Weak Debt Auction In China Increases Worries About Interbank Lending (Jun 2013)


Source: WSJ – Weak Debt Auction In China Increases Worries About Interbank Lending

Notable excerpts:

In a rare failure, China was unable to sell all of a government bond to banks Friday, heightening concerns about a severe funding squeeze in the money market that has sent interbank borrowing costs soaring.

Banks have been short of cash since the end of last month, as they kept more funds to meet regulatory requirements. But the liquidity crunch worsened recently as customers yanked out deposits ahead of a three-day holiday earlier in the week, pushing a seven-day benchmark for interbank funding costs up to 6.87% Friday from 6.39% Thursday and 4.8% two weeks ago.

The lackluster demand for the debt sold by the Ministry of Finance deals a fresh blow to China’s already-beleaguered financial markets, which have been hit by the slowing economy. Stocks slumped to their lowest in six months this week, and the currency weakened from a record as global investors pulled money out.

The Ministry of Finance last failed to sell an entire bond almost two years ago, and this time sold just 9.53 billion yuan ($1.55 billion) of 273-day government bonds, well below the originally planned size of 15 billion yuan, traders participating in the auction told The Wall Street Journal Friday. The government also had to pay more to borrow, with the yield at 3.76%–far higher than the 3.14% on similar bonds currently being traded.

Tight liquidity is the main cause for the ministry’s failure to complete the bond sale today. The high funding cost in the interbank market has made such investments even less popular,” said Yan Yan, senior trader at China Guangfa Bank.

The failure isn’t the first, with state-owned Agricultural Development Bank of China only able to sell slightly more than half of a planned 20 billion-yuan bond on June 6.

Beijing has also been cracking down on a wide range of financial services and potentially risky wealth-management products that straddle the boundaries of the country’s conventional and unconventional financial systems. That has been cutting banks’ access to cash and restricting their options on how they raise funds.

“We believe the series of policy-tightening measures applied to the shadow-banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening,” said Zhiwei Zhang, economist at Nomura.

“We expect liquidity to remain tight in June and July” given leaders in Beijing have recently signaled that monetary policy loosening is unlikely in the short term, Mr. Zhang added.



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