China Central Bank Imposes Lending Limits

As per sources, China's central bank has instructed certain lenders to limit interest rates on an interbank debt instrument due to the increase in short-term yields on bank debt and tensions in funding markets. This information was disclosed on Nov 17. Four sources have indicated that certain big commercial lenders were instructed not to offer negotiable certificates of deposit (NCDs) at excessively high rates. NCDs, also known as Non-Convertible Debentures, are a widely used debt instrument that banks issue to meet their short-term financing requirements.

The recent guidance from the central bank emphasizes the intention of keeping borrowing costs low in an economy that is slowing down. This is being done despite the increased issuance of debt by the central and local governments to support the infrastructure and consumer sectors. Traders have noted a steady increase in NCD issuance rates and secondary market rates since August, with both now reaching near six-month highs.

On Nov 15, China's central bank injected 1.45 trillion yuan ($200.14 billion) in one-year medium-term lending facility (MLF) loans into several financial institutions, increasing cash availability. The liquidity injection was larger than expected by the market, resulting in a net cash injection of 600 billion yuan into the banking system. This is the largest monthly increase since December 2016.