The balance sheet of China’s central bank has contracted, spurring a surge in interbank deposit rates has put many commercial lenders in a tight spot.
The latest “Monetary Authority Balance Sheet” issued by the People’s Bank of China indicates that its total assets have fallen 2.3% since January to hit 33.73 trillion yuan at the end of March.
The balance contraction was chiefly due to declines in central bank loans and funds outstanding for foreign exchange, which dropped 775.325 billion and 54.691 billion yuan respectively over the past two months.
The monetary base fell 30.1 billion yuan to 30.23 trillion yuan, while currency issuance dropped by over 400 billion yuan.
Industry observers believe that the recent lightening of PBOC’s balance sheet is incidental as opposed to planned, because China does not satisfy the conditions for a sustained contraction like the one flagged by the Federal Reserve for later this year.
Shrinking central bank balance leads to surging interbank rates
Commercial banking sources speaking to 21st Century Business Herald said that capital has become extremely hard to access, especially medium to long-term maturities.
Interbank rates have lifted to over 5% for maturities of under six months, as well as risen to as high as 4.75% for six month A+ deposits, which is too expensive for the wealth management products of most banks to match.
Many observers believe that recent sustained gains in interbank rates are closely related to PBOC’s shrinking balance sheet, leading to weakness in the bond and stock markets.