PBOC Pumps in More Cash After Baoshang Seizure Spooks Market
PBOC Pumps in More Cash After Baoshang Seizure Spooks Market
(Bloomberg) -- China’s central bank moved to curb the risk of a funding squeeze on banks after the government’s surprise seizure of Baoshang Bank Co. sparked a jump in borrowing costs.
The People’s Bank of China injected net 250 billion yuan ($36 billion) into the financial system via open-market operations on Wednesday, the most since Jan. 17, following a net addition of 150 billion yuan in the first two days of the week. That’s after the seven-day repo and one-month interbank rate both spiked this week, making funding costs more expensive for financial institutions.
Analysts expect the funding conditions to worsen for smaller banks, with fewer investors willing to buy their negotiable certificates of deposits, which is an important financing channel for those lenders. Baoshang Bank’s interbank creditors, mostly financial institutions, with exposure of more than 5 billion yuan, will get paid no less than 70% of the principal, people familiar with the matter said. Read about Baoshang Bank fallout here.
“The central bank needs to take action quickly to stabilize market confidence, otherwise smaller banks and non-bank financial institutions will suffer a liquidity crisis,” said Gary Zhou, Hong Kong-based fixed-income director at China Securities International.
The PBOC will auction 80 billion yuan of three-month treasury deposits at commercial banks on behalf of the Ministry of Finance on Thursday, the first time in four months.
Here is a look at how funding conditions have tightened for China’s commercial banks after the Baoshang takeover.
Issuance of negotiable certificates of deposit tanked to 12.4 billion yuan on Tuesday, down about 80% from the amount on Monday, according to official data. The sales from those rated AA and below amounted to less than 3 billion yuan.
To make things worse, some Chinese banks and securities firms tightened requirements for NCDs that are used as collateral for funding. Some financial institutions now only accept NCDs sold by state-owned and joint stock banks as collateral while some have refused to lend money to investors pledging NCDs issued by lenders rated AA+ and below for now, traders said.
As a result, new issuance of NCDs faces strong headwind, and banks that heavily rely on interbank borrowings are expected to suffer liquidity crunch if sales remain weak, according to a research note by Jianghai Securities Co. About 7.4 trillion yuan of NCDs will become due this year, with a maturity peak in June, the research note said.
The one-month interbank rate known as Shibor rose to 2.82% on Tuesday, the highest since May 5. The gauge will face another test in the next few months with a 3 trillion yuan funding gap among financial institutions looming between June and August, according to Bloomberg-compiled data.
The seven-day interbank repurchase rate hit 2.86% on Tuesday -- the highest since April 16 -- before retreating to 2.78% this morning after the liquidity injections from the PBOC. The open market operations Wednesday appear to be aimed at calming market sentiment which may result in tightening of liquidity, according to Bloomberg economist David Qu.
“At the end of the month, funds tend to be tight, at the same time, the Baoshang event has a negative impact on market sentiment, PBOC is worried about the combination of the two effects causing sharp market fluctuations,” Qu said.
--With assistance from Claire Che, Helen Sun, Jun Luo, Lucille Liu, Molly Dai, Heng Xie and Zhang Dingmin.
To contact Bloomberg News staff for this story: Tongjian Dong in Shanghai at tdong28@bloomberg.net;Livia Yap in Singapore at lyap14@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net;Jing Zhao in Beijing at jzhao231@bloomberg.net
To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Lianting Tu, Chan Tien Hin
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With assistance from Bloomberg