24 May 2019
The PBoC will allow existing long-term NCDs to run their course until maturity, in order to prevent new debt burden for banks. Photo:
The PBoC will allow existing long-term NCDs to run their course until maturity, in order to prevent new debt burden for banks. Photo:

New rules show deleveraging remains policy direction

Chinese financial institutions will not be allowed to issue interbank negotiable certificates of deposit (NCDs) exceeding one year from Sept. 1, the People’s Bank of China (PBoC) said in a statement released on Aug. 31.

This can be seen as the latest sign that financial deleveraging remains the policy direction.

Meanwhile, existing long-term NCDs would be allowed to run their course until maturity.

I believe the reform of the NCDs has two main reasons. First, the certificates are supposed to be used to help banks manage short-term liquidity and therefore long-term NCDs might be misused by some financial institutions as wealth management or other interbank asset management products, which is Beijing’s policy direction.

The tighter scrutiny of NCDs is aimed at strengthening the regulation of the interbank business, steering money into supporting the real economy rather than being manipulated within the financial industry. In fact, some banks have used NCDs aggressively to raise money to invest in higher-yield but risky instruments.

Second, the central government intends to close a regulation loophole. The PBoC said it would add NCDs with tenor of less than one year when it calculates bank’s liabilities in its regular assessment.

The move will prevent banks from issuing NCDs with tenor of more than one year to replace NCDs maturing within a year, thereby circumventing the rule.

In fact, the PBoC issued a notice to regulate interbank lending jointly with the China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission and State Administration of Foreign Exchange in April 2014.

It stressed that financial institutions should confirm the duration of financing prudently. And interbank lending issued must be no longer than three years in duration, and other interbank financing should have a duration of no longer than one year.

The latest move echoed the previous statement. The PBoC also offered some flexibility by allowing existing long-term NCDs to run their course until maturity, in order to prevent new debt burden for banks.

In the meantime, there are about 140 billion yuan of longer-than-one-year certificates, which represent a small portion of total issuances. Therefore, the new policy would have a limited impact.

Chinese authorities have been encouraging companies to use multiple funding channels to reduce their debt level, instead of adding leverage for expansion. SOEs will be first targeted, and their financing activities will be under tight scrutiny in the future.

I believe the employee stock ownership plans at state-owned enterprises and mixed-ownership reform in SOEs will make some progress. Also, the authorities would push ahead with debt-to-equity swap programs and strengthen oversight of the debt levels of corporates.

In fact, the central bank continues to drain liquidity from the market as the interbank money rate spiked. It shows that the central bank is keen to maintain a tightening bias.

China’s Shibor is likely to hover at high levels this month given that a large amount of NCDs will mature in September and banks prepare for a rigorous quarterly inspection of their books by the central bank at the end of the quarter. In that sense, investors should not anticipate any monetary easing in the near term.

This article appeared in the Hong Kong Economic Journal on Sept. 4

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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