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Flight to safety for lenders amid China property woes


Lenders are expected to stay cautious towards China’s cash-strapped property sector as Shenzhen-based developer Kaisa’s debt woes continue to rattle the market. But they will continue to lend to larger mainland companies.

“Companies from China will remain a major source of business for loan markets this year,” said Sonia Li, head of syndicated loans for Asia at JP Morgan. “But you will see a flight to quality for Chinese borrowers, particularly in light of what is happening in the real estate sector. Lenders will be very cautious to the real estate sector,” she added.

China has become a bigger part of Asia’s loan markets. According to Thomson Reuters data, China was the largest driver for loan growth in the Asia-Pacific region last year, accounting for $141.3 billion in loan volume or about 27% of the total in the region. Infrastructure, project and real estate deals accounted for slightly more than two-thirds of that volume.

Given the increasing exposure banks have to Chinese property, a protracted downturn could have a knock-on effect on the banks. “A lot of mid-sized and big Chinese banks as well as foreign banks have exposure to the China property sector. A big downturn in China real estate market would affect everyone but the mainland banks have the most exposure to the property market,” said Christine Kuo, senior credit officer at Moody’s.

For now, however, the rating agency views Kaisa’s problems as being unique to the company and, at a briefing in Hong Kong on Tuesday, Simon Wong, Moody’s senior credit officer, told reporters that he didn’t think the Shenzhen’s developer’s problems would pose a systemic risk to the sector.

“If the Kaisa case is resolved satisfactorily, such as another developer coming in and potentially buying Kaisa’s assets at fair market value, I think that would also help to ease investors’ concerns,” Wong told reporters.


Kaisa given respite but is still in the doghouse Kaisa default triggers broader loan worries Agile woe compounds China’s property problems Cofco Land plans up to $500m placement Loan Week, February 6-12

For now though, investors and lenders are giving the sector a wide berth.

Kaisa had been subject to unexplained bans imposed by the Shenzhen government on the sale of its property projects in Shenzhen. Reports had been circulating that other developers including Fantasia and China Overseas Land & Investment have faced similar bans but the companies have since clarified that the blocked sales are due to administrative procedures by the authorities, and not violations by the companies.

Lenders could also turn wary towards small-cap companies. “China is an important market but we expect more large-cap and higher grade companies this year compared to last year given the concerns over the mid-cap sector,” said Amit Khattar, head of syndicated loans for Asia at Deutsche Bank.

Subordination risk

Kaisa’s problems expose the risks that offshore lenders face. It had initially defaulted on a $51 million loan with HSBC. While it subsequently got a waiver from the British lender, other creditors have frozen some of its onshore bank accounts, and if it came down to a default, onshore lenders would get first dibs on the assets.

Offshore lenders are often subordinated to mainland lenders as the loans are typically issued through offshore holding companies, using the so-called red chip structure.

China’s State Administration of Foreign Exchange (Safe) has made moves to take away some of that subordination risk and, in July last year, relaxed the rules to allow mainland companies to use onshore assets as collateral when raising funds offshore. However, there are restrictions, and Safe has made it clear that the proceeds have to be kept offshore.

“The change in Safe rules means that offshore lenders can get senior secured access to Chinese companies rather than just a red chip structure,” said Khattar. “It is a meaningful development but the number of companies using this has been limited by restrictions over the use of proceeds,” he added.

Lenders have been comfortable lending to offshore holding companies, provided they are perceived to be a strong credit. For example, smartphone company Xiaomi last year tested the market with a debut $1 billion loan, which attracted 29 lenders. Xiaomi is cash rich, with no onshore borrowings.

However, weaker companies are expected to come under more scrutiny now. “Lenders have become more comfortable with loans using offshore holding company structures,” said Deutsche Bank’s Khattar. “But they will be more wary about certain credits,” he added.

This year could be a more challenging one for mainland companies as Taiwanese lenders are keen to keep their exposure to mainland companies down, and could look to diversify to Indian or Southeast Asian companies. “Taiwanese banks were big investors for China loans in the past but they have pretty tight China limits at the moment,” said JP Morgan’s Li.

But amid ongoing market volatility, more companies could start tapping the loan markets as bond yields have risen. “Bond market volatility specially in the high yield market could see more high yield issuers trying to access the loan markets in 2015,” said Khattar.

¬ Haymarket Media Limited. All rights reserved.

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Apple just took out a $6.5 billion loan even though it's sitting on $178 billion in cash


View photo. China Daily/Reuters Apple sold $6.5 billion in bonds on Monday, according to Bloomberg.

That’s the same Apple that last week announced an record-breaking $18 billion profit over the holiday quarter.

It’s reasonable to ask: why would Apple — a company with $178 billion in cash — need a loan?

In short: taxes.

The vast majority of Apple’s cash hoard is held offshore.

Apple can defer taxes on that cash until it decides to bring it back to the U.S.

Apple doesn’t want to bring the money home, though. It could pay up to 35% of whatever it brings back to Uncle Sam, which could easily be a multi-billion dollar tax bill.

Apple wants a tax repatriation holiday, like the one recently proposed by Senators Barbara Boxer and Rand Paul.

The Boxer-Paul would tax cash Apple brought home at 6.5%, much lower than the rate it would otherwise pay.

But the prospects for the Boxer-Paul plan aren’t looking good. Senator Orrin Hatch, Chair of the Senate Finance Committee, has already expressed skepticism about it. And this bill hasn’t even been introduced yet.

Meanwhile, Apple still needs cash in the US. The $6.5 billion it raised will go towards stock repurchases, dividend payments, and debt repayments, according to Bloomberg.

With corporate taxes so high, and interest rates so low, it’s much cheaper for Apple to raise debt and pay it back with interest than to repatriate cash.

Unless we see corporate tax reform, Apple will probably keep raising money this way for the foreseeable future.

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China’s PBOC Braces for New Year Cash Demand With Loan Rollover

The People’s Bank of China rolled over a 269.5 billion yuan ($43.4 billion) lending facility to banks and added 50 billion yuan in loans as it seeks to ease liquidity ahead of the Chinese New Year holiday.

The facility, first issued in October with an interest rate of 3.5 percent, was rolled over to keep the money market stable, the central bank said in a statement on its official microblog account. It said the move also aims to smooth liquidity before the holiday, which begins Feb. 18.

The PBOC has sought to shore up liquidity and broaden stimulus efforts in recent months, cutting the benchmark lending rate in November and issuing billions of yuan in short- and medium-term loans to banks. Each year around this time, demand for yuan starts to spike as Chinese give each other red envelopes full of cash for the Lunar New Year holiday.

“There may be some irregular capital inflow and outflow around the world,” PBOC Governor Zhou Xiaochuan said at a World Economic Forum panel in Davos, Switzerland minutes after the central bank announcement. “That may also be a source of volatility.”

The PBOC doesn’t intend to provide too much liquidity, Zhou said in Davos.

China’s money-market rate climbed the most in a month today amid speculation banks will start hoarding funds to meet demands for cash. The central bank hasn’t conducted open-market operations since November. Last month, the PBOC reportedly rolled over part of a separate 500 billion yuan lending facility.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at

To contact the editors responsible for this story: Malcolm Scott at Nicholas Wadhams

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New rules on bank deposits will inject less cash than some hope

By Lu Jianxin and Pete Sweeney

SHANGHAI (Reuters) – New rules changing how Chinese banks measure their savings base have more to do with squeezing shadow banking than monetary easing, and will inject far less cash into the system than many believe, Chinese money traders say.

The People’s Bank of China (PBOC) has enlarged the deposit base for banks by telling them to count in it their inter-bank deposits from non-bank financial institutions.

There’s a 75 percent loan-to-deposit ratio (LDR) for banks. Thus, making deposits larger, by definition, should let banks lend more.

Many see the PBOC move as a stimulus measure. Fitch Ratings said in a report on Tuesday that the change would enable banks to boost total credit by up to 6 trillion yuan (636 billion pounds).

Zhu Haibin, economist at J.P. Morgan, wrote on Friday that as banks temporarily do not need to set aside reserves on the additional deposits, the rule change lowers the system LDR by about 500 basis points and “hence removes LDR binding constraint in bank lending.”

But others don’t expect the rule change to have much impact on lending.


“Some analysts have exaggerated the potential effect of the central bank’s move because they only see half of the moon,” said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

“The move is not a policy tool (to ease) but a reform to include deposits that should have been included in the LDR supervision long ago,” he said. “That means the PBOC can follow up by including interbank loans into the LDR’s lending base to keep policy consistency.”

Lu was referring to widespread speculation that the rule adjustment was an attempt to simulate a major easing move, such as reducing the reserve ratio requirement (RRR) or cutting interest rates, by injecting cash into the system sideways, without flooding the market with more cash than it can digest.

To some analysts, the LDR ratio has not been a constraint on Chinese bank lending, so the broadened definition of deposits provides room for lending that banks won’t necessarily use.

The latest data issued by the China Banking Regulatory Commission shows that the daily average LDR of Chinese banks in the third quarter stood at only 66.8 percent, up slightly from 64.3 percent at the end of June.

“Most Chinese banks rarely lend up to the limit of the 75 percent of their deposits, let alone do so in the current environment of lacklustre cash calls thanks to slowing economic growth,” said a dealer at a major state-owned bank in Shanghai.

“The money some say is being freed up for lending has already been in the markets for a while; it’s not like a fresh injection via an RRR cut.”


Fresh money would be provided by a central bank cut in the RRR, which J.P. Morgan’s Zhu and many other economists still think the PBOC will eventually make.

Traders see the new regulations as targeting the growth of interbank deposits created by non-bank institutions, in particular those from the securities industry, special purpose vehicles (SPVs), non-banking financial deposits as well as overseas deposits.

The crackdown makes sense, given signs new players – in particular brokerages – have exploited regulatory loopholes to expand their shadow banking business rapidly despite the regulatory crackdown. Official measures are now seen underestimating the shadow sector by up to $2.6 trillion.

Fitch said the new regulations would also increase the disclosure of shadow bank lending on the balance sheet and thus improve transparency.

“By recognising these exposures as loans, banks would also have to increase provisioning against non-performing assets,” it said.

(Editing by Nachum Kaplan and Richard Borsuk)

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Tourism cash to repay $150mln Chinese loan for Vic Falls airport expansion

TRANSPORT minister Obert Mpofu has told the tourism ministry to aggressively market the country’s premier tourism destination to help repay a $150 million Chinese loan to upgrade the Victoria Falls International Airport.

China Exim Bank provided the loan for the expansion work being carried out by China Jiangsu which includes the construction of a new 4km runway, a new international terminal building, upgrading domestic terminal building, new fire station, new control tower and state –of–the art aviation specialist equipment.

The new terminal building will be able to handle 1,2million passengers per annum from 400,000 currently while the new runway would enable the airport to handle wide body aircraft.

Mpofu said government’s ability to repay the loan would depend on the Zimbabwe Tourism Authority’s marketing initiatives.

“The airport is almost complete now and this is the time to start marketing it so that we get more airlines and tourists coming,” said Mpofu during a media tour of the airport.

“The tourism ministry is the biggest beneficiary. It is now up to you ZTA to market the airport starting now because this project benefits you mostly.

“Without that government will not be able to repay the loan because no money will come in if there are no tourists and airlines using the airport.”

ZTA chief operating officer Givemore Chidzidzi said they would continually market the country, with prominence given to new facilities such as Victoria Falls airport.

“There is a lot of work to be done. We have upped the game and will always market the new look airport to lure more visitors,” said Chidzidzi.

The Victoria Falls corporate community, which is dominated by tour operators, has pledged to extensively market the resort town.

Zimbabwe Council of Tourism representative Barbara Murasiranwa said they were prepared to partner government in marketing Victoria Falls.

“As stakeholders we are going to assist,” said Murasiranwa who is also Hotel Association of Zimbabwe (HAZ) deputy president.

“We are not going to have an ‘us and them attitude’. At the moment we are working with Zimra, Civil aviation Authority of Zimbabwe and immigration and we have spent $25,000 in three months giving water to clients at ports of entry.

“Temperatures are usually high at this time of the year and we thought we should take care of our visitors. We have five planes landing at the airport at almost the same time and we took it upon ourselves to help with water.”


Murasiranwa said they were encouraged by the fact that government is making plans to make Victoria Falls a tourism hub.

“We are already marketing the airport and all our brochures and websites feature the new look facility,” she added.

Construction activity is likely to be complete by June next year, with commissioning expected in August, Mpofu said.


Harare Town Clerck spent Chinese loan cash on posh cars

HARARE mayor Bernard Manyenyeni has launched an investigation into allegations his town clerk used part of a Chinese loan meant for water projects to buy 26 luxury vehicles without authorisation from city fathers.

Manyenyeni early this year suspended the own Clerk, Tendai Mahachi, but the move was blocked by local government minister Ignatius Chombo.

The mayor announced the probe during Thursday’s council meeting after it emerged that the local authority has used $8 million of the $144 million loan facility from China.

The loan was meant for a water distribution rehabilitation project currently underway at Morton Jaffrey water works.

During Thursday’s meeting, councillors accused Mahachi of having a “hidden motive” by not disclosing the expenditure.

They went on to demand a detailed report on how much of the loan has been used and how many vehicles were procured without the knowledge of the city fathers.

Deputy mayor Thomas Muzuwa demanded a breakdown of how the loan has been used, suggesting that there could have been misappropriation of funds.

“Maybe we are just relaxed when there is no longer a single cent remaining under the deal. Why should we be kept in the dark when such things happen?” Muzuwa asked forcing Manyenyeni to call for a probe.

“When we procure anything in council it has to be brought in light because residents’ money will be used.

“It surprising to see new vehicles lining up in the car park while others are already in the field without us as councillors being informed; we demand to know how things are now being run in this council,” he said.

Muzuwa said they were informed that 26 top of the range vehicles were bought, but Harare water Director, Christopher Zvogbo who was representing the town clerk said he was aware of only 13 vehicles and also acknowledged that $8 million was used.

When he appeared before a Parliamentary probe recently, Manyenyeni told legislators that the loan deal was shrouded in a lot of controversy with the equipment and material procured using the funds over priced by double their value.

“On the issue of the Chinese project, we are seized with understanding how the costing was arrived at,” Manyenyeni said then.

“The costs are definitely questionable. In a number of areas some have been itemised and some have not been itemised,” Manyenyeni said.


Mahachi did not attend the meeting to defend himself, a move that some councillors said he might be hiding something by absenting without a reason.


Three banks offer $4.95 bln bridge loan for OCBC's Wing Hang deal-sources

(Adds details of the loan, background)

By Prakash Chakravarti and Saeed Azhar

HONG KONG/SINGAPORE, April 2 (Reuters) – Three banks are providing a fully underwritten $4.95 billion bridge loan to Singapore’s Overseas-Chinese Banking Corp Ltd (OCBC) to fund its offer to buy Hong Kong-based Wing Hang Bank, according to sources close to the matter.

Bank of America Merrill Lynch (BofA), HSBC and J.P. Morgan are sharing equal underwriting of the loan, the sources said, which will have a 12-month tenor.

The size of the loan, which is the same as OCBC’s all-cash offer for Wing Hang, shows how hungry lenders in the region have become to book assets and finance large acquisitions.

BofA, HSBC, and J.P. Morgan declined to comment. OCBC did not return a call seeking comment.

OCBC said on Tuesday that it has agreed to buy Wing Hang for HK$125 per share, or $4.95 billion, in a deal that would give the Singapore lender a much sought-after gateway to the Greater China region.

The sources said the bridge will be taken out by capital markets fundraisings to be determined later this month. OCBC said on Tuesday that it planned to raise equity but did not give more details.

OCBC’s bridge loan will be the second such banking acquisition-related loan in Hong Kong in recent months.

Last October, four banks provided a $1 billion bridge loan to Yue Xiu Enterprises Holdings Ltd for its HK$11.64 billion ($1.50 billion) purchase of a 75 percent stake in Hong Kong lender Chong Hing Bank Ltd.

Record low interest rates across the globe have fuelled cheap loans and huge borrowing levels in Asia. Following the region’s quick recovery from the 2008 financial crisis, banks have thrown themselves at the feet of companies with strong credit ratings and the desire to purchase assets at home and abroad.

While that has helped Asian companies expand their businesses, leverage levels across the region have risen sharply, sparking concerns that a sharp economic slowdown would spark the kind of debt distress China is showing signs of.

The $8 billion loan for Chinese e-commerce giant Alibaba Group completed last July is an example of the appetite among lenders. Nine banks underwrote the loan initially, while nine other lenders joined the deal subsequently.

($1 = 7.7571 Hong Kong Dollars) (Reporting by Prakash Chakravarti of IFR/LPC and Saeed Azhar; Editing by Michael Flaherty and Ryan Woo)

Mergers, Acquisitions & TakeoversFinanceWing Hang Bankbridge loan […]

China Yuchai International Extends Loan Agreement with HL Global Enterprises Limited

SINGAPORE, Feb. 19, 2014 /PRNewswire/ — China Yuchai International Limited (CYD) (“China Yuchai” or the “Company”), announced today that its wholly-owned subsidiary Venture Lewis Limited (“VLL”) has entered into a loan agreement with HL Global Enterprises Limited (“HLGE”) (“2014 Loan Agreement”) for the extension of a loan of S$68,000,000 (“Loan”) to HLGE. The original amount of the Loan was S$93,000,000 which was granted to HLGE in February 2009 to refinance the zero coupon, unsecured, non-convertible bonds (“Bonds”) issued by HLGE in 2006 and which matured on July 3, 2009 (“Maturity Date”). However, the principal amount has been reduced to S$68,000,000 pursuant to partial repayments of S$10,000,000, S$8,000,000 and S$7,000,000 made by HLGE in February 2011, April 2012 and July 2013 respectively. The Company through another wholly-owned subsidiary, Grace Star Services Ltd., owns 48.9% of the issued ordinary shares of HLGE.

The unsecured Loan has, pursuant to the terms of the 2014 Loan Agreement, been extended for one year from July 2014 and is due for repayment in July 2015. Under the terms of the 2014 Loan Agreement, the interest payable will remain as the aggregate of a margin of 1.25% per annum and the 12-month Singapore Interbank Offer Rate expressed in a percentage rate fixed by the Association of Banks in Singapore for Singapore Dollars as of February 18, 2014. In the event the interest rate charged on external funds utilized by China Yuchai for their investment in HLGE is increased, the Company has a right to negotiate with HLGE with a view to agreeing on an increase in the interest rate payable by HLGE under the 2014 Loan Agreement subject to compliance with certain regulatory requirements. A negative pledge undertaking against any disposal or creation of security over substantially all of HLGE’s assets without VLL’s consent is also included.

The Company’s Board of Directors approved the Loan extension after taking into account (i) the continued challenges facing HLGE’s hospitality operations in China from increasing competition and high operating costs which impacted on its results; (ii) the weak financial position of HLGE and its difficulties in obtaining financing from financial institutions; (iii) the need to provide continuing support to HLGE; and (iv) continued efforts being made by HLGE to explore opportunities to grow its earnings base and improve its cash flow. This transaction has also been reviewed and approved by the Company’s audit committee who has determined that the terms of the Loan extension are fair and reasonable and are not prejudicial to the interests of the Company and its shareholders.

About China Yuchai International

China Yuchai International Limited, through its subsidiary, Guangxi Yuchai Machinery Company Limited (“GYMCL”), engages in the manufacture, assembly, and sale of a wide array of light-duty, medium-sized and heavy-duty diesel engines for construction equipment, trucks, buses and cars in China. GYMCL also produces diesel power generators, which are primarily used in the construction and mining industries. Through its regional sales offices and authorized customer service centers, the Company distributes its diesel engines directly to auto OEMs and retailers and provides maintenance and retrofitting services throughout China. Founded in 1951, GYMCL has established a reputable brand name, strong research and development team and significant market share in China with high-quality products and reliable after-sales support. In 2012, GYMCL sold 431,350 diesel engines and is recognised as a leading manufacturer and distributor of diesel engines in China. For more information, please visit

For more information, please contact:
Kevin Theiss / Dixon Chen
Tel: +1-646-284-9409


Will China’s Cash Squeeze Pinch the Real Economy?


By William Kazer A worker stuffs a toy bear with cotton at a factory in Wuhan, Hubei province. Reuters

China’s cash squeeze has pushed up interest rates on the domestic interbank market, raised funding costs for the nation’s banks and left many people wondering if this is putting the real economy into lower gear. So far the evidence is inconclusive.

There is proof of slower economic growth. Gross domestic product growth slipped in the final quarter of last year, dropping to 7.7% from 7.8% in the third quarter, and the trend could be continuing into this year. A gauge of factory-level activity–the HSBC Purchasing Managers’ Index—showed contraction in January from December, falling to its lowest level in six months.

The measure of manufacturing activity gives considerable weight to smaller, private companies, the ones that most likely to be vulnerable to any upward move in borrowing costs. The state-dominated banking system has traditionally taken care of the state sector first.

Shen Jianguang, economist at Mizuho Securities Asia, said rising interest rates on the interbank market have taken a toll on the nation’s smaller companies, which are having more trouble getting bank credit. It’s time for the government to step in and offer them some help, he added.

“Interest rates have been moving higher, and smaller enterprises are feeling the effects,” he said.

The cash squeeze, partly due to seasonal factors and the central bank’s tighter credit stance, pushed up interbank rates dramatically in June and then again in December. In June, the overnight rate briefly spiked to 30%, and in December the seven-day rate touched 10%. Rates for both durations have since come down to around 5%, but that is still above the 3% level seen in April last year.

Not everyone is convinced that the elevated interbank rates are having a major impact on corporate borrowing just yet.

Zhu Haibin, economist at J.P. Morgan, insists there has only been a “partial pass-though” of these elevated interbank rates to corporate borrowers. “Interest rates are not fully market-based,” he said, referring to the central bank’s guiding role in deposit rates as well as other curbs on lending.

An official at a major trust firm said interest rates on trust loans–generally medium-term credits–have held relatively steady at about 12% during and after the latest cash squeeze.

Executives at small businesses maintain that the key problem is not the interest rate on borrowings but rather the difficulty in getting any bank credit at all. A partner at a small, private firm based in Changsha in Hunan province said his company had been trying to get financing to buy a coal mine but was unable to obtain any bank after the first cash squeeze in May and June. Ultimately, the company obtained an 80 million Hong Kong dollar (US$10.3 million) loan through Hong Kong, he said.

HSBC economist Ma Xiaoping said banks have generally preferred to sacrifice some of their profits rather than antagonize customers just as competition for business in the market heats up. The loan prime rate–an average of the lending rate banks offer to their best customers–has moved up marginally, advancing to 5.73% from 5.71% when it was introduced in late October.

But the banks’ willingness to take on the bulk of the additional funding costs is unlikely to continue indefinitely, said Ms. Ma, adding: “The impact will show up sooner or later.”

So far the big domestic banks–with a much wider deposit base than smaller banks–haven’t had to worry too much about the higher cost of funds from the interbank market. With their bigger branch network, they can rely on an ample supply of lower-cost deposits—which pay only a maximum of 3.3% for one-year funds.

This means that a large slice of bank lending has a substantial cushion from higher interbank funding costs, analysts said.

“We don’t see much impact at this point,” said Hu Kai, senior analyst for corporate finance at Moody’s Investors Service. “But we are watching this.”

–William Kazer and Liyan Qi

Follow @ChinaRealTime on Twitter for the latest updates.


China eases credit squeeze with lots of cash and surprising transparency

* Abrupt rate rise prompts central bank to inject cash

* PBOC telegraphs injection, suggests better market signalling

* Cash crunch risks undermining IPO resumption

* Regulators creating pilot to help small banks directly

By Pete Sweeney

SHANGHAI, Jan 21 (Reuters) – China’s central bank moved to head off another destabilising cash squeeze on Tuesday with a big injection of cash – flagged in advance in a surprising act of transparency to relieve anxious markets.

Faced with an abrupt rise in benchmark interest rates on Monday, which saw the benchmark seven-day repo rate quoted as high as 10 percent at one point, the People’s Bank of China (PBOC) announced it had provided an unspecified amount of emergency cash directly to some banks through its short-term lending facility (SLF).

It also committed to injecting money into the financial system during regularly scheduled open market operations on Tuesday – an unusual behavioural change for the central bank, which usually remains cagey about such plans.

As good as its word, the PBOC dumped 255 billion yuan ($42 billion) into the interbank market, the first injection since Dec. 24 and the largest amount in one day in 11 months.

The central bank also set up a lending facility specifically for smaller banks, who often complain they are squeezed out of the interbank market by bigger players.

“We think these are significant steps by the PBOC,” said Zhang Zhiwei, China economist at Nomura in Hong Kong.

“These announcements suggest that the central bank is very concerned about potential liquidity risk in the interbank market leading into the Lunar New Year holiday period, as well as the financial risks in small banks,” he wrote in a research note.

Following the central bank actions, benchmark rates eased sharply on Tuesday and several bond auctions by the China Development Bank went smoothly, pricing below expectations.

Stock markets were also relieved, with the benchmark CSI300 Index closing up nearly 1 percent on the day.

But money dealers remained cautious. They said cash withdrawals as Chinese prepare for the Lunar New Year holidays in the first week of February and planned initial public offerings (IPOs), which require potential investors to lock up cash, could apply upward pressure to rates in the absence of fresh fund injections by the PBOC.

Markets are also jittery over whether a 3 billion yuan mining trust loan, underwritten by China Credit Trust, will be allowed to default at the end of the month.


Chinese regulators want to move the country away from a credit-intensive growth model without putting short-term economic stability at risk, but volatility in the interbank lending markets show the difficulty they have in striking a balance.

“The PBOC is committed to deleveraging and reform but it has to tread cautiously,” said a former central bank researcher, who spoke on condition of anonymity.

“Tightening money and credit conditions could put more pressures on the economy, and higher borrowing costs could erode profit margins of manufacturers and hurt the real economy.”

By refraining from injecting cash into the country’s interbank market – the funding pool commercial banks often use to cover risky credit bets – the PBOC has effectively engineered a sustained rise in short-term interest rates.

But by doing so, it has also set off a series of panic attacks in the market.

Last June, short-term rates jumped as high as 30 percent as domestic media circulated reports of panicking bankers and cash machines running dry. A less dramatic rise in rates occured in December.

The cash crunches hit Chinese stock markets, which are particularly sensitive to liquidity conditions, creating a headache for the China Securities Regulatory Commission (CSRC), which is trying to restore investor confidence in stock markets to serve as a viable alternative to bank lending.

The January rate rise was of particular concern because it risked setting off a stock market slide just as the long-frozen IPO market was being revived.


The PBOC was publicly criticised during the cash crunches in 2013 for not clearly communicating with the market, causing retail investors to overreact. Monday’s announcement telegraphing its intention to inject funds appears to have been a small step in addressing that criticism.

However, central bankers have repeatedly and publicly defended their behavior by arguing that there is plenty of liquidity available in the system. If banks managed their cash supply better, that money would be available, they said.

Some traders said Monday’s announcement was a step away from this hard-line position, pointing to the PBOC’s commitment that it would create regional SLF centres around China to directly deliver cash to smaller stressed banks.

This would address a common complaint from traders at smaller banks that the big four state-owned banks abuse their mass and market influence to bully smaller entities into paying exortionate rates for short-term cash, even when they have plenty of cash to hand.

“It appears the central bank feels major banks have not done a good job in offering funds to smaller rivals, so it now wants to do itself,” said a trader at a joint-stock bank in Shanghai.

On the other hand, economists point out that the smaller banks, which are particularly hungry for profits, tend to be far more deeply engaged in the kind of speculative lending, or shadow banking, that the PBOC is trying to suppress or redirect.

Industrial Bank, Minsheng Bank , and Ping An Bank are the most vulnerable to rising interbank rates due to their heavy reliance on short-term interbank borrowing, Michael Werner, China banks analyst for Bernstein Research, wrote in a note to clients in November.

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