China Shadow Banks Pay Record Premium for Cash as Squeeze Bites

  • Spread between repo fixing and weighted average rate spikes
  • Tightness to remain but may ease from current level, ANZ says
Photographer: China Photos/Getty Images AsiaPac

The last day of a bitter year for China’s non-bank borrowers is proving to be especially painful: they’re now paying a record premium for short-term funds.

As interbank lending rates climbed on Friday due to banks hoarding cash for year-end regulatory checks, the increase was especially significant for non-bank financial institutions, such as securities and insurance companies. A measure of what they’re paying for seven-day funds relative to costs for big Chinese banks surged to the highest level ever.

The funding cost gap is reflected in the spread between China’s seven-day repurchase rate fixing and the weighted average rate, which expanded to almost 3 percentage points, the most in data going back to 2006. Non-bank borrowers tend to have a greater influence on the fixing, while large banks have more sway over the weighted average.

“Non-bank financial institutions are having a hard time," as authorities tighten regulations, said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. “I’m not optimistic about the liquidity conditions in the first quarter. But there’s a chance the tightness may ease after the new year."

This year has been tough for players in China’s debt markets, as money market rates jumped and bonds tumbled amid an official campaign to curtail leverage. The drive is expected to continue in 2018, with top leaders led by President Xi Jinping pledging this month to “fight the battle" against financial risks.

Still, there was one piece of better news for borrowers on Friday: the central bank said it would allow lenders to use reserves to meet their liquidity needs during the Spring Festival in February.

— With assistance by Tian Chen, Justina Lee, Xize Kang, and Emma Dai

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