Near zero interbank lending due to pressure from China

The cost of some types of short-term interbank lending fell to almost zero last week as China’s monetary policymakers are pushing banks to lend more to give a boost to slowing economic growth. But corporate demand for loans remains weak.

The annualized interest rate that Chinese banks paid to borrow from other banks that use corporate instruments as collateral fell to almost zero from more than 2% in November, according to data from the Shanghai Commercial Paper Exchange.

According to analysts, this decline indicates that banks are struggling to increase their loans to companies as requested by the central bank, and therefore are boosting loans between themselves by swapping those instruments.

With the economy slowing, the central bank recently began trying to boost credit growth after trying to limit leverage for most of the year, vowing last week to ensure stable credit expansion. However, with the housing crisis continuing and economic activity slowing, the real economy is likely to take some time to respond.

“The fact that bond trading rates fell sharply for a month in a row to around zero shows that the demand for business loans in December is significantly lower than the credit extension target.“, He said Lv Pin, Analist of Changjiang Securities Co.

Instead, banks are trying to inflate credit growth figures by negotiating with each other on bank acceptances, he said.

Bank acceptances are a promissory note issued by Chinese companies in exchange for short-term bank loans. These can be traded on the secondary market, and the banks that hold the bonds use them as collateral to borrow money from other banks and pay an interest rate that depends on the duration of the loan and also on who guarantees the promissory note.

Buying acceptances is counted as an extension of a loan and therefore helps banks meet their loan installments, according to analysts including Wang Yifeng from Everbright Securities Co.

For loans based on bank acceptances due in one to three months, the interest rate fell below 0.01% on December 23, data from the Shanghai Commercial Paper Exchange showed. Those rates were the lowest on record, according to data compiled by Changjiang Securities.