Deleveraging Drive Leads to Historic Decline in Interbank CD’s


The ongoing drive by financial regulators to deleverage the Chinese economy appears to be taking effect, with commercial banks posting negative growth in interbank certificates of deposit and bonds and debentures in May.

The latest data from Finchina indicates that commercial interbank CD financing for May, referring to the total issuance volume minus the total repayment volume, contracted by 330.4 billion yuan, for the worst performance since December 2013.

Rates for interbank CD’s are closing in on 5%, with commercial banks are making haste to tidy up their balance sheets in run up to the deadline for the submission of their self-inspection reports mandated by the China Banking Regulatory Commission on 12 June, as well as the People’s bank of China’s mid-year macro-prudential assessments.

Bonds and debentures also saw negative growth on the back of enduringly high costs for funds. Investment grade bonds and debentures saw negative growth of 223 billion yuan in May, hitting its lowest single month level since the turn of the century.

According to industry observers the financial deleveraging drive pursued by China’s regulators has effectively suppressed credit extension, with the performance of interbank CD’s and bond issuance expected to languish for some time to come.

Enterprises in the real economy are expected to face a worsening environment for refinancing as a consequence.

Ming Ming, chief fixed income analyst with CITIC Securities, said that although the focus of the current deleveraging drive is the financial sector and not the real economy, financial institutions could pass on the effects of the credit squeeze to the real economy and negatively impact growth.

Commercial banks, and smaller lenders in particular, will see decline in the available funds due to tightening of interbank CD’s, while rising bond rates could lead to an increase in credit risk of low-to-medium quality issuers.

According to China Securities Journal even high-quality enterprises in China’s real economy experiencing difficulty obtaining loans.

Expectations of capital scarcity have prompted commercial banks to become more cautious when extending credit, raising the threshold for lending approval as well as extending the inspection time.