Friday, 16 January 2009

Foreign Banks Back in China Interbank Market

Chinese lenders less nervous, market flush with funds

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Guanyu said...

Foreign Banks Back in China Interbank Market

Chinese lenders less nervous, market flush with funds

Reuters
15 January 2009

(SHANGHAI) Foreign banks are resuming trade in China’s interbank lending market as jitters over the global financial crisis ease, and as loose monetary policy leaves the market flush with funds, traders said yesterday.

Many foreign banks had largely been shut out of the interbank lending market since late September last year after the global crisis made Chinese banks, which feared counterparty risks, reluctant to lend to them.

That forced some foreign banks to cut back on trading in China’s money markets as they struggled to obtain funds from other sources, such as sales of their holdings of central bank bills and borrowing from the short-term bond repurchase market.

But in the last few weeks many foreign banks have again become able to borrow overnight from Chinese banks, and in recent days, they have even resumed longer-term borrowing for periods of up to one month, traders said.

‘Chinese banks have resumed lending to foreign banks because of an easing of market worries about the global environment, and since Chinese government policy is to encourage a level playing field for foreign and local banks,’ said Frances Cheung, fixed income analyst at Standard Chartered Bank in Hong Kong.

Although global markets still worry about shrinking economic growth, government rescue operations have apparently made them less fearful of a collapse of the banking system.

The two-year dollar swap spread, a gauge of counterparty risk, was quoted at 55.75 basis points in Asia last Friday, more than 100 basis points off its peak in October last year. Spreads are near their tightest levels since August 2007, when the US sub-prime mortgage collapse was still in its early stages.

Actions by China’s government have helped to reduce jitters in its domestic money market.

Last November, the central bank launched a ‘term auction facility’ to provide cash-short foreign and Chinese banks with funds if needed, banking sources said. Authorities have not revealed which, if any, banks have used the facility.

Meanwhile, the central bank has flooded the money markets with funds. The overnight Shanghai Interbank Offered Rate, an indicative rate for interbank lending, has plunged 239 bps since the end of September to 0.8333 per cent yesterday, its lowest level since SHIBOR was launched in early 2007.

Last week, the China Banking Regulatory Commission told selected foreign banks that they could trade some of the country’s corporate bonds for the first time, bankers said.

This was seen by the market as a vote of confidence by Chinese authorities in the operations of foreign banks.

Willingness to lend in China’s interbank lending market has not completely returned to pre-crisis levels; two of the biggest Chinese banks are still refusing to lend to foreign institutions, although they are reviewing that policy, traders said.

But a trader at a major US bank in Shanghai, who declined to be identified because the bank did not want to reveal details of its trading activity, said: ‘Our liquidity squeeze has eased. Chinese banks are more willing to lend and SHIBOR rates have come down, while our customer deposits have increased.’

Foreign banks accounted for 706.9 billion yuan (S$154 billion) or about 21 per cent of total interbank borrowing in China during the first three quarters of last year, central bank data shows.