Exclusive interviews with leading policymakers that convey the true policy message that impacts markets.
Reporting on key macro data at the time of release.
Real-time insight on key fixed income and fx markets.
- Emerging MarketsEmerging Markets
Real-time insight of emerging markets in CEMEA, Asia and LatAm region
- MNI ResearchMNI Research
Actionable insight on monetary policy, balance sheet and inflation with focus on global issuance. Analysis on key political risk impacting the global markets.
- About Us
--Deleveraging Campaign Hitting Banks' Balance Sheets
--Competition For Funding Expected To Heat Up
BEIJING (MNI) - Chinese banks that need to drink from the interbank market
to quench their thirst for funds are suffering as tighter regulation and the
continuing campaign to force financial institutions to deleverage reduces the
volume of liquid in the trough.
Yields on negotiable certificates of deposit (NCD), an important source of
wholesale funding for small and medium-sized lenders without the huge deposit
bases of the big state-owned banks, have risen dramatically since October.
Primary market rates on three-month NCDs issued by joint-stock banks rose to
4.9100% on Friday, the highest since early June, up from 4.2999% on Oct. 9 and
4.5700% on Oct. 30, and heading for the biggest monthly jump since May.
Primary market rates on three-month NCDs issued by city commercial banks
and rural commercial banks are even higher, standing at 5.0729% and 5.1060%,
respectively, on Friday. Rates have risen so much that since October it's been
costing banks more to borrow three-month money through selling NCDs than to take
unsecured loans from other banks based on the three-month Shanghai Interbank
Borrowing Rate (SHIBOR).
The jump in NCD rates comes at a bad time for banks, as they face massive
refinancing of maturing NCDs over the next two months just as demand is waning
as a result of the PBOC's financial deleveraging campaign and tighter
A total of CNY2.1 trillion yuan of NCDs are set to mature in December, the
second-highest monthly total since the instruments were introduced by the PBOC
in December 2013, according to China Merchants Securities estimates. That comes
on top of the CNY1.8 trillion maturing in November.
Although seasonal factors, including the need for banks to dress up balance
sheets to meet the requirements of the PBOC's Macro Prudential Assessment (MPA),
are partly responsible for the rise in NCD yields, the upward trend started much
earlier this year.
"This wave of rising NCD yields started in early October after the
[weeklong] National Holiday, while in the past few years, NCD yields only
started to rise from November," Qi Sheng and Long Shuo, analysts at Zhongtai
The primary market yields of three-month NCDs issued by joint-stock banks
has remained generally steady last October, rising from 2.8200% on Oct. 7 to
2.9100% on Oct. 27 -- the last trading day in October.
But the jump in primary market rates hasn't been triggered by banks
expanding their NCD liabilities, as net new issuance has been muted.
"Banks have been making efforts to meet the requirements of regulators in
the deleveraging campaign," an executive in the financial markets department at
an east-coast city commercial bank told MNI.
The campaign has targeted interbank assets and what the PBOC has called
"idle funds" sloshing around the system that have been used to leverage up
rather than lend to the real economy. "There are hardly any new interbank assets
like NCDs and interbank borrowings, and banks are just rolling over their
maturing NCDS to keep their balance sheets stable."
The net issuance of NCDs was negative in September and October, contracting
by CNY124.7 billion and CNY262.4 billion, respectively, although it has been
positive so far in November at CNY154.7 billion.
The executive said he sees little chance of yields coming down in the short
"It is more likely for NCD yields to go up than down for a while," he said.
"Supply of NCDs are still high as banks have such a high demand for wholesale
funds, and the competition for funding will get fiercer as the PBOC isn't going
to relax its monetary policy stance and big banks will be hesitant to lend out
money as year-end approaches."
Banks dependent on NCDs for funding are being buffeted by a perfect storm
of tighter liquidity, the PBOC's strategy to increase money-market interest
rates to force deleveraging, slower growth in bank deposits, incentives for
lenders to direct credit to the "real economy" to qualify for a cut in their
reserve requirement ratios in January, and regulations that are curbing demand
for NCDs from banks, non-bank financial institutions and big money-market funds
such as Yuebao, the world's biggest fund, which is run by internet giant
Alibaba's affiliate Ant Financial.
Although the interbank market is now pretty much resigned to tighter
liquidity, especially after the PBOC's message in last week's quarterly monetary
policy report that dashed hopes for any loosening, stress is building. The
central bank was forced to pump CNY810 billion of liquidity into the market last
week through open-market operations, the most since January, as the sell-off in
Chinese government bonds (CGBs) deepened and repo rates surged. The central bank
returned to a more parsimonious stance this week, but still added CNY150
The cost of other types of funding is also rising. The Ministry of
Finance's latest auction of three-month deposits on Nov. 17 saw a yield of 4.6%,
up from 4.42% in October and the highest since early 2015.
Low excess reserves held by banks at the PBOC, a reflection of tight
liquidity conditions, are contributing to the shortage of funds. The central
bank said in its latest monetary policy report that the ratio was just 1.3% at
the end of the third quarter.
The PBOC's efforts to force banks to lend more money to the "real economy"
rather than investing in financial products is also having a negative impact on
interbank liquidity and demand for NCDs. The central bank announced on Sept. 30
that it will cut the reserve requirement ratio (RRR) for banks starting on Jan.
1, based on how much they loaned in 2017 to small and micro enterprises and
other borrowers that fall under the government's "inclusive finance" label. As a
result, lenders have been redirecting some of their funds to meet those
requirements and ensure they get the maximum RRR reduction on offer, which could
be as high as 1.5%.
"A lot of banks have been actively issuing loans to meet the PBOC's
criteria," a trader at a rural commercial bank on the east coast told MNI. "That
has left less liquidity in the system for NCD purchases and reduced demand for
NCDs among investors."
Yields are also rising because of the relatively slow growth in bank
liabilities that has manifested itself in a significant drop in the pace of M2
expansion this year. M2 rose by 8.8% in October year on year, the weakest
increase on record.
"I think the most important reason for the increase in NCD rates is the low
M2 growth," the executive at the city commercial bank said. "If overall deposit
growth has slowed so much, banks are having to compete really hard to get
funding, thus driving interest rates higher."
The pressure on the liabilities side of banks' balance sheets is still high
as they need to meet regulatory requirements while at the same time avoiding the
need to dump assets.
Banks must roll over their maturing NCDs because if they don't they will
have to sell assets, Qin Han and Gao Guohua, analysts at Guotai Junan
Securities, said in a report on Wednesday. According to their calculations,
outstanding NCDs issued by big banks, city commercial bank and rural commercial
banks amounted, respectively, to CNY179.6 billion, CNY3.91 trillion and CNY879.8
billion at the end of October, all record highs. Only joint-stock banks saw a
decline, although they still had CNY3.17 trillion outstanding.
"A common strategy for financial institutions now is to issue high-cost
debt so that their balance sheets do not contract, and then gradually replace
their low-yield assets with higher-yield assets" to minimize the impact on their
margins, they said.
The trader at the rural commercial bank said he expects NCD yields to keep
rising until mid-December but they may then soften as a significant amount of
fiscal spending is expected to kick in, which will add liquidity to the banking
system through the interbank market.
"The targeted required reserve ratio cut will also benefit liquidity
starting in January," the trader said.
Higher NCD yields are adding pressure onto an already distressed bond
The average yield on 10-year Chinese government bonds continued its upward
path this week, rising by another 4.5 basis points as of Thursday to 3.9851%,
although it did break through the key psychological level of 4% several times
during the week.
"The key factor pushing this wave of rising bond yields is the increasing
cost of banks' funding, which is squeezing their demand for bonds," China
Merchants Bank said in a report on Wednesday. "The negative impact of the 'tight
and balanced' monetary policy and the new regulations [announced last week] on
asset management products can be seen in the rising cost of funds."
CITIC Securities sees little prospect of yields coming down significantly,
forecasting that the 10-year CGB will be trading in a range of 3.8% to 4% for
some time. "Against the background of a deepened financial deleveraging campaign
and the PBOC's repeated statements that hinted the monetary policy stance will
not likely be moved by low M2 growth, pressure on banks' funding costs,
including NCDs, will continue," Ming Ming, an analyst at China CITIC Securities,
wrote in a report on Tuesday.
--MNI Beijing Bureau; +86 10 85325998; email: email@example.com
--MNI Beijing Bureau; +44 203-586-2244; email: firstname.lastname@example.org
--MNI Beijing Bureau; +86 (10) 8532-5998; email: email@example.com