Interbank CD Plunge Attests to Effective Deleveraging

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Precipitous changes in the volume and pricing of China’s interbank certificates of deposit attest to the impact of a rigorous deleveraging campaign launched by financial regulators.

The latest official data indicates that interbank CD origination has fallen sharply in recent months, plunging from over 2 trillion yuan in March to 723.69 billion yuan in April.

In the second week of May net CD financing drop to an historic one-week low of -107.3 billion yuan, for the third successive week of negative growth.

In tandem with this dive in interbank CD issuance has been a steady rise in weighted average rates.

According to observers the drop in interbank CD issuance and simultaneous price rise serve as key indices for assessing the success of China’s ongoing deleveraging drive.

Qi Sheng, chief fixed income analyst with Zhongtai Securities, said to Caixin the shifting figures attest to the success of deleveraging in the Chinese economy.

According to Shi Lei, chief investment officer of Xi Yinzi Tougu, deleveraging is already half way through, and the problem of maturity mismatches has already been resolved.

In Shi Lei’s opinion during the first stage of deleveraging the central bank tightening capital supply, yet financial institutions were unwilling to divest themselves of assets, creating the problems of maturity mismatches.

During the second quarter not only has liquidity been severely constricted, regulatory measures have also intensified across the board, with financial institutions shifting their goal towards a reduction in asset scale.

“In terms of funds, at present excess reserves are at historic lows, but overall interbank lending funds aren’t especially tight. This shows that everyone’s leverage is falling, the scale is coming down, which is the biggest difference from the past.

Shi Lei said that liquidity constraints are at their peak, and it would be very difficult to tighten capital availability further.

Shi anticipates a credit shock during the second phase, and the slow spread of deleveraging to China’s real economy.

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