HSBC: Interbank rates pose no risk to China's growth

Due to seasonal factors and structural issues, China's interbank lending rates spiked at the year-end, but posed no major risk to the country's economic growth for 2014, HSBC said in a report. "We still expect growth to stabilize at around 7.5 percent in 2014, given that the (interbank lending) rate spikes should normalize and thus have a limited impact on investment," HSBC China economists Qu Hongbin and Sun Junwei said in the report published on Friday. Interbank lending rates spiked again over Christmas to a half-year high, which forced the People's Bank of China (PBOC, central bank) to intervene to calm the market via reverse repurchase (repo). On Dec. 23, the 7-day interbank repo rate jumped to an intraday high of nearly 10 percent, from around 4.5 percent on Dec. 17. The 14-day interbank repo rate jumped to 9.5 percent on Dec. 23 from around 4.6 percent on Dec. 17. A day later, the PBOC intervened with the reverse repo operation, pumping 29 billion yuan into the banking system. As a result, rates started to normalize to below 6 percent on Dec. 25. But at the current level of around 5 percent, the rates are still much higher than the average of around 4 percent over the first 11 months of 2013, Qu and Sun said in the report. They attributed the rates spike partly to seasonal factors, such as banks preparing to meet year-end regulatory requirements, and a smaller-than-usual year-end boost in fiscal disbursements. "But it is also symptomatic of structural problems, with financial institutions, especially the smaller banks, having become more reliant on short-term interbank borrowing to finance long-term lending, resulting in a worsening duration mismatch between liabilities and assets," they said. It was the second time in 2013 for Chinese banks to encounter spikes in interbank lending rates. In June, the 7-day Shanghai Interbank Offered Rate (Shibor), which measures the rate at which Chinese banks lend to one another, hit a record high of over 13 percent. Qu and Sun maintained that China's money market rates are likely to remain elevated in the near term, due to the demand for cash ahead of Chinese New Year, which falls on Jan. 31, and the banks' desire to ramp up lending at the start of the calendar year. In addition, the PBOC has to strike a delicate balance between avoiding a repeat of the June 2013 cash crunch and ensuring it does not encourage commercial banks to continue to leverage up, they said. Rising short-term interbank lending rates have lifted government bond yields, therefore pushing up the cost of funding for bond issuance -- which accounts for around 11 percent of total financing for the real economy, they said. "However, the cost of bank loans, measured by either preferable lending rate or the weighted average lending rate, remains largely stable." More importantly, the PBOC is expected to target around 13-percent credit growth this year, which should be adequate to support around 7.5-percent year-on-year GDP growth, they said. Apart from credit growth, the gradually-improving external outlook, steady investment expansion and resilient consumer spending should keep China growing steadily in the coming quarters. Moreover, with the government delivering reforms, the power of private consumption and investment demand could be unleashed sooner than many expect, they added.