Chinese interbank lending rates spike on demand for liquidity

Lending rates in China spiked on Thursday as demand for liquidity was boosted ahead of a raft of upcoming initial public offering (IPOs) next week, a day after Beijing announced new measures to loosen credit to lower bank funding costs.

The benchmark seven-day repurchase rate, a gauge of funding costs, ended the session 21 basis points higher but at one point in the day spiked by as much as 200 basis points, to 5.2%.

The National Interbank Funding Center was forced to extend its trading hours by 30 minutes, closing at 17:00 in Shanghai today. Demand for funds was made worse by 50bn yuan in Treasury deposits maturing on Wednesday.

“Some institutions were facing difficulties to meet their funding demands today,” said Lin Yijian, an analyst at Guangzhou Rural Commercial Bank, quoted by Bloomberg. “Liquidity will continue to be tight through to next week.”

On Wednesday, China's State Council announced a raft of new measures to loosen credit to lower bank funding costs and make IPOs easier.

The Council revealed new measures to loosen bank requirements on loan-to-deposit ratios and the management of loan quotas, as well as measures to prevent high interest rates, plus new government support for cross-border financing to take advantage of lower funding costs overseas.

A Morgan Stanley note on Beijing's new credit loosening policies, said "Lower real rates will help. Policy makers have and will continue to introduce more targeted measures to lower funding costs, including credit easing. While the yield curve has shifted down notably in recent months with the help of PBOC’s targeted easing measures through MLF, bank’s lending rate remained elevated."

Analysts said they expect looser financial conditions to help all sectors, not just the small and medium enterprises (SMEs) and agriculture areas targeted, and added that they believed the likelihood of a universal reserve requirement ratio or interest rate cut is "low in the near term".

"In addition to policy easing in the property area, we believe lower funding costs for mortgage borrowers and developers will boost property investment growth towards 1Q2015. Consequently, policy makers will unlikely evoke the rate cut measure against a stabilizing environment."