Business / Opinion

Historic shift in China's banking

By Lu Zhengwei (chinadaily.com.cn) Updated: 2014-01-24 16:59

In the meantime, we predict the market may still see the constant fluctuation of interest rates, although the thresholds could help avoid cash rate spikes.

Third, the expansion of its standing lending facility will benefit the bond market in the long run despite short-term shocks.

Historically speaking, the current thresholds of interest rates are relatively high and have rarely been exceeded. In this sense, the thresholds could be mainly used to stabilize people's expectations.

The central bank never sent a clear signal like this before, leaving a wide-open money market with "endlessly" soaring interest rates. Now, however, the bond market could see a diminishing yield return as it approaches the rate ceiling.

The target rate of the SLF set by the PBOC will form the ceiling of interbank lending in the currency market, which is regarded as an innovative tool for regulating the money market.

It also clearly shows the ceiling in the bond market. The demand for government bonds, central bank bills, and financial bonds will increase because they can be used as collateral for the SLF. Government bonds will therefore see lower returns in the future due to increased demand.

Because of the different leverage rate, the popularity varies among government bonds, policy bank financial bonds and high-grade corporate bonds. Government bonds, central bank bills and policy bank financial bonds could probably be given a better leverage rate, especially government bonds.

Furthermore, encouraging corporate financial institutions to file their collaterals before applying for the SLF could largely increase the percentage of government bonds in their portfolio. Therefore, yields for government bonds will decrease further in the future as demand increases.

The PBOC's SLF operations are still experimental. The move, according to the central bank, is to "ensure money supply in local financial institutions" as depositors start withdrawing cash ahead of the Chinese Lunar New Year.

Still, it is expected to remain in effect with improvements after the major holiday.

The author is head of Financial Market Research and chief economist at Industrial Bank Co Ltd. The views do not necessarily reflect those of China Daily.

 

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