China’s Big Banks Could Drive Up Money Market Rates with NCD Funding Spree


China’s big five banks are expanding their use of negotiable certificates of deposit (NCD) to access short-term funding for loans, in move that could drive up rates on money markets.

Data from Bloomberg indicates that sales of NCD’s by China’s big five lenders surged to 424 billion yuan (approx. USD$68 billion) in the first quarter of 2018, or more than double the previous three-month sales record of 166.1 billion yuan posted in the third quarter of 2017.

According to analysts Chinese big banks are making increasing use of the money market to tap funds to meet rising loan demand, as growth in deposits eases, and regulators crackdown on the use of wealth management products.

New lending in China hit a unprecedented high of 2.9 trillion yuan in January, yet deposit growth dropped to its lowest level on record in 2017, and WMP’s posted meagre growth of 1.69% in the wake of Beijing’s crackdown on shadow banking.

Analysts expect the surge in NCD issuance to heat up the money market.

“With the biggest banks joining smaller ones to be short of funding now, money rates are prone to spike at some points,” said David Qu, Australian & New Zealand banking Group’s Shanghai-based market economist, to Bloomberg.

NCD’s were first launched in 2013 as an avenue for smaller lenders to access funds by providing them with an instrument akin to a bond. Over 8.2 trillion yuan in NCD’s are outstanding, making them the fourth-biggest bond category in China after sovereign, local government and policy bank debt.

While smaller banks are dialling back their use of NCD’s due to pressure from regulators to deleverage, China’s big lenders have taken to them as a cheaper form of debt issuance for which available quotas remain ample.

Mid-sized lender Industrial Bank Co. was the biggest NCD issuer last year, but has since reduced projected issuance for 2018 by 24% to 680 billion yuan.

Shanghai Pudong Development Bank, the second largest NCD issuer in 2017, has also slashed issuance for 2018, with a reduction of 13% to 700 billion yuan.

In sharp contrast big five lender Bank of Communications sold 222 billion yuan of NCD’s in the first quarter alone, while Agricultural Bank of China used the instruments to raise 126 billion yuan.