China bill yields plunge as banks ‘window dress’ loan books

SHANGHAI, May 23 (Reuters) – Slowing economic growth in
China and anaemic demand for loans has sparked heavy buying of
low-risk short-term financial instruments by lenders, pushing
yields near zero, as banks seek to meet internal lending

Strong demand for banker’s acceptance bills – debt
instruments guaranteed by banks – has pushed yields on one-month
bills to an average of less than 1% and as low as 0.04% since
the beginning of Shanghai’s COVID-19 lockdown in late March,
according to data from the Shanghai Commercial Paper Exchange.

That compares with an average yield of 2.07% during the
first three months of the year. It is also well below banks’ own
interbank borrowing cost of around 2%.

The surge in demand for short-term instruments reflects a
quirk of Chinese regulations, by which banks’ commercial paper
holdings are counted as short-term lending, said Raymond Yeung,
Greater China chief economist at ANZ.

“This allows banks to ‘window dress’ their loan books by
purchasing banker’s acceptance bills so that they can meet the
loan targets,” he said.

A loan officer at a state bank said meeting banks’ internal
performance metrics for average daily volume and month-on-month
increases in lending has become increasingly challenging as
widespread lockdowns in Shanghai darken an already gloomy growth
outlook for the world’s second-largest economy.

“There is especially a lot of pressure to meet targets on
loans to private firms. But where on earth can we find so many
good projects? In order to meet targets, the only way is to buy
bills, even if yields are low,” he said.

While commercial paper financing contributed to most of the
fresh corporate loans extended in April, overall new lending in
China plunged about 80% from March, and hit the lowest in nearly
4-1/2 years.

The authorities have taken steps to support hard-hit sectors
of the economy and encourage lending, but lockdowns have eroded
the effectiveness of easing and muted demand more than supply,
said Robin Xing, chief China economist at Morgan Stanley.

“In a normal year without COVID, it takes about three to six
months until easing measures have a strong, clear pass-through
to broad-based activities,” Xing said. “But this year, given the
lockdowns, the pass-through will be longer.”

The increasingly common practice of buying bills to meet
loan targets has already sparked criticism from banks and
exchange officials.

Such activity is the main contributor to trading volatility
in the commercial paper market, and creates a disconnect between
prices of commercial paper and other similar assets, Xie
Jinglei, an official at the monitoring department of the
Shanghai Commercial Paper Exchange, wrote in a paper posted on
the exchange website.

Guo Xinqiang, vice manager of Zheshang Bank’s commercial
paper business, said in a working paper that adjustments are
needed to curb the practice, as banks buying commercial paper on
the secondary market does not channel money into the real

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

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

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