Chinese Interbank CD Issuance Drops to Near Two Year Low in January

Chinese interbank certificates of deposit (CD’s) have posted a plunge in both issuance volumes and rates in the first month of 2019.

Data from Wind indicates that the total issuance of interbank CD’s in China fell to a near 23-month low of 1.05721 trillion yuan in January, while the average issuance rate was 3.0369%.

The January issuance volume marks a contraction of over 40% compared to the December, with domestic investors pointing to ample liquidity as a key factor for the decline alongside a modest volume of maturing interbank CD’s last month.

Wind data indicates that 803.97 billion yuan in interbank CD’s matured in January, for net financing of 253.24 billion yuan.

The rates of interbank CD’s also saw a sharp decline, with the average rate of 3.0369% in January marking a drop of over 30% compared to the reading of 4.799% for the same period last year.

Sun Binbin (孙彬彬), chief fixed income analyst at Tianfeng Securities, said to Yicai that cost of funds is set to continue declining in future, and the coupon rate for interbank CD’s could drop to 2.5% or even lower.

Interbank CD’s also saw an extension in their maturity structure in January, with the 379.23 billion yuan in 1-year instruments issued that month accounting for 35.93% of the total, as compared to around 10% previously.

According to analysts the maturity increase has been prompted by the official launch of the “Commercial Bank Liquidity Risk Administrative Measures” (商业银行流动性风险管理办法) on 1 July 2018, which outlines the three new metrics of net stable funds ratio (净稳定资金比例), liquidity matching ratio (流动性匹配率) and high quality liquid assets adequacy ratio (优质流动性资产充足率).

Under the Measures 6 month to 1 year financing enjoys a stable funds coefficient of 50% during assessment of the net stable funds ratio, while financing with a maturity of under 6 months has a coefficient of zero, leading to a drop in the supply of 1 to 6 month interbank CD’s.

Li Feng (李锋), vice-head of the Minsheng Securities Research Institute, said that the new Measures also contributed to a decline in rates.

“Shifts in regulatory policy are a key factor behind the decline in interbank rates since mid-2018,” said Li.

Despite the contraction in interbank CD issuance in January, Chinese banks are expected to step up issuance in 2019 following a sizeable increase last year.

Total interbank CD issuance by Chinese financial institutions was 21.1 trillion yuan in 2018, for a rise of 4.62% compared to 2017, and the highest annual issuance level since 2013.

According to Yicai of 1 February over 300 Chinese banks have issued their interbank CD issuance plans for 2019, with the majority lifting their full year issuance volumes.

Xu Chengyuan (徐承远), chief financial analyst with Dongfang Jinsheng (东方金诚), said that a considerable disparity between growth in the assets and liabilities sides of commercial bank balance sheets indicates that many will remain highly dependent on interbank CD’s.

Another source from the Chinese banking sector said to Yicai that the accumulation of funds on the interbank market reflects an “asset famine,” with demand on the rise amongst lenders for high-quality assets that provide ample returns and lower risk.

“From a buy side-perspective, after the central bank reduced the reserve requirement, interbank funds have become quite ample, yet lending has been insufficient.

“Buying interbank CD’s is an ideal choice, providing profits as well as the ability to control risk.”

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