Chinese bill collapses as lenders ‘dress the window’ on lending books

An aerial view shows the Lujiazui financial district and other buildings along the Huangpu River amid a lockdown to contain the spread of the coronavirus disease (COVID-19) in Shanghai, China March 30, 2022. Photo taken with a drone. REUTERS/Aly Song

SHANGHAI, May 23 (Reuters) – Slowing economic growth in China and anemic demand for loans have triggered massive purchases of low-risk short-term financial instruments by lenders, pushing yields near zero , as banks seek to meet their internal lending targets.

According to data from the Shanghai Commercial Paper Exchange.

This compares to an average return of 2.07% over the first three months of the year. It is also well below the banks’ interbank borrowing cost of around 2%.

The rise in demand for short-term instruments reflects a quirk of Chinese regulations, whereby banks’ commercial paper holdings are considered short-term loans, said Raymond Yeung, chief economist for Greater China. at ANZ.

“It allows banks to dress up their loan portfolios by buying banker’s acceptance bills so they can meet lending targets,” he said.

The regulatory loophole has distorted interest rates in the commercial paper market and risks encouraging arbitrage activity and undermining China’s monetary policy.

A state-owned bank loan officer said it’s increasingly difficult to meet banks’ internal performance metrics for average daily volume and monthly loan increases as widespread lockdowns in Shanghai darken already bleak growth prospects for the world’s second largest economy. Read more

“There is especially a lot of pressure to meet the targets for lending to private companies. But where can we find so many good projects? To meet the targets, the only way is to buy bills, even if the returns are low “, he said.

While commercial paper financing contributed to most new business loans issued in April, new global loans in China fell around 80% from March and hit their lowest level in nearly 4 years. and half.

SILENT REQUEST

Authorities have taken steps to support hard-hit sectors of the economy and encourage lending, but the lockdowns have eroded the effectiveness of the easing and reduced demand more than supply, said Robin Xing, an economics economist. head of China at Morgan Stanley.

“In a normal non-COVID year, it takes about three to six months for the easing measures to have a strong and clear impact on broad-based businesses,” Xing said. “But this year, given the closures, the pass-through will be longer.”

Commercial paper yields have fallen in the past, often near the end of a quarter or year, before rebounding quickly. But over the past month, ultra-low yields have persisted.

The increasingly common practice of buying bills to meet lending targets has already drawn criticism from banks and foreign exchange officials.

Such activity is the main contributor to trading volatility in the commercial paper market and creates a disconnect between commercial paper prices and other similar assets, wrote Xie Jinglei, an official with Shanghai Commercial Paper’s surveillance department. Exchange, in an article published on the exchange site.

Guo Xinqiang, vice director of commercial paper business at Zheshang Bank, said in a working paper that adjustments are needed to curb the practice because banks that buy commercial paper in the secondary market do not channel the money. to the real economy.

Such activities distort interest rates, “incentivize illegal arbitrage, and reduce the authenticity and effectiveness of central bank monetary policies.”

Reporting by Samuel Shen and Andrew Galbraith Editing by Vidya Ranganathan and Jacqueline Wong

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