Key facts
- Chinese regulators have instructed some banks to set a floor of 0.5% for bill re-discount rates.
- The move is intended to curb aggressive bill buying by banks facing weak loan demand.
- Bill re-discount rates had fallen significantly in recent months, with some as low as 0.01% reported.
- Regulators are concerned about market speculation on credit growth due to sharp fluctuations in bill rates.
Chinese regulators have instructed some banks to cease conducting bill re-discount operations at rates below 0.5%, according to sources. This directive aims to curb aggressive bill buying by financial institutions struggling with weak loan demand and excess liquidity in a sluggish economy.
The guidance was issued after bill re-discount rates plummeted in recent months. Banks, finding it difficult to secure borrowers, turned to the bill market to meet lending quotas and manage surplus funds. Traders have reported instances of rates as low as 0.01% at month-end.
Sources indicated that the tighter oversight was prompted by the rapid and significant decline in bill rates, which undermined regulatory efforts to guide market expectations. Another source suggested that regulators may be concerned that sharp movements in bill rates could be exploited for speculation on the state of credit growth.
This action follows a Reuters report last month that China's central bank had directed some commercial banks to increase lending, signaling persistent weakness in credit demand. New bank lending in China rose less than anticipated in May, following a contraction in the prior month, as the prolonged property downturn continued to dampen household borrowing.