SHIBOR Rises Above Loan Prime Rate As Real Economy Deleveraging Lags

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The one-year Shibor rate has risen above the interbank one year loan prime rate, and is now closing in on the PBOC one year benchmark rate.

On 22 May the one year Shibor rate reached 4.3024%, above the interbank one year LPR of 4.3%, as well as not far off the central bank one year benchmark rate of 4.35%.

Simultaneous with this odd inversion in capital costs, rates for interbank CD’s and wealth management products have also posted continuous gains.

The one-year interbank CD rate is at least 5 – 5.15%, which is well above the current LPR.

Industry participants say that banks are raising their interbank rates in anticipation of second quarter macro prudential assessments.

China Huarong Asset Management notes that market rates have risen significantly since Q4 2016, with a number of banks raising FTP   by 20 – 30 basis points, or shifting from annual to quarterly or even monthly pricing in order to deal with changes to the costs of capital.

A fixed income report released by China Merchant Securities points out that an inversion in the order of LPR, representing demand in the real economy for funds, and interbank rates, representing demand in financial markets for funds, indicates that deleveraging is only taking place in the financial system, and hasn’t yet spread to the real economy.

The report envisages two likely scenarios in the near future – the first is that there is large-scale deleveraging in the real economy, which leads to an abrupt rise in capital costs and a bottoming out of economic growth.

At such time deleveraging in the financial markets may have reached a terminus, and capital costs as well as bond rates may shift downwards.

The second scenario is ongoing “steady leverage” in the real economy, with average financing costs holding stable, while deleveraging in financial markets continues until it expands the debt gap, or even triggers a liquidity crisis.

According to the report authors the first scenario is more likely than the second scenario, on the basis of current trends in property, commodities and stock markets.

Huang Zhilong, head of Suning Finance Macroeconomic Research Centre, said that the Shibor/LPR inversion is a short-term phenomenon, with little room for further increase in interbank rates, as well as little further need for micro-tightening of monetary policy by the central bank.

 

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