China Markets Show Anxiety Over Looming $380 Billion Funding Gap

(Bloomberg) -- A looming liquidity shortage is challenging China's efforts to keep borrowing costs low amid the economic fallout from the global pandemic.

At least 2.7 trillion yuan ($380 billion) of cash will evaporate from the nation's financial system next month as short-term bank debt and policy loans mature, according Bloomberg calculations. That puts pressure on the central bank to add to recent easing measures without fueling bubbles, and may otherwise accelerate a slide in government debt. The central bank on Friday said it would inject 300 billion yuan into the banking system using short-term instruments, adding to similar moves earlier in the week.

The prospect of tighter liquidity is already adding stress to the money market. The overnight repurchase rate -- an indicator for interbank borrowing costs -- almost tripled over the past two weeks, while the seven-day tenor almost doubled during the period. The yield on 10-year government bonds climbed 12 basis points to 2.7% this week.

Chinese businesses face growing uncertainty both domestically and abroad due to the global economic shutdown as well as escalating tensions with the U.S. While Chinese authorities have cut policy rates multiple times this year, they've avoided the large-scale stimulus seen in other major economies to avoid aggravating the country's massive debt problem.

“The second half of June will be very difficult for banks, which will face more volatile, unpredictable and higher borrowing costs,” said Xing Zhaopeng, a market economist at ANZ Bank China Co. “Beijing will likely cut the reserve-requirement ratio or the rate on medium-term policy loans as soon as next week.”

Here's a look at the factors that will drain cash in June:

• Some 740 billion yuan of China's medium-term lending facility will come due, with 500 billion yuan maturing on June 8 and another 240 billion yuan on June 19th
• Nearly 1.4 trillion yuan of negotiable certificates of deposit -- a kind of short-term bank debt -- will mature in June
• Lenders will buy 100 billion yuan of notes sold by the central government and another 500 billion yuan issued by local authorities on a net basis in June according to Citic Securities Co. -- and will need to set aside cash to do so
• Banks will hoard cash to meet the demand for regulatory checks by the end of June
• Banks will need money to buy special government bonds, the auction date and amount of which is currently unknown

In a government work report delivered last week, the Chinese government abandoned its decades-long practice of setting an annual target for economic growth and widened its targeted budget deficit it to more than 3.6% of gross domestic product.

The People's Bank of China is likely to inject liquidity via further reserve-ratio cuts “by as much as 100 basis points over the next couple of weeks,” according to Nomura International Ltd. That would be the nation's third such reduction this year, following a broad cut in January and a targeted one in March.

“Due to the liquidity pressures, short-end government yield will likely increase while the room for back-end rates to rise is relatively limited,” Tianfeng Securities Co. analysts led by Sun Binbin wrote in a note. The PBOC will likely reduce the reserve-requirement ratio to ensure ample cash supply, they added.

©2020 Bloomberg L.P.

With assistance from Bloomberg