Chinese Banks Said to Curtail Bill Financing to Prevent Risks

  • Tightening could add to liquidity squeeze in financial system
  • ICBC branch suspended financing to coal, steel trading firms

Some Chinese banks have tightened risk management of short-term lending known as bill financing amid increased regulatory scrutiny, according to people familiar with the matter.

An Industrial & Commercial Bank of China Ltd. branch has suspended such lending for iron ore, steel trading and coal trading companies, and limited transactions to select banks, one of the people said, declining to be identified as he isn’t authorized to speak with media. A joint-stock bank has also temporarily halted bill financing, which many smaller firms rely on to pay operating costs, a second person said. The funds usually must be repaid within several months.

The China Banking Regulatory Commission issued a notice earlier this month asking banks to review bill-financing businesses for violations and risks, two people familiar with the matter said. That adds to pressure on liquidity in the financial system before Lunar New Year holidays next month. While borrowing costs in China remain near decade lows, yields in the bond market have jumped this week as capital outflows amid the the yuan’s tumble crimp cash.

“The mess in bill financing will add to the already tight liquidity,” said Ji Weijie, a credit analyst at China Securities Co. “More banks are likely to tighten their control over issuing such financing, which would worsen the financial-market liquidity even further.”

PBOC Moves

The CBRC’s press office in Beijing didn’t immediately respond to a faxed query seeking comment. An ICBC press officer declined to comment.

In a bid to avert a cash crunch amid record capital outflows, the People’s Bank of China told some banks to cancel repurchase agreements that were conducted at interest rates it deemed excessive, according to people familiar with the matter. The PBOC injected 400 billion yuan ($60.8 billion) of cash into the nation’s financial market Thursday through open market operations, the most in three years.

The bill financing problem associated with some banks is "a major factor" for the recent liquidity tightening in the interbank market, according to Zhang Ruirui, who helps oversee more than $75 billion in fixed-income portfolios for Pacific Asset management Co., a unit of China Pacific Insurance (Group) Co.

Internal Controls

Onsite checks of some banks’ bills businesses last year by the regulator found “imprudent behavior,” according to the notice seen by Bloomberg News. The CBRC identified violations including the financing being used to inflate deposits and loans, lenders engaging in fraudulent transactions, and adjusting the accounting of the business to lower capital charges, according to the notice.

The regulator has asked banks to strengthen internal controls, the notice showed. Employees at lenders were banned from bringing official stamps and other bank credentials to conduct bill-financing transactions when traveling, it showed.

Banks must strictly safeguard against capital from their bills businesses being embezzled and used for illegal fundraising, the regulator said in the notice. It also told lenders they must prevent those businesses from being manipulated to inflate performance.

Two employees at the Beijing branch of state-controlled Agricultural Bank of China Ltd. are under investigation for allegedly taking 3.8 billion yuan of bank’s acceptance bills out of the branch’s safe and cashing on those bills through repurchase transactions, Caixin reported Friday, citing unidentified people.

Agricultural Bank didn’t immediately respond to a phone call and a faxed query from Bloomberg News for comments.

— With assistance by Heng Xie, Shuqin Ding, Ling Zeng, and Aipeng Soo

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