CASH is so abundant in China’s financial markets that even traditionally liquidity-starved firms are swimming with money.
Non-bank institutions like asset managers are sailing through the last few days of May, as their short-term borrowing costs remain stable after climbing at the end of 10 out of the last 12 months. That’s because Chinese residents, unimpressed with falling deposit rates at banks, started pouring their savings into higher-yielding wealth and money-market funds offered by these firms.
This may be a welcome development for policymakers as cash-rich non-bank firms tend to buy corporate bonds rather than government debt, which would provide greater support for the private sector. It would in turn boost China’s economy that’s suffering from weak demand due to fragile business sentiment and a prolonged housing crisis.
“The trend of retail investors shifting cash into non-banks hasn’t ended and there’s room for these institutions to buy even more bonds,” Industrial Securities analysts led by Huang Weiping wrote in a note. “It is still a good window to long bonds from May to July.”
Typically, non-bank firms face a mini cash squeeze at month- or quarter-end because lenders tend to hoard money to window-dress their balance sheets for regulatory checks. The liquidity tightness can also worsen when there’s a lack of confidence in further policy easing.
That’s no longer the case as Chinese residents withdrew a record amount of savings from banks to avoid painfully low deposit rates and invested them in financial products run by the likes of asset management firms for better returns.
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Non-bank firms are able to achieve higher returns on their wealth management products by buying corporate bonds and debt sold by local-government financing vehicles that carry higher yields than sovereign debt. Large commercial lenders, on the other hand, tend to focus on government and policy bank bonds.
The shift is happening in the backdrop of ample liquidity in the banking system due to years of monetary easing by the People’s Bank of China. The country is also ramping up fiscal stimulus as local government bond issuance in May reached the most in seven months.
“There’s still vast room for the size of wealth management products to grow even further,” Huaxi Securities analysts led by Liu Yu wrote in a note. “Most of the liquidity will eventually flow into the real economy due to non-banks’ purchase of corporate bonds.”
The demand for such debt from non-bank firms has narrowed the yield premium offered by five-year top-rated corporate bonds over similar-dated sovereign notes, official data show. The yield spread between three-year AA LGFV bonds and corresponding government notes fell to a record low.
Beijing recently sought to push back on the bull run in long-term sovereign notes as it warned of a reversal and hinted that a mismatch between market prices and the economic outlook will be corrected. China’s issuance of special bonds may also drain liquidity and result in higher yields.
These factors should keep buyers of corporate and LGFV bonds on guard as they are priced based on sovereign debt.
But for now, the ample cash supply is likely to suppress yields.
“Loose liquidity conditions for non-banks will remain in place for a while,” said Qi Sheng, chief fixed-income analyst at Orient Securities. “Overall, front-end bonds will do better than long-end. And then credit will do better than rates.” BLOOMBERG
