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Business / World Business

China banks brace for June cash squeeze as fund costs jump

Published: 10 Jun 2017 - 01:46 am | Last Updated: 04 Nov 2021 - 09:13 am
A man walks past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing.

A man walks past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing.

Bloomberg

Shanghai:  China’s deleveraging dilemma -- how to squeeze excess liquidity out of the financial system without spurring a full-blown cash crunch -- is facing its toughest test.
June is traditionally a tight time for banks because of regulatory checks, and this year, lenders are grappling with an official campaign to reduce the level of borrowing as well. Wholesale funding costs climbed to the most expensive in history, and the 30-day Shanghai Interbank Offered Rate has jumped 51 basis points this month to the highest level in more than two years.
While China’s deleveraging drive has spurred losses for investors in the nation’s stocks and bonds, policy makers have so far avoided a panic sell-off, and Nomura Holdings Inc. says that the authorities will step in to prevent any crises. Global money managers have a stake in how June plays out as well, with the 2013 funding crunch helping push the S&P 500 Index to its biggest loss in eight months.
“The combination of factors will lead to a more severe situation than in the past couple of years,” said Ji Linghao, a Shanghai-based bond analyst at Huachuang Securities Co. “The central bank should have a bottom line: it mustn’t allow a system-wide crisis because it is trying to mitigate financial risks.”
The debt market has been hit especially hard by the campaign to reduce the level of borrowing, with companies canceling a record 200 billion yuan ($29bn) of debt sales in the last two months. A potential Federal Reserve interest-rate increase next week is adding to the pressure amid concern the People’s Bank of China may follow suit.
The one-month interbank rate known as Shibor rose to 4.59 percent yesterday, the highest since April 2015. That surpasses both the one-year cost of 4.41 percent and the Loan Prime Rate -- which banks offer to their best borrowers -- of 4.30 percent.
Policy makers will maintain a tightening bias -- although in a manageable and calibrated manner -- and interbank rates could rise by another 40-50 basis points, Morgan Stanley economists led by Robin Xing wrote in a June 4 report.
China’s bond yield curve has inverted for the first time since 2013’s cash crunch, and the second time in data going back 2006. The one-year sovereign yield surged 20 basis points this month to 3.66 percent, three basis point higher than the 10-year yield. The curve probably won’t normalize in the short term, said Qin Han, an analyst at Guotai Junan Securities Co.
Chinese banks’ excess reserve ratio, a gauge of liquidity in the financial system, fell to 1.65 percent at the end of March, according to data from the China Banking Regulatory Commission.