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Asia Markets
Dash for Cash Squeezes China's Money Market
From the Wall Street Journal of Thu, 18 Dec 2014 06:24:27 EST
Short-term borrowing costs in China soared Thursday amid growing demand for cash ahead of coming IPOs.
Short-term borrowing costs in China soared Thursday amid growing demand for cash ahead of coming IPOs. Reuters

SHANGHAI—Short-term borrowing costs in China soared Thursday as demand for cash surged due to a number of new stock offerings and the year-end shopping spree.

A recent ruling that bans the use of lower-grade corporate bonds as collateral for loans, once a key source of funding for many institutional investors, has also intensified the scramble for funds.

The cash squeeze is putting the country’s financial system under renewed stress, though so far it hasn’t spread to other sectors such as stocks or the bond markets. The money markets in China have grown dramatically in recent years, with smaller banks especially vulnerable to the higher borrowing costs as they’re most reliant on the interbank market for cash.

The weighted average of seven-day repurchase agreements, or repo, a benchmark for short-term funding costs in China’s money market, rose to 5.27% from 3.89% Wednesday and 3.53% at the beginning of this week. However, the level remains well below the 12% peak that it touched at the height of the unprecedented cash crunch that China suffered in the summer of 2013.

“The upcoming IPOs is the most important reason behind today’s funding squeeze. The usual year-end thirst for cash also is also playing a part,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co.

A dozen companies, including broker Guosen Securities and budget carrier Spring Airlines, are raising a total of $2.2 billion over the next few weeks from domestic stock listings. They are set to take orders for their offerings between Dec. 18 and Dec. 23.

Investors’ enthusiasm about the new IPOs was even more evident in the smaller funding market on the Shanghai Stock Exchange, the bigger of China’s two exchanges.

The weighted average of the seven-day repo on the Shanghai market, where investors use exchange-listed bonds as collateral for short-term borrowing, soared to 12.20% from 10.60% Wednesday. It stood at 6.80% Monday.

Such one-off factors aside, the recent strong rally in China’s stock market and a fresh move by Beijing to rein in growing risk in the corporate bond market are having a more lasting impact on the supply of funds, Mr. Wang said.

China’s securities clearing house last week banned the use of lower-grade bonds, mostly issued by cash-strapped local governments and small firms, as collateral for short-term borrowing between investors.

Faced with a slowing economy, Beijing is grappling with rising risk in its financial system, including poorly regulated informal lending channels, a rapid increase in corporate debt and deteriorating fiscal conditions of regional governments as the property market weakens.

The new ruling has led to a selloff in such bonds and forced many investors to seek fresh funding in the money market, analysts said.

According to estimates by Shenyin & Wanguo Securities Co., the total value of corporate bonds disqualified as repo collateral under the new rule exceeds 1.25 trillion Chinese yuan (US$201 billion), or 60% of all outstanding corporate bonds listed on China’s two stock exchanges.

“At the same time, the red-hot stock market is also diverting funds away from fixed-income products,” Mr. Wang said.

The Shanghai market closed virtually flat Thursday, after producing a 45% gain this year.

Write to Shen Hong at

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