Chinese banks have used negotiable certificates of deposit to avoid Beijing’s ongoing deleveraging measures according to a new analysis from UBS Group AG, implying little relent in China’s credit crackdown ahead.
One of the chief deleveraging measures imposed by Beijing has been a clampdown interbank borrowing, which Chinese lenders had previously used to engage in shadow banking activity and drive up liabilities.
China’s financial regulators were concerned about the potential for interbank transactions to create a “layering effect,” with loans by large banks to smaller banks resulting in greater interdependence while also worsening the opacity and complexity of the system.
The new report from UBS analysts led by Jason Bedford points out that Chinese banks managed to elude the clampdown on wholesale borrowing via the use of short-term funding instruments called negotiable certificates of deposit.
NCD’s were first launched at the end of 2013, providing smaller banks who lack the broad deposit base of the big state-owned banks with an alternative funding channel.
The instruments proved immensely popular, with data from Bloomberg pointing to a 22-fold surge in issuance to 20.2 trillion yuan during the period from 2014 to 2016.
Despite the intensification of Beijing’s deleveraging campaign last year, NCD’s issued by Chinese banks saw growth of 1.5 trillion yuan (approx. USD$235 billion) in 2017, more than compensating for a 1.3 trillion yuan drop in interbank borrowing.
According to UBS this is the reason why the deleveraging campaign has yet to have much an adverse impact on Chinese banks.
“We believe many market watchers have overestimated the rate of progress in credit tightening,” said the report.
While asset growth saw a marked easing in 2017, deposits as a percentage of liabilities saw only a 4 basis point increase across the same period to 71.84%, for an “unexpectedly lacklustre” improvement in their leverage.
For this reason UBS analysts see the deleveraging process continuing for some time to come.
“We are still early in the credit tightening process with a low likelihood of easing on the horizon,” said the report.