New Report: "China Halts Bank Cash Transfers"

This comes from Forbes and thus far no one else has picked up the story: 

China Halts Bank Case Transfers

The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.

This notice, for instance, appears on the online portal for Citigroup's C -2.74% Citibank unit for its China customers:

1. Due to the system maintenance of People’s Bank of China, Domestic RMB Fund Transfer through Citibank (China) Online and Citi Mobile will be delayed during January 30th 2014, 16:00pm to February 2nd 2014, 18:30pm. As to the fund availability at the receiving bank, it depends on the processing requirements and turnaround time of the receiving bank. We apologize for any inconvenience caused.

2. During Spring Festival, Foreign Currency Transfer Transaction through Citibank (China) Online and Citi Mobile will be temporally not available from January 30, 2014 18:00pm to February 7, 2014 09:00am. We apologize for any inconvenience caused.

In short, there will be a three-day suspension of domestic renminbi transfers. There will also be a suspension, spanning nine calendar days, of conversions of renminbi to foreign currency.

The specific reason given—“system maintenance” at the central bank—is preposterous.  It is not credible that during the highest usage period in the year—the weeklong Lunar New Year holiday beginning January 31—the central bank would schedule an upgrade and shut down cash transfers. 

A better explanation is that the country’s banking system is running dry.  Yes, there is an increased need for money in the run-up to and during the Lunar New Year holiday, but that is only a small factor.  After all, central bank officials knew this spike in demand was coming—it occurs every year at this time—and a core function of central banks is to manage seasonal liquidity fluctuations. Moreover, the holiday has not started yet, and the PBOC, as that institution is known, could have added more liquidity to meet cash needs.

So what’s really going on?  This crunch follows similar incidents in June and December of last year.  In June, for instance, the central bank used the excuseof a “system upgrade” to allow banks to shut down their ATMs and online banking platforms.  As a result, they conserved cash and thereby avoided a nationwide meltdown. 

So today’s “system maintenance” notice is a sign of a fundamental problem.  Banks, in short, need cash to rollover ever-increasing amounts of nonperforming loans and wealth management products.  This month, cash needs are even higher than normal because of the impending default of the Credit Equals Gold wealth product scheduled for January 31.  Analysts are worried that the failure, if it occurs, will cause a China-wide panic.

Perhaps more important, the Federal Open Market Committee is holding its next meeting on January 28-29 so there could be an announcement on the 29^th on the trimming of bond purchases.  The suspension of FX transactions means that speculators will not be able to dump renminbi and buy dollars.  Fed Chair Bernanke’s words on tapering, beginning in May of last year, shook emerging markets.  A FOMC announcement this time could undermine China, especially because of the darkening perceptions about that country.

Banks are evidently scrambling for cash.  They have, in the past, resorted to desperate maneuvers at the ends of calendar quarters to meet regulatory requirements.  The current crunch is even more alarming because it cannot be occurring for quarter-end reasons.

Something is very wrong in China at the moment.  Banks’ apparent need to conserve cash, coming just weeks after the last incident, looks ominous.