driver of domestic liquidity conditions in China's managed exchange rate system."
In a new note to clients Bank of America's Ting Lu wrote: "There are many factors behind the interbank liquidity squeeze that might be cited, but we believe that the ultimate reason is the central bank’s tough stance as the PBOC can practically provide unlimited liquidity to ease every squeeze if it wishes to."
Banks have been clamoring for a reserve requirement ratio cut.
So why isn't the Chinese central bank stepping in?
As we previously explained the People's Bank of China seems to be in no mood to support banks' constant demand for liquidity.
"It seems that the PBoC and some other regulators could be taking the opportunity of the tight funding conditions to ‘punish’ some small banks which had previously taken advantage of the stable interbank rates to finance their purchase of higher-yield bonds," wrote Lu.
This also comes at a time when banks are required to meet their loan-to-deposit ratio requirement in filings to both the central bank and the China Banking Regulatory Commission (CBRC).
Earlier this week Fitch's Charlene Chu warned that China's credit bubble is unlike anything in modern history.
This also elicited some worrisome responses from some of our favorite China experts on Twitter.
I hope you do realise that by now, China is on crisis watch.
— Also sprach Analyst (@theanalyst_hk) June 20, 2013
SHIBOR at 25% basically means there is no functioning interbank market in China - it's like money markets seizing up post-Lehman
— Patrick Chovanec (@prchovanec) June 20, 2013
China faces "Das Boot" dilemma: Do you face the depth charges or dive deeper? Do you face defaults or pump even more money into bubble?
— Patrick Chovanec (@prchovanec) June 20, 2013
This chart from Bloomberg BRIEF's Michael McDonough showed the early run up in the seven-day repo rate:
Lu expects tight interbank liquidity conditions to last till July.
* We updated the data to reflect the latest numbers quoted by Bloomberg