Dearth of deposits pushes China's big banks to short-term debt

Beijing

CHINA'S biggest lenders are increasingly using short-term financing to meet demand for loans, in a development that could push up money-market rates.

The banks are rushing to sell negotiable certificates of deposit, an instrument that sounds like a saving account but is actually more like a bond. Issuance of these by the five largest lenders more than doubled to 424 billion yuan (S$88.4 billion) in the first quarter from a previous record in the three months ended Sept 30, according to data compiled by Bloomberg.

Banks are taking this approach as deposit growth dwindles and the government curbs the sale of wealth management products. While new lending in China rose to an all-time high of 2.9 trillion yuan in January, deposits increased at the slowest pace ever last year and WMPs rose just 1.7 per cent.

"With the biggest banks joining smaller ones to be short of funding now, money rates are prone to spike at some points," said David Qu, Shanghai-based market economist at Australia & New Zealand Banking Group Ltd. "People shouldn't take it for granted that the ample liquidity we've seen in the first quarter will necessarily last."

NCDs, introduced in 2013 as a way to funnel cash to smaller financial institutions, are becoming popular among bigger lenders thanks to their cheap cost relative to issuing debt. Big banks also previously hadn't used up their quotas for the instruments, making them an easy source of funds as alternative channels get shut down.

China's big five are usually considered cash rich as they have far more outlets across the country than smaller banks, allowing them to be net providers of funds in the interbank money market. As these financial institutions turn to NCDs to secure funding, they're less able to help others in case of liquidity tightening.

With more than 8.2 trillion yuan of contracts outstanding, NCDs are the fourth-largest type of bond in China, after sovereign, local government and policy bank debt.

Bank of Communications Co has been the biggest user of NCDs among the top five lenders, selling 223 billion yuan worth so far this year. Agricultural Bank of China Ltd has sold 127 billion yuan, while Bank of China Ltd, China Construction Bank Corp and Industrial & Commercial Bank of China Ltd have issued a combined 76 billion yuan. All five banks declined to comment.

Smaller lenders, meanwhile, are reducing their use of NCDs as China seeks to lower leverage in the financial system. Industrial Bank Co, last year's top issuer, cut its plan for 2018 by 24 per cent to 680 billion yuan, and Shanghai Pudong Development Bank Co, the second largest, reduced its plan by 13 per cent to 700 billion yuan.

"The NCD market will witness a change this year - the big banks boosting sales and smaller ones reducing due to regulatory curbs," said Ming Ming, head of fixed income research at Citic Securities Co. The former will probably increasingly depend on NCDs, he said.

The cost of three-month AAA rated NCDs fell to 3.80 per cent on Monday, the lowest since December 2016, in the wake of the central bank boosting cash injections during the top legislature's annual meeting in March. Still, analysts expect momentum to shift upward.

"Market rates are under pressure to go higher as borrowings have become increasingly difficult in the financial system," said Wang Yifeng, a Beijing-based researcher at China Minsheng Banking Corp. BLOOMBERG