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

SHANGHAI: 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 targets.

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. — Reuters