China lowers SHIBOR to clear debt pile

CAPPING RATES::The Shanghai interbank offered rate has plunged 200 basis points since March 31 to attract buyers as local governments stepped up bond issuances


Tue, May 26, 2015 - Page 15

The Chinese government needed lower borrowing costs to clean up a local debt mess. The central bank obliged.

The three-month Shanghai interbank offered rate (SHIBOR) has tumbled 200 basis points since March 31, heading for the biggest two-month drop since 2008. That coincides with the government commencing a municipal bond program and the exchange of regional loans into lower-yielding notes.

Jiangsu Province and Xinjiang Autonomous Region both sold three-year debt for less than 3 percent last week, almost matching the sovereign, after the start of issuance was delayed last month.

People’s Bank of China (PBOC) Governor Zhou Xiaochuan (周小川) has accelerated monetary easing just as local authorities started issuing more than 1.77 trillion yuan (US$286 billion) in bonds, a four-fold jump from last year. Banks are the biggest buyers of government debt and will have more appetite for the securities as loan rates decline.

Local-government obligations may have reached 25 trillion yuan, more than the size of Germany’s economy, Mizuho Securities Asia Ltd estimates.

“The central bank will do everything it can to make sure the municipal bonds are sold at low cost,” Shanghai Yaozhi Asset Management LLP chief operations officer Wang Ming said. “If rates rise because of the increased supply, leading to even higher costs than previous borrowings, what would be the point of the debt swap? So rates will be capped.”

Interbank borrowing costs remained stubbornly high even after the PBOC cut the one-year deposit rate to 2.25 percent from 3 percent since November, and lowered major lenders’ reserve-requirement ratio to 18.5 percent from 20 percent. Three-month SHIBOR was 4.9 percent until the end of the first quarter, before sliding to 2.9 percent yesterday.

Banks cut borrowing costs as it became clear that money-market rates would remain low. The seven-day repurchase rate, which is influenced by PBOC activities, averaged 2.18 percent this month and 2.87 percent last month, down from 4.49 percent in March. The central bank rolled over lending facilities and refrained from carrying out operations to halt the decline.

“The expectation for interbank liquidity to stay loose in the foreseeable future gives banks the incentive to lend out longer funding,” said Becky Liu (劉潔), a senior rates strategist at Standard Chartered PLC in Hong Kong. “It is much needed under the current environment to ensure local government bond issuance can go smoothly. The rate is likely to fall further.”

Another reason for falling interbank rates is the slowdown in capital outflows that has left finance firms with ample supplies of yuan.

Chinese banks sold a net 106.2 billion yuan of foreign exchange last month, compared with a deficit of 406.2 billion yuan a month earlier, State Administration of Foreign Exchange data show. The yuan rose 0.1 percent last week to 6.1976 a dollar. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major peers, declined 3 percent last month, the biggest monthly drop since 2011.

“The capital outflows moderated thanks to a stall in the dollar’s advance,” said Xie Yaxuan, Shenzhen-based chief economist at China Merchants Securities Co (招商銀行). “We expect cross-border flows to continue improving.”