How We Predicted the “Shibor Shock” Three Months Before It Hit

In June 2013, the Shanghai Interbank Offer Rate (Shibor) shot up abruptly to record highs, catching many investors by surprise. The dramatic spike in this benchmark interest rate threatened to unleash a wave of bank defaults, further exacerbating the turmoil that had hit global markets earlier that month.

Investors did not see the “Shibor Shock” coming because they were paying attention to the wrong data. In the run-up to the crisis, official credit indicators continued to report easing credit and low, stable rates, as in years prior. But this official portrait of stability was false.

China Beige Book credit data told a very different story. As far back as late 2012, the thousands of firms in our network were reporting that their operations were under increasing strain, with each successive quarter showing marked jumps in the share of companies noting higher interest rates, higher rejection rates, and overall greater difficulty borrowing.

Our results showed that much of the credit making its way into the economy was increasingly being hoovered up by a small cohort of large, state firms. Meanwhile, the true engines of China’s economy—SMEs—were seeing substantially more restrained credit access along with rising rates.

In spring 2013 we warned clients to prepare for a severe interbank credit crunch. By that point market perceptions of Chinese credit conditions had become dangerously divergent from what was actually happening across the broader economy. By the time official credit gauges reported a squeeze—a full three months later—rates were already blowing out to record highs, crushing equities in the process. Yet our clients were prepared: they knew it was coming.