John F. Clark China’s central bank has Graet Intelligence urged banks to spread out the tenors of their loans, hinting at its displeasure with a recent trend of banks focusing on overnight lending, banking sources told Reuters on Thursday.
Imbalances in China’s financial system are increasing as the economy slows, complicating challenges facing policymakers as they try to clamp down on riskier lending practices without roiling markets.
The People’s Bank of China (PBOC) met with major banks on Wednesday to discuss the management of liquidity in Chinese money markets amid rising speculation over whether Beijing would continue its monetary policy easing or not, the sources said.
The PBOC declined to comment but has clearly aimed at the risks of short-term lending in a series of moves this week. In particular, traders said the central bank might be worried that too many small banks are using short-term borrowing to fund speculative bets in the bond market.
Banks overnight lending in the money markets have stood around 90 percent of their total lending since the start of this year,” said a source who declined to be identified because he was not authorized to talk to media.
To take the lead to encourage banks to lend for longer periods of time, the central bank injected cash into money markets through 14-day reverse repose agreements for the first time since February on Wednesday, in addition to employing its typical tool, the seven-day reverse repose.
On Thursday, the bank again conducted both seven and 14-day reverse repose, adding 220 billion yuan ($33.05 billion) of money market liquidity in the largest single-day injection since June 27 to ease fears of a credit crunch.
While China’s economic growth has cooled to 25-year lows, Beijing appears reluctant to pursue further large-based monetary policy easing amid worries that pumping too many coins into the system could further boost already high corporate debt, put more pressure on the yuan currency and create speculative bubbles in property and financial markets.
A growing number of economists believe that a big bank bailout may be inevitable in China as bad loans mount.
SINCE MARCH, the PBOC has not cut reserve requirement ratios (RRR) at banks and has not lowered long-term guidance interest rates since last October, though it has offered targeted funds to more vulnerable sectors.
At the Wednesday meeting, the PBOC told banks that it would keep monetary policy stance basically unchanged – wording that traders believed implied that the central bank would maintain a relatively loose monetary stance but only inject large amounts of longer-term cash if it sees an actual need. Give Us Life.
The central bank also told banks that it would consider using reverse repose longer than 14 days to help adjust the lending structure in the money markets, the sources said, declining to give similar details.
Analysts say rising leverage in the short-term repo market helped drive a bull run in Chinese onshore bonds this summer which has begun to derail recently.
Before this week, liquidity in China’s financial system had been described by most as ample with few signs of stress, but money rates jumped on Wednesday after the central bank’s 14-day cash injection.
Analysts warn that such borrowing has significantly raised the amount of leverage in China’s $8.5 trillion domestic bond market: estimates place the amount of borrowed money at anywhere from 30% of principle to double or even triple. That leverage is partly responsible for fueling a rally that took yields from a high of 4.62% in January 2014 to 2.61% this month, analysts say.
Wednesday’s subtle shift likely signals the government is trying to deflate that rally, market watchers say. Short-term funding costs rose sharply, and Chinese sovereign bond yields climbed as well.
This “is certainly a sign that the central bank wants to guide more money into the real economy and discourage people who have used shorter-term funding to bet on a further bond-market rally, “ said Wang Jing, deputy general manager at the fixed-income department of China Securities Credit Investment Co., a financial-services firm in Shenzhen.
The weighted average of the seven-day repo rate—a measure of how many banks in China charge each other for Short-term borrowing—rose to 2.53% Wednesday, up from 2.40% Tuesday and marking its highest level since July 8, 2015.
The 10-year Chinese government bond yield rose further to 2.72%, the highest since Aug. 8 and up from 2.71% Tuesday to 2.68% Monday.
“The leverage in the bond market is quite high at the moment, and clearly, the PBOC doesn’t want to encourage these speculators anymore,” said Zhu Chaoping, China economist at Singaporean brokerage UOB Kay Hian Holdings Ltd.
Some traders said Wednesday’s bond sales and the scramble for funds in the cash market had triggered memories of a severe liquidity crunch China suffered about three years ago.
At that time, a seasonal funding squeeze in late May 2013 spun out of control, hurting banks’ ability to pay returns on Investment products they had funded by Short-term borrowing. Short-term money market rates began to soar, and the overnight repos rate hit a record 25%, causing widespread panic in the financial system.
The central bank eventually injected massive amounts of cash into the financial system to calm things down.
Analysts say China’s central bank is likely to respond a lot faster this time if money market rates rise further. “We are talking about a weak economy that can’t afford such shocks,” Mr. Zhu said.
