Ongoing liquidity demands mean June set to be a tight month for China’s money market
Stricter rules mean banks likely to be more unwilling to lend to each other as quarter-end approaches and Beijing assesses systemic risk
As the end of the month approaches, China’s Interbank lending rate – already touching a two-year peak – is set to rise further.
With market concerns already swirling of a potential liquidity crunch, the Chinese government has even felt it necessary to issue an editorial in the the China Banking Regulatory Commission’s (PBOC) official state newspaper, in an attempt to douse the fears.
“With liquidity demand usually spiking on seasonal factors such as end-quarter regulatory reviews, tax payments and the simple fear of a reoccurring liquidity crunch,” said Zhao Yang, chief China economist at Nomura in a new report, “June is a cruel season for China’s money market.”
At the end of the month, Chinese banks also need to submit their quarterly figures to the banking regulator under the government’s MPA – or the “macroprudential assessment framework” to give it its full title – the system of monitoring or assessing systemic risk in the country.
This is not a new development, but analysts say what has changed are the rules have become a lot more strictly enforced since the start of this year.
“The CBRC [the China Banking Regulatory Commission] has already told the banks they really will enforce the MPA’s rules, and so as the end of the quarter approaches, they will all be trying to tidy up their balance sheets,” said Victor Wang, a banking analyst at Jefferies.
“As a result, the banks will be less willing to lend to each other during this period, which is one of the key reasons Shibor will rise.”
Shibor refers to the “Shanghai Interbank Offered Rate” and on Tuesday the one-month Shibor rate stood at 4.65 per cent, the highest in over two years.
The only time Shibor has approached this level in the past two years was in late March of this year – the last time banks had to submit their quarterly figures.
However, an editorial on Saturday in China Financial News – a paper operated by the PBOC – citing the central bank’s assistant governor Zhang Xiaohui, strenuously rejecting any suggestion that the tighter rules were a sign of instability.
“The MPA is absolutely not a source of financial market risk, in fact, it is the opposite as it requires banks to strengthen their risk controls,” the editorial quoted Zhang as saying.
Another concern is the expected rate increase by the US Federal Reserve which could be expected to make capital outflows from China more likely, if the PBOC didn’t keep its own rates relatively high.
Again, however, Zhang also denied this was a concern.
“Even if the federal reserve were to raises rates in June, the market has already begun to digest this and oversight mechanisms have begun to respond,” he was quoted as saying.
But it’s not just short-term factors that drive the rise in interbank rates.
“To me, it an attempt by the authorities to drive deleveraging that is causing liquidity to tighten more than the upcoming MPA,” said Tommy Xie an economist at OCBC bank.
However, economists are reassured by a number of indications from the authorities, that they are willing to provide short- to medium-term liquidity to stabilise expectations, if needed.
Last week, the central bank injected 498 billion yuan in liquidity via a medium-term lending facility, a move which Xie described as “encouraging”.
“In our view, it shows the PBOC’s policies are flexible,” he said.
Nomura’s Zhao agreed. “The PBOC has learned its lesson from the liquidity crunch of June 2013 and is likely to smooth liquidity conditions, when demand spikes,” he wrote in a note earlier this month.
That sudden shortage of credit in 2013, however, forced the overnight Shibor rate to soar to 30 per cent.
“The PBOC comforted the banks on May 25 by saying it would provide short- to medium-term
liquidity to stabilise market expectations if required,” Zhao added, and last week’s capital injection supported this interpretation.
While there is a clear distinction between the rates at which banks lend to each other and those at which they lend to corporates, OCBC’s Xie says there is sufficient leakage between the two that tighter money market liquidity would affect borrowers.
“I see tighter liquidity affecting the real economy, which is set to slow in the second half, and that might mean the authorities slow the pace of deleveraging,” he said.
“After all, the 19th Party Congress is coming soon, and the government will want to preserve stability.”
Not all are hurt by higher interbank rates, however.
Those banks with large, stable sources of funds from deposits are normally net lenders in the interbank market and so benefit from higher rates and this has caused banks’ performances in the first half of this year to diverge.
Banks have also been using other means to attract funds, and yields on some wealth management products are now more than 7 per cent as they scramble to attract cash, rather than having to rely on more expensive sources of funds in the interbank market.