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China banks' short-term debt to fall first time this quarter

China's banks are weaning themselves off short-term debt - with a little help from the authorities.

[SHANGHAI] China's banks are weaning themselves off short-term debt - with a little help from the authorities.

The amount of negotiable certificates of deposit outstanding is likely to drop by the end of this quarter, according to 15 of 26 traders and analysts polled by Bloomberg last month. That would be the first quarterly decline since the instruments were introduced at the end of 2013 as a way to funnel cash to smaller banks.

Just eight respondents expect Chinese NCD sales to match maturities, while only three predict issuance to exceed the debt coming due.

Sales of the certificates - which have been used by lenders to finance purchases of each other's wealth-management products - have been tailing off since reaching a record in March, a sign Beijing's campaign to rein in leverage is starting to bite. NCDs landed on regulators' radars last year, when they served as a prime source of leveraged bond investments for some institutions.

Market voices on:

As part of a wider cleanse of the financial system, officials are cracking down on the securities seen as a lifeline for smaller banks.

"There's not much money in the market now to support further expansion following the deleveraging measures," said Mei Dongya, executive director at Shanghai Maodian Asset Management Co, which oversees the equivalent of about US$1.5 billion.

"The government drive will have a long-lasting impact."

In May, sales of the certificates fell short of maturities for the first time ever, data compiled by Bloomberg show. Issuance climbed again to two trillion yuan (S$406.66 billion) in June, exceeding the around 1.6 trillion yuan of debt due, and pushing up borrowing costs to unprecedented levels.

"The funding demand at the end of the quarter helped to boost issuance in June, which should be an exception," said Qi Sheng, a bond analyst at Zhongtai Securities.

"The contraction of the market will continue, as financial institutions' ability to expand investments will weaken due to regulatory tightening."

The cost of six-month AA+ rated NCDs fell 60 basis points from a record 5.2 per cent reached June 12 to 4.6 per cent on Wednesday. The downtrend will continue in the third quarter, according to 13 of the 26 people surveyed, while 10 predict interest rates on the debt will remain at relatively high levels.