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China cash squeeze lurks again as 2.3t yuan of NCDs come due

[BEIJING] China's money market is bracing for yet another squeeze.

A record 2.3 trillion yuan (S$469.58 billion) of negotiable certificates of deposit - a funding lifeline for medium and smaller banks - are set to mature next month, adding to the stress of an official deleveraging drive that has pressured onshore bonds lower in all but two months of this year.

The flood of maturities comes at an especially challenging time for the nation's interbank market, with lenders hoarding cash every September to satisfy quarter-end regulatory checks. Money rates spiked in April and May, with the government rolling out a range of deleveraging measures.

Markets felt the squeeze again in June amid regulatory requirements that helped push the yield on NCDs to a record. The yield on three-month AAA contracts was at 4.40 per cent on Monday, compared with a peak of 5 per cent in June.

"Unless the People's Bank of China takes very strong measures to revert market expectations -  which is unlikely - money rates are likely to climb in fluctuation next month amid the large NCD maturities," said Liao Qiang, senior director of financial institutions at S&P Global Ratings in Beijing. "Banks will try to refinance most of them, and smaller ones will have to try harder to seek deposits if they find issuing NCDs more difficult."

The certificates, introduced in China in 2013, are an important source of funding for medium and small banks, which find it harder to attract savings because they have a limited number of branches. Chinese lenders sold 11 trillion yuan of NCDs in the first seven months of this year, while 8.9 trillion yuan matured in the same period.

The nation's benchmark seven-day money-market rate has averaged 2.77 per cent so far this year, compared with 2.37 per cent in 2016. It closed at 2.89 per cent Tuesday.

"The market will definitely become more volatile in September," said Ming Ming, Beijing-based head of fixed-income research at Citic Securities Co, China's biggest brokerage. "Banks will face stronger pressures to adjust their businesses, which involves winding down interbank borrowing. But they may feel less pressure to roll over maturing NCDs, as they would reduce issuance due to tighter PBOC regulations. The growth of the outstanding amount of NCDs will slow."