Chinese Lenders Withdraw from Shadow Banking as Capital Costs Invert


As interbank funding costs rise above the reference rate for bank loans, Chinese lenders are dialling down their shadow banking activities and refocusing on conventional, on-balance sheet deposit operations.

The one-year Shibor remained above the one-year loan prime rate for a second consecutive day on 23 May, with the two figures at 4.3024% and 4.3% respectively.

This means that the reference rate for Chinese banks to borrow capital from each other, as represented by Shibor, is now above the reference rate for banks to lend capital to their most favoured customers, as represented by the loan prime rate.

Stated otherwise, it may end up costing more for Chinese banks to borrow capital from their lending peers than they would earn from lending funds to end borrowers.

According to some analysts this inversion in capital costs indicates that many banks are withdrawing from shadow banking operations and refocusing on conventional on-balance sheet operations, leading to hikes in the rates offered to depositors.

A number of big state-owned banks have increased the deposit rates for various terms by as much as 40%, while the rates offered by commercial lenders and municipal banks remain higher than China’s big five banks.

Speaking to Beijing Business Today, one client manager from a joint-stock commercial bank reported a sizeable rise in the rates offered for large-sum certificates of deposit.

He said that for CD’s worth 300,000 yuan the bank provides rates at a 30 to 50% premium compared to the base rate.