(Bloomberg) -- Chinese banks are under increased funding pressure, an unintended consequence of increased monetary easing efforts that fueled a stock rally and cut demand for debt products.
The yield on one-year negotiable certificates of deposit sold by AAA rated banks, a popular bond-like fundraising tool for lenders, rose to the highest since June earlier this month, before edging lower in recent days, Bloomberg data show. Its premium over the seven-day repurchase agreement rate, a money market benchmark, is hovering near its widest since February.
The liquidity strain on lenders was an unexpected outcome of the Chinese central bank’s recent decision to cut key interest rates by 20 to 30 basis points to revive growth. The stepped-up policy loosening has caused an erosion of savings deposits, increasing the need for banks to raise funds elsewhere. It also led to a rally in the country’s stocks, diverting more funds away from lower-yielding debt instruments widely used by lenders.
The latest funding struggle is also a reminder of the importance for Beijing to deliver on its pledge to re-capitalize big state-owned banks, a move aimed at helping them cope with record low margins, sinking profits and rising bad debt.
“The recent rise in NCD issuance costs shows large banks’ continued need to raise debt and improve their liquidity indicators,” Huaxi Securities Co. analysts wrote in a note. “NCD rates will likely stay elevated near term because big banks were the first to slash deposit rates and will face potential government bond supply pressure in the fourth quarter.”
China last month unveiled its biggest package yet to shore up its sputtering economy, slashing policy rates as well as borrowing costs on $5.3 trillion in outstanding mortgages. The central bank also delivered the biggest-ever cut on the interest rate charged on its one-year policy loans and Governor Pan Gongsheng had said a reduction in deposit rates would follow.
The country’s largest state-owned lenders last week followed up with their second reduction of deposit rates this year, as they rushed to salvage record low margins amid weakened profitability. The move risks prompting more savers to flee in pursuit of higher-yielding investments, adding pressure on lenders to replenish liquidity through other channels.
Aggravating the situation has been investors’ decision to pull some $149 billion out of wealth management products that invest heavily in bonds and NCDs to chase a rally in Chinese shares. The strong showing of equities also halted a bull run in bonds, with concerns rising about a future supply glut from the central and local governments.
Under pressure, some big state banks have raised coupon rates when selling new NCDs recently. The Agricultural Bank of China Ltd., for example, sold its one-year NCDs at 1.95% rate earlier this week, the highest for the lender for this type of debt since Sept. 6, according to data from the China Foreign Exchange Trade System.
NCD rates tend to rise in the last quarter on rising seasonal demand and banks are quite cautious about lending to peers, given the uncertainties over fiscal stimulus which may involve additional debt supply, said Xu Yongbin, co-chief investment officer of U-Shine Private Equity FD Mgt Co. Interest in NCDs is also waning among foreign funds and wealth product managers, he added.
There are signs that the People’s Bank of China has already started to act to ease broader liquidity conditions. On Thursday, it injected the most short-term cash since July in its open-market operations to limit swings in funding costs.
The PBOC may also deliver another cut to banks’ reserve requirement ratio to aid its effort, according to Nomura.
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