June 20, 2017 / 2:25 AM / in 2 years

Funding scramble squeezes China's borrowers despite PBOC injections

SHANGHAI, June 20 (Reuters) - Generous money injections by China’s central bank are helping to maintain some calm in the country’s financial markets, but market rates are persistently high, reflecting worries that liquidity conditions remain unusually tight.

Rates on 14-day repos climbed to 5.3 percent on Monday, their highest late April, showing that a large gap remains between the supply of funding and demand from banks.

Liquidity conditions are typically tight in China in June due to tax payments and as companies look to make their balance books look healthier at the end of the month and quarter. A rigorous quarterly inspection by the People’s Bank of China (PBOC) is also prompting banks to hoard cash.

This year, a regulatory clampdown on riskier forms of financing, particularly between banks and non-financial institutions, has created additional strains on the system.

“Liquidity is tight toward of the end of the month, and there’s high demand for borrowing that spans into next month, which is why you see the 14-day rates are pretty high,” said a trader at Xiuwu Rural Commercial Bank, a small lender in China’s central Henan province, who is borrowing 100 million yuan ($14.64 million) from the market for 1-14 days.

But she said the PBOC’s recent money injections had helped to ease market stress.

The PBOC injected a net 110 billion yuan into money markets on Monday through a combination of seven-day, 14-day and 28-day reverse repos, traders said, bringing net injections through regular open market operations since the end of May to 540 billion yuan, according to Reuters calculations.

That is in addition to an injection of 498 billion yuan into the financial system through the PBOC’s medium-term lending facility (MLF) loans earlier in June, more than offsetting the 431.3 billion yuan of MLF loans maturing this month.

The PBOC had been actively draining funds from the system earlier in the year and has been pressing banks to deleverage as part of a concerted campaign by Chinese authorities to contain risks in the financial system from a rapid buildup in debt.

The closely watched three-month Shanghai Interbank Offered Rate (SHIBOR) was at 4.74 percent on Monday, just four basis points below a two-year peak last Wednesday. The three-month SHIBOR rate has risen more than 45 percent since the beginning of 2017, eclipsing the PBOC’s benchmark lending rate of 4.35 percent.

“Because of the liquidity injections by the PBOC, we have seen the market sentiment improving over the past couple of weeks, but if the imbalance between assets and liabilities cannot be solved, we still see strong pressure on SHIBOR,” said David Qu, market economist at ANZ in Shanghai.

Rapid expansion of lending by mid-sized banks over the past several months has eaten up their liquidity cushions, forcing them to turn to an increasingly expensive interbank market for funding, Qu said.

The rise in SHIBOR rates this year has been accompanied by a rise in rates paid for Negotiable Certificates of Deposit (NCDs).

These short-term debt instruments, favored by smaller banks, are not yet included in the PBOC’s Macro Prudential Assessment (MPA), the quarterly inspection of banks’ books.

The rate on three-month AAA-rated NCDs was at 4.8461 percent on Monday, according to data from the China Foreign Exchange Trading Service (CFETS), hovering near two-year highs of more than 5 percent last week.

Zheng Lianghai, an analyst and Dongxing Securities, said that higher NCD issuance despite high borrowing costs shows that “some banks are quite desperate for money.”

Despite the squeeze on borrowers, market observers don’t fear a cash crunch like that in June 2013, as they expect the PBOC to continue to supply necessary liquidity to the market.

Some China watchers believe the squeeze three years ago had been triggered at least in part by the PBOC’s efforts to encourage more de-risking at a time when conditions were already seasonally tight. The resulting spike in borrowing rates roiled domestic and global financial markets.

But there is a risk in banking on continued PBOC support, said Qu.

“I think the market may be relying on the authorities’ relaxation, or the PBOC’s liquidity injections, too much,” he said, noting that deleveraging remains a priority for regulators in the medium term.

“Sooner or later they will start deleveraging again ... you cannot win a bet on relaxation.” ($1 = 6.8285 Chinese yuan renminbi) (Reporting by Andrew Galbraith and Samuel Shen; Editing by Kim Coghill)

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