China Tells Big Banks to Sustain Funding Amid Squeeze Worry
China Tells Big Banks to Sustain Funding Amid Squeeze Worry
(Bloomberg) -- China is stepping up efforts to avert a funding squeeze among the nation’s banks and securities companies after a rare government seizure of a small lender triggered concerns about a vital part of the nation’s financial plumbing.
The People’s Bank of China and the main securities regulator called on big banks and brokerages to increase financing support for leading securities firms at a meeting on Tuesday, according to people familiar with the matter.
Regulators encouraged interbank lending and repurchase financing among the measures, said the people, who asked not to be identified as they’re not authorized to speak publicly. Such operations are crucial to the provision of credit and processing of financial transactions in the economy. Any seizing up of interbank funding could make it even tougher for private-sector companies to obtain financing, at a time when China’s growth is weakening.
“The PBOC will continue to watch the market closely and provide liquidity when needed, said Ken Hu, chief investment officer for Asia Pacific fixed income at Invesco Hong Kong Ltd. “Despite a series of liquidity injections, banks and nonbank financial institutions (NBFI) have continued to face divergent funding conditions.”
Tuesday’s gathering followed one on Sunday where the same set of regulators met chief managers from some brokerages and fund houses to discuss methods to reduce risks to bond-market liquidity, people familiar with that earlier session said. The People’s Bank of China has itself been boosting interbank funding after its surprise takeover of Baoshang Bank Co. last month, which shook investor confidence in the nation’s roughly 4,000 small banks.
The PBOC has pumped in a net 415 billion yuan ($60 billion) into the financial system in operations over the past five straight days. The moves have helped pull the seven-day interbank repurchase rate down to where it was before the Baoshang takeover. Yet not all financial institutions are benefiting from the easing, as lenders become more selective with their counterparties as well as with the collateral tied to repo lending.
The PBOC didn’t immediately reply to email seeking comment and China Securities Regulatory Commission didn’t immediately reply to fax.
Fragile Confidence
The knock-on effects of the Baoshang takeover illustrate the fragility of confidence in a financial system still dominated by the state sector. Chinese policy makers have been struggling to encourage continued flows of credit to private-sector borrowers in the aftermath of their crackdown on shadow banking in recent years.
In a move to standardize disposal of pledged bonds in a repo transaction where the borrower defaults on the payment, China’s interbank trading platform operator said this week it will conduct anonymous auctions of notes in a repo payment failure if the two parties involved couldn’t reach an agreement on a resolution.
“Regulators are prepping for more interbank defaults,” analysts at Beijing-based research company Trivium China wrote in a note Tuesday. “It’s not panic time yet, but if regulators mess this up, it could be a big problem.”
Authorities announced the Baoshang takeover on May 24, citing credit risks at the lender. The central bank later said the seizure was an isolated case, while revealing that the move was triggered by a misappropriation of funds by Tomorrow Group. The investment conglomerate is being probed by Chinese officials, according to people familiar with the investigation.
The move has sent shock waves through China’s financial markets. Interbank borrowing rates spiked and sales of negotiable certificates of deposits -- a channel that small banks rely heavily on for funding -- plunged. Investors also dumped the loss-absorption debt from city and rural commercial banks.
Things have largely calmed down after the cash injections from the PBOC, yet the incident is affecting how investors price bank risk. The yield premium on short-term debt sold by smaller banks over larger ones has widened to 45.6 basis points, the highest since August.
“The ripple effect from Baoshang Bank takeover is bigger than expected,” said Tommy Xie, economist at Oversea-Chinese Banking Corp. in Singapore. “The PBOC is having to take a series of measures to contain the risks from spreading, which I believe will be effective in the end.”
--With assistance from Shiyin Chen and Annie Lee.
To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net;Tongjian Dong in Shanghai at tdong28@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net
To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Lianting Tu, Christopher Anstey
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