With spiking dramatically higher due to collateral stress in its banking sector, Chinese Vice Premier Liu just announced he will meet with U.S. Treasury Secretary Steven Mnuchin to prepare for a trade dispute resolution summit between President Trump and Chinese President Xi Jinping in late November.

Although the financial press tended to focus on last week’s -2.3 percent plunge in the U.S. Dow Jones Indiustrial Index and the -0.73 percent drop for the Asia Index as signs of the risks from the U.S.-China Trade War, the most important financial story may be the little watched, but hugely important, action in the the Shanghai Interbank Offered Rate (SHIBOR) wholesale interbank overnight lending rates that spiked from 1.98 percent on Thursday to 2.47 on Tuesday morning.

The extraordianarily large 25 percent increase in the cost for immediate cash is seen as a sign of banking stress as large Chinese banks are tightening down and/or restricting loans to smaller banks by demanding dramatically higher interest rates.

China’s banking system was already the most leveraged in the world before the People’s Bank of China cut the reserve requirement ratios (RRRs) for both large and small banks from 15.5 percent to 13.5 percent on October 15. The government-driven encouragement for banks to increase lending capacity means that Chinese banks, instead of being able to loan about 6.4 yuan for every yuan in customer deposits, can now loan about 7.45 yuan for every yuan in customer deposits.

The move injected a net 750 billion yuan ($109.2 billion) in new cash into the banking system by releasing 1.2 trillion yuan in liquidity, with another 450 billion yuan to offset payments for existing PBOC medium-term bank loans that were about to mature.

Beijing authorities have continued to flood liquidity into its financial system this year in hopes of restraining capital flight and preventing the forced selling of the 4.24 trillion yuan ($613 billion) of Chinese stock shares have been pledged as collateral for bank loans, according to China Securities Depository and Clearing Corporation data.

But the real threat to Chinese banking stability is the PBOC’s creative vocabulary to claim that its nonperforming loans percentage ratio is just 1.7 percent, very close to the some of the best banking systems, according to the World Bank, including the United States’ at 1.2 percent; Japan at 1.19; and Sweden at 1.1 percent.  

But unique to the planet, China has another category of loans that are over 90 days in default, but not written off as impaired, called “Special Mention Loans.” Including this cateory, that often involves state-owned-enterprises, would raise the ratio of nonperforming loans to 5.3 percent of total loans outstanding.

If the Middle Kingdom conformed to world banking standards, China’s nonperforming loan ratio would be about the same as traditionally problematic banking systems including Botswana at 5.3 percent; Lebanon at 5.4 percent; Uganda at 5.6 percent; and Armenia at 5.4 percent.

Despite President Trump ratcheting up the Trade War with announcement of an investigation into possible national security tariffs on car imports, the South China Morning Post reported that Chinese Vice Premier Liu He will visit the U.S. before President Trump and Chinese President Xi Jinping hold a bilateral summit during the November 30 to December 1 meeting of the G-20 leaders in Buenos Aires.