China $885 Billion Bank Funding Rush Shows Caution Over OutflowsBloomberg News
Certificate of deposit sale plans already exceed 2015 total
PBOC interest-rate cut room limited by record capital outflows
How serious is the risk of a sudden exit of funds from China’s banking system? The nation’s banks aren’t waiting to find out.
Ninety-nine lenders announced plans for 5.8 trillion yuan ($885 billion) in certificate of deposit sales this year, data from the National Interbank Funding Center show, exceeding the full-year total of 5.4 trillion yuan in 2015. That echoes record issuance of CDs by Chinese banks offshore in December before a shortage of yuan caused overnight interbank interest rates to jump to 67 percent in Hong Kong this week.
Chinese banks have three good reasons to be raising cash now. First, capital is flowing out of the country and foreign-exchange reserves declined by a record $108 billion in December to $3.33 trillion, making it wise to have more short-term funds available. Second, a decline in the yuan has limited the People’s Bank of China’s room for interest-rate cuts, encouraging lenders to lock in low borrowing costs while they can. And third, savings will be a less dependable source of funding as deposit rates are liberalized.
“If the currency remains under pressure, it will affect liquidity and funding costs,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province. “Issuance will certainly climb further this year. Yuan volatility has made the interest-rate prospect more complicated as the central bank may now be more cautious in easing. If outflows worsen, lenders will have to replenish liquidity.”
Pressure on China’s currency, stocks, capital outflows and economic growth is intensifying as policy makers wrestle with the transition toward giving markets a greater role. The yuan has dropped 5.6 percent in six months and the Shanghai Composite Index of equities lost 23 percent, while reserves are down almost $670 billion from their 2014 high.
Declines in the yuan have encouraged the central bank to pause after cutting rates to record levels in October, despite the slowest growth in a quarter of a century. The speed of capital outflows is worrisome and reserves need to hold above $3 trillion in 2016, Li Daokui, former academic adviser to the PBOC and a professor at Tsinghua University, said on Jan. 9.
The appeal of the currency is fading as the premium of China’s 10-year sovereign yield over U.S. debt has narrowed to 50 basis points, the least since 2011. Household deposits in foreign currencies climbed to $85.2 billion in November from $73 billion in January last year, PBOC data show. Individuals have also become increasingly attracted to higher-yielding wealth management products.
The central bank removed a ceiling on deposit rates in October, a move it called the “riskiest” part in freeing up interest rates. To make it easier for smaller banks with fewer branches to raise funds, the PBOC allowed lenders to sell negotiable certificates of deposit to their peers in 2013. Sales were just 34 billion yuan in the first year, before climbing to 906 billion yuan in the following year, data compiled by Bloomberg show. Most of the securities have terms of between three and six months.
Monthly CD sales soared to a record 918 billion yuan by December 2015 and lenders are still announcing new issuance plans for 2016 every day. More than 100 banks have joined a self-discipline committee to issue the short-term financing instruments so far. They are required to disclose the annual plans three days before the first offering every year.
“CDs have increasingly become an important channel for banks to obtain a relatively low cost of funds,” said Xu Yuehong, an analyst at Bank of Communications Co. in Shanghai. “Interest-rate liberalization may lead to bigger swings of savings, and CDs can help secure a stable source of funds.”
While short-term borrowing costs are attractive inside China, they are rising. The overnight Shanghai Interbank Offered Rate was at 1.95 percent on Wednesday, compared with an average 1.83 percent in the fourth quarter. The PBOC drained funds in open-market operations and via the Medium-term Lending Facility in December after flagging concerns over pumping in too much liquidity.
Banks may be bracing for higher rates. Chinese lenders’ offshore units from Hong Kong to London raised a record 70 billion yuan offshore selling CDs in December. That came after Hong Kong’s pool of yuan savings shrank to the smallest in two years, and just before the overnight Hong Kong Interbank Offered Rate climbed 53 percentage points to a record 66.82 percent on Tuesday.
The State Administration of Foreign Exchange has verbally instructed some banks to limit yuan outflows and reduce offshore yuan positions and liquidity, according to people with knowledge of the matter.
While not all analysts agree that banks need to be hoarding funds at this time, those betting on a dovish PBOC have been disappointed. The median forecast in a December survey was for a cut in the benchmark one-year lending rate to 3.85 percent this year from 4.35 percent and to lowering of major banks’ reserve required ratio to 15 percent from 17.5 percent.
“The reserve-requirement ratio cuts didn’t come as many people had expected, reflecting a cautious attitude adopted by the PBOC,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants Securities Co. “In the short-term, there’s limited room for interest rates to go down further, while volatility is likely to increase.”
— With assistance by Helen Sun