CBRC Crackdown Spurs Wave of Bond Redemptions


CBRC continues to step up its sweep of the banking sector, prompting a wave of outsourced redemptions amongst the big lenders.

The China Banking Regulatory Commission has launched a crackdown of unprecedented scope and intensity as part of concerted efforts to dial down leverage and risk in the Chinese market.

The move has led to panicked reactions amongst China’s banks, prompting a wave of redemptions of outsourced debt investments by the country’s biggest lenders.

“We have currently almost suspended operations at hand,” said one source at a major state-owned bank to Quansheng China. “[We’re] dealing with files, filling in various forms, in order to deal with inspection by the regulatory authorities, including CBRC.

“The People’s Bank of China’s macro prudential assessments have just finished, and CBRC has launched 7 documents in the space of two weeks. None of us have enough time to properly research the impact of their documents and response policies, but we feel in general that this year supervision and regulation will tighten up a great deal, and the impact on interbank and outsourced operations will be even greater.”

Members of the banking sector believe CBRC’s latest crackdown marks an end to rampant growth in the balances of Chinese banks over the past five years, on the back of financial liberalisation and surging growth in asset and wealth management operations, as well as a boom in shadow banking.

China’s lenders will now have to contend against a challenging operating environment characterised by intensified regulation and inspections well as narrowing interest margins.

Banks Respond to CBRC Crackdown with Wave of Redemptions

Asset management personnel from China’s big banks point to a wave of outsourced redemptions amongst lenders, with large-scale sell-offs on the bond market over the past two trading days.

The redemption wave is believed to be primarily due to the pressure brought to bear upon lenders by intensified regulation, as well as inexperience upon panicked banking personnel.

Observers point out, however, that despite that many of these redemptions will be temporarily stayed because of high levels of unrealised losses due to China’s enervated bond market.

Li Qilin, chief macroeconomic researcher with Lianxun Securities, said to Quanshang China that bond assets cannot obtain high rates of returns, and banks will struggle to make-up losses following redemption.

“If the scale of losses isn’t large, then banks can still bear them on their own. But if the redemptions are concentrated, how will they deal with large-scale losses?

“Banks may still bear [these losses], and make a compromise choice between the scale of outsourced [bonds] and the scale interbank debt

“They will redeem those that are profitable with small unrealised losses, and continue to use interbank deposits to maintain the volume of most of those outsourced bonds with comparatively high unrealised losses.”