However, there is a limit to how high rates can get before financial risks begin to emerge. Earlier in the month investors were caught off guard by a series of defaults among a few state-owned enterprises (Yongcheng Coal & Electricity Holding Group as well as Tsinghua Group were among the notables). This has led over 20 Chinese companies to delay plans to issue new bonds. Furthermore, the credit events in the corporate sector have affected domestic demand in the sovereign bond market, even though foreign demand remains strong. This has resulted in even greater upward pressure on yields. Finally, commercial banks, who hold 49% of onshore domestic bonds, are experiencing a surge in demand for cash. 3-month shibor, the interbank lending rate for Chinese banks, has doubled over the last 5 months to 3%, now higher than the level at the start of the year. The gradual tightening of the financial system has prompted the PBOC to inject a net $30 billion in the form of reverse repos, similar to Federal Reserve operations at the end of last year. China has continued to avoid a major crisis in their efforts to tackle the excessive build-up of debt post-GFC. Time will tell as to how successful their efforts will ultimately be. For now, we await the next PBoC meeting at the end of December for any shifts in strategy.