China ex-regulator warns on bank funding risk as NCD issues boom

SHANGHAI (Reuters) - The former head of China’s securities regulator has raised concern about banks addressing funding shortages by ramping up issues of short-term interbank debt instruments that have in the past attracted regulatory scrutiny.

Xiao Gang, former chairman of the China Securities Regulatory Commission, said that against the background of a large increase in bank credit, banks faced an “arduous task” of making up for cash shortfalls for maturing old products.

Regulatory crackdowns on wealth management products, in particular structured deposits, have led to a surge in issues of negotiable certificates of deposit (NCDs), short-term debt instruments traded in the interbank bond market, to make up for the shortfall in bank liabilities.

The transition from wealth management products should “fully respect reality” and not be rushed, Xiao, a member of the Chinese People’s Political Consultative Conference, a high-profile advisory body, told an asset management forum on Sunday.

The government recently extended the grace period for the implementation of new asset management rules to the end of 2021, with the aim of reducing pressure on lenders hit by the coronavirus.

Reuters reported in June that China’s banking and insurance regulator had told banks to scale back on high-yield structured deposits, which combine traditional deposits with higher-return investment products, after banks had aggressively marketed them to attract funds.

With a major source of funding squeezed, banks have turned to NCDs.

Data from the Shanghai Clearing House showed that banks issued NCDs worth 1.71 trillion yuan ($245.50 billion) in July, up 26.6% from a month earlier.

“It may be an early sign of the comeback of shadow banking if the expansion continues on a larger scale, which could divert liquidity designated for the real economy towards financial arbitrage,” said Gary Ng, an economist at Natixis in Hong Kong.

Ming Ming, an analyst at CITIC Securities, said in a note that net financing by the instruments fell in the first half of the year, as loose monetary policy meant banks did not need to issue many to meet funding demands.

Shifting central bank policy since May has led to more demand for funds raised through NCDs and smaller net financing in the previous period means a need for more current issuance, driving up prices, said Ming.

On Friday, AAA rated three-month NCDs yielded 2.5874%, according to Refinitiv, compared with 1.2001% in early April. AAANCD3MS=CFXS

Chinese regulators have in the past clamped down on banks’ use of NCDs as a funding tool after smaller lenders used them as a tool for speculation on longer-term investments.

Reporting by Andrew Galbraith and Samuel Shen; Editing by Robert Birsel