July 14 - Chinese financial regulators have issued guidance to a number of banks prohibiting them from carrying out bill re-discount operations at rates below 0.5%, people with knowledge of the matter said. The action is part of efforts to restrain aggressive buying in the bill market that grew amid weak demand for traditional loans.
In recent months, re-discount rates for bills dropped significantly as banks, faced with a shortage of willing borrowers in a slow economic cycle, increased purchases of commercial bills to meet lending targets and to place surplus liquidity. Market participants reported that re-discount rates near month-end occasionally fell to 0.01%.
One source described the tighter oversight as a reaction to the rapid and steep decline in bill rates when banks purchased large volumes of bills, a development that regulators felt undermined attempts to shape market expectations. Another person familiar with the guidance said regulators may worry that volatile swings in bill rates are being interpreted by market players as signals about the health of credit growth.
All of the individuals spoke on condition of anonymity because they were not authorised to discuss the matter with the media. The Shanghai Commercial Paper Exchange did not immediately respond to a request for comment.
Last month, the central bank instructed some commercial banks to step up lending efforts, reflecting concern that demand for credit remains subdued. Separately, new bank lending in China rose by less than anticipated in May after contracting the month before, with a prolonged downturn in the property sector continuing to depress household borrowing.
Context and implications
The guidance not to re-discount below 0.5% aims to slow the prevalence of ultra-low pricing in the bill market that emerged as banks searched for safe, short-term assets when traditional lending opportunities were scarce. Regulators' intervention signals an intention to prevent market practices that might distort price signals related to credit conditions.
Given the anonymous nature of the sources, details on the scope and duration of the guidance were not available. Regulators' concerns as described by the sources center on the rapidity of rate declines and the potential for market interpretation of those moves to fuel speculation about overall credit growth.
While the guidance affects bill market operations directly, its implications touch broader areas of financial intermediation, including bank balance-sheet management and the transmission of monetary signals into lending behavior.