China’s banks are still bingeing on short-term financing, defying analyst predictions that they would wean themselves off such debt as regulators intensify a crackdown on leverage.
Sales of negotiable certificates of deposit — a key funding source for medium and smaller banks — surged 49 percent from a year ago in the third quarter to a record 5.4 trillion yuan ($819 billion), according to data compiled by Bloomberg. While strategists had predicted in June that the NCD market would shrink, it turned out to be one of the few funding channels left as officials drained cash from the interbank market and asked lenders to strengthen risk controls.
China’s deleveraging looms large in debt-market dynamics these days, with government bond yields at two-year highs and the one-week Shanghai Interbank Offered Rate not far from the most expensive since 2015. Still, officials are also trying to keep the economy humming: they’ve tweaked the rules governing NCD issuance, but haven’t shut off the taps as credit growth accelerates.
“The short-term debt is an indispensable fundraising channel for smaller banks,” said Shen Bifan, head of research at First Capital Securities Co.’s fixed-income department in Shenzhen. “As other channels get squeezed, and lenders’ books continue to expand, as is the case now amid solid economic growth, it’d be difficult to see the NCD market size shrink.”
Net financing — sales minus maturities — through such securities was at 333 billion yuan in the third quarter, versus a total of 1.7 trillion yuan in the first half, data compiled by Bloomberg show. With more than 8 trillion yuan of contracts outstanding, it’s now the fourth-largest type of bond in China, after sovereign, local government and policy bank debt. While 15 of 26 traders and analysts surveyed in June said the market size will shrink, only 10 of 22 respondents polled last month said see that happening.
The certificates — which have been used by lenders to finance purchases of each other’s wealth-management products — came under regulatory scrutiny last year, when they started to serve as a source of leveraged bond investments for some institutions. In August, the People’s Bank of China asked lenders with more than 500 billion yuan of assets to classify the debt as interbank liabilities from next year. This is seen effectively capping sales.
“The central bank’s rules indicate the smallest lenders aren’t affected, so they can continue to issue the debt,” said Qin Han, chief bond analyst at Guotai Junan Securities Co. in Shanghai. If the NCD market expansion can go back to a more reasonable pace, it’s acceptable to the regulations, he said.