Interbank certificates of deposit slated to mature will hit their highest single-month level in nearly four years next month, with 2.25 trillion yuan (USD$340 billion) due in September alone.
Several factors prompted the large-scale issuance of interbank CD’s by Chinese financial institutions in June, including mid-year macro-prudential assessments by regulators, a cross-seasonal spike in the demand for funds, as well as the maturation of a large volume of previously issued instruments.
The over 2 trillion yuan in interbank CD’s issued that month put June only second to March this year in terms of total issuance volume.
Because most of the interbank CD’s issued in June had 3-month maturities, the amount of the instruments due in September is expected by Wind Data to hit 2.2477 trillion yuan – the highest figure for a single month since the end of 2013.
The current one-month peak for 2017 is June, when 1.63 trillion yuan in interbank CD’s came due.
According to Wind Data a total of 2068 interbank CD’s are due in September, of which 410 have 1-month maturities, 586 have 3-month maturities, 625 have six-month maturities, 101 have 9-month maturities and 346 have one-year maturities.
3-month interbank CD’s account for 963.65 billion yuan, however, or 43% of the total amount set to mature.
Joint-stock banks account for the king’s share of interbank CD’s due in September, with an aggregate value of 1.24 trillion yuan, comprising over 55% of the total for the month.
Municipal commercial banks are in second place, accounting for over 34%.
A report authored by CSC Financial’s chief macro-economic and debt analyst Huang Wentao indicates that given low excess reserve ratios, pressure on banking sector liquidity is spurring heightened demand for interbank CD’s.
Chinese regulators have been clamping down on interbank lending in earnest this year, however, as part of an ongoing campaign to clamp down on the shadow banking sector and deleverage the economy.
According to Huang China’s ongoing campaign to deleverage the financial sector is far from over, and while bank self-inspections mandated by regulators are more or less over, further measures could still be on the cards.
The People’s Bank of China recently indicated in its second quarter monetary policy implementation report that interbank CD’s will be included in its macro-prudential assessments of lender starting from the first quarter of 2018, which is expected to account for 500 billion yuan in banking assets.
For this reason issuance volumes in September could see a decline in tandem with a rise in the cost of interbank borrowing.
Figures from Wind Data indicate that the interbank CD issuance volumes for June, July and August are 2.01 trillion yuan, 1.58 trillion yuan and 1.3 trillion yuan respectively, showing a marked trend of decline.
Commercial banks issued 607 interbank CD’s worth a total of 342.27 billion yuan during the week from August 13 – 19, for a marked decline compared to the previous week, and a one-week net decline of 42.1 billion yuan.
Issuance costs also embarked upon an upward trajectory starting in the middle of July, with 3-month and 6-month rates steadily rise.
The interbank CD rates for commercial banks have risen to 4.4% at present from 4.1% in mid-July, for an increase of nearly 30 basis points, while 6-month instruments rose from 4.25% to 4.5%.
Given that capital tends to tighten at the end of September in tandem with pressure from China’s ongoing deleveraging campaign, regulators expect that interbank CD rates could continue to increase.
According to CMSC’s chief fixed income analyst Xu Hanfei, however, the MPA changes won’t have too much of an impact upon the interbank CD market.
Speaking to Hexun Xu said that the economic growth peak for 2017 has already passed, and that growth in banking sector assets is expected to slow in the near future, easing pressure on the liabilities side of balance sheets.
For this reason the current bounce in interbank CD rates is likely just a provisional phenomena.
“The future path of interbank CD’s will mainly be determined by liquidity levels and supply and demand amongst financial institutions,” said Xu.
“Looking at the latest trends on the interbank CD market, the banks have already started to perform dynamic adjustment of their issuance strategics on the basis of regulatory expectations.”