Chinese banks are set for a liquidity test in June as they face record debt maturities and a potential exodus from deposits.
The lenders are on the hook to repay a record 4.2 trillion yuan ($751 billion) of negotiable certificates of deposit, which are short-term debt instruments, next month. That comes at a time when regular savings deposits are shrinking as interest rate cuts prompt investors to turn to products with higher returns, with some analysts projecting the withdrawals to reach trillions of yuan.
While a reduction in deposit rates helps redirect savings into investment and spending to curb downside to the economy, any cash crunch at banks caused by this dynamic could spark volatility in the money market. It would also put policymakers on alert to smooth out funding conditions, especially as June marks the end of the quarter.
“Liquidity stress and money market volatility is set to increase in June as investors may withdraw deposits from banks to re-allocate funds into wealth products, leading to instability in banks’ liability,” said Lv Pin, chief fixed income analyst at Topsperity Securities.
Major Chinese banks trimmed deposit rates across maturities this month to preserve their shrinking profitability, after China cut its policy rate in a bid to support the economy contending with a second trade war with the US. Rates on demand deposit, for example, edged closer to zero, which may deter investors from parking idle cash in such instruments.
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“We are expecting about 1.5 trillion yuan of deposits to be further withdrawn and reinvested into wealth products, and banks will come under similar stress seen in the second quarter last year,” said Xu Yongbin, co-chief investment officer of U-Shine Private Equity FD Mgt Co.
A record 3.9 trillion yuan of deposits flowed out of banks in April 2024 amid China’s efforts to bolster the economy by reducing the allure of bank deposits. Officials also imposed rules to restrict lenders from competing for deposits by offering extra rate premiums back then.
Growing jitters
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The costs of banks’ NCDs have risen recently, reflecting growing jitters in the money market. The yield on one-year NCDs sold by China’s top rated banks climbed to the highest in three weeks.
Any sharp increase in these costs could prompt the People’s Bank of China to step up its liquidity injections. The central bank has already raised one-year fund injection to banks in a monthly operation and lowered the amount of cash banks need to keep in reserve in May.
The yuan’s stability is also likely to lower the bar for any potential cash injection by the PBOC as such a move would otherwise weigh on the currency.
“Despite market concerns on liquidity in June, we think the PBOC might be active in liquidity provision using various tools, now that yuan’s depreciation has eased,” Mary Xia, head of research at Beijing Jifeng Fund Management.
Chart: Bloomberg
