The People’s Bank of China will carry out the first macro-prudential assessment (MPA) with the inclusion of negotiable certificates of deposit (NCDs) at the end of this quarter. China Securities Journal reporter noted that as of the assessment is coming, outstanding NCDs are rising instead of decreasing. The scale of NCDs even hit a record high in the first half of the month. Large state-owned banks which used to be reluctant in issuing NCDs are much active this year. Experts and employees from banks said that as financial deleveraging deepens, the issuance of NCDs will be restricted.
Outstanding NCDs expanded
Data from the People’s Bank of China shows that as of the end of 2017, outstanding NCDs recorded 8.03 trillion yuan, down 0.41 trillion yuan from its peak in August 2017. Data from Shanghai Clearing House shows that since the beginning of this year, outstanding NCDs have been rising, and reported 8.69 trillion yuan as of March 28, a relatively high level in history.
Xu Chengyuan, chief analyst with Golden Credit Rating International Co., Ltd., believes that three factors can explain the rise. Firstly, with significant debt pressure, commercial banks still have to rely on NCDs for funding. Secondly, the rate of NCDs decreased since the beginning of the year. The decline in debt costs gives a driver for commercial banks to issue NCDs. Thirdly, the duration of NCDs have increased slightly. The proportion of 3-month and 6-month NCDs rises.
Data from Shanghai Clearing House shows that NCDs issued in January amounted 1.43 trillion yuan, that in February were 1.48 trillion yuan and that in March as of March 28 were 2.24 trillion yuan.
Zhao Xue, researcher with BOC International Financial Research Institute, said that the recent expansion of NCDs has something to do with banks’ liquidity management. As the end of the first quarter is coming, banks that are under debt pressure use NCDs to supplement their balance sheet at the time when deposits are declining rapidly. On the other hand, the decline of NCDs rate is another factor.
Industrial Research analyst He Jinjin said that NCDs expanded remarkably in the first half of the month. On the one hand, more than 1.88 trillion yuan worth NCDs come due in March. On the other hand, banks want to attract cross-quarter fund in advance before rates go high at the end of the quarter. In addition, large state-owned banks also become major issuers.
“Starting from last week, the net amount of financing in the primary NCDs market decreased sharply.” He Jinjin pointed out that except large state-owned banks, the amount of financing made by other types of banks went down greatly.
Large state-owned banks more passionate in NCDs issuance
“One of major reason for the rising outstanding NCDs in March was that large banks and joint-stock banks piled up issuance,” said Tang Lihua, research with Hengfeng Bank Research Institute. “Particularly, the issuance made by large banks increased significantly both on a monthly and yearly basis. That made by mid and small banks, including urban and rural commercial banks continued to shrink.”
Before actions were taken to cut leverage and strengthen financial regulation, a large amount of NCDs in the interbank market were issued by joint-stock banks, or urban and commercial banks. Chen Qi, senior researcher with BOCOM Financial Research Center, said that large banks have advantages in obtaining funds from the central bank. In the interbank market, large banks usually play the role as lenders; while medium and small banks are borrowers.
“The proportion of NCDs issued by big banks has increased since 2018, while that of joint-stock banks, urban commercial banks and rural commercial banks decreased. It is very likely that the proportion structure will show trending change.” Chen predicted that there might be slight change in the roles of big banks and small and medium banks that they play in interbank market in the future and the direction where capital outflow may change.
“State-owned banks, which issued NCDs in a small number before, have enhanced the issuance significantly since early this year, and the proportion continues to climb.” He Jinjin though that it was caused by the pressure of their liabilities. As they can meet requirements for the proportion of interbank liabilities, they can continue to gain capitals via issuing NCDs. On the other hand, it may be the result that they have to prepare for making break even and conducting wealth management through issuing NCDs in advance to the implement of new rules about assets management.
Structure of assets and liabilities needs to be optimized
Supervision over NCD has been getting tightened since financial deleveraging at the end of 2016. A series of new policies like MPA assessment, rules of making record for NCDs and rules about liquidity prevented further expansion of issuance of NCDs. Industry insiders predicted that growth in issuance of NCDs may slow down in 2018 but won’t see cliff fall.
Many banks have taken measures specific to filing for NCDs. According to statistics from Wind, as of now, 456 banks have released their 2018 plan about issuing NCDs with joint-stock banks still playing an important role in NCD issuance.
But some banks intend to expand the issuance. Bank of Communications plan to issue another 250 billion yuan of NCDs when compared with that in last year. Bank of Beijing and Bank of Nanjing raise the issuance by 50 billion yuan and 40 billion yuan from that of last year, respectively. Tang Lihua said that “as borrowing costs of the whole industry would like to increase this years. At the same time, some banks face pressure from interbank deleveraging. Under the pressure of management of overall liquidity risk, some banks have plans of increasing NCD issuance.”
Ming Ming, chief fixed income researcher of Citic Securities, indicated that the government intended to introduce NCDs in 2013 as a step toward liberalizing interests, but the market turned it into a weapon for arbitrage over practice in last three years. Its actual usage deviated from the initial theory. But this deviation has been turned back on the right track after one year of correction. NCDs without property of arbitrage will be only an ordinary tool for commercials banks to undertake debts in the future.
As regulators didn’t completely restrict NCDs issuance, He Jinjin predicted that the issuance scale of NCDs won’t decrease sharply. The key is that banks need to make the expansion within regulation and match the growth of overall liabilities so as to ensure liabilities stable.
Tang Lihua said that some small and medium banks which are faced with heavy pressure need to re-adjust structure of their assets and liabilities and end the excessive dependence on NCDs. They should consolidate deposit foundation, broaden channels of liabilities, strengthen comprehensive liability ability and cope with pressure from liquidity risk management.
Recently, senior managers from banks remarked that banks should lead interbank business back to their origin. Zhao Huan, head of Agricultural Bank of China, said that they should practice new regulation rules. Liu Xiaochun, head of China Zheshang Bank, indicated that banks should have mutual exchange and adjust liquidity for interbank business in the future.
(By Coral & Vanessa)
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