Chinese financial regulators have issued instructions to select banks prohibiting them from carrying out bill re-discounting transactions at interest rates below 0.5%, according to sources who spoke with Reuters on Tuesday. The directive reflects growing regulatory concern over aggressive activity in the bill market driven by sluggish loan demand.
The crackdown follows a sharp drop in bill re-discount rates in recent months. With few willing borrowers in a slow-moving economy, banks have been turning to the bill market as a way to fulfill lending quotas and put excess cash to work. Traders have noted that rates as low as 0.01% were not unusual, particularly near the end of each month.
One source explained that the heightened oversight was prompted by rates falling too quickly and too steeply when banks moved to purchase bills in large volumes — a trend that was working against regulators’ attempts to shape market expectations.
A separate source indicated that regulators may also be worried that dramatic swings in bill rates were giving the market a way to speculate on the overall condition of credit growth in the country.
All sources asked not to be identified, as they were not authorized to speak publicly on the matter. The Shanghai Commercial Paper Exchange did not respond to a request for comment.
Reuters reported last month that China’s central bank had directed certain commercial banks to ramp up their lending activity — a signal that credit demand remains soft. That concern was reinforced by data showing that new bank lending in May came in below expectations, following a contraction the prior month, as an ongoing slump in the property sector continued to drag on household borrowing.
