Chinese regulators have instructed some banks not to conduct bill re-discount transactions below an interest rate of 0.5%, stepping up efforts to curb aggressive trading activity in the country’s commercial paper market as weak demand for loans continues to distort credit conditions.
The guidance, disclosed to Reuters by sources familiar with the matter on Tuesday, comes after bill re-discount rates collapsed to exceptionally low levels in recent months as banks increasingly turned to the bill market to compensate for sluggish lending activity and absorb excess liquidity.
According to market participants, re-discount rates had at times fallen to as little as 0.01%, particularly at month-end, reflecting intense competition among banks to purchase commercial bills rather than extend traditional loans.
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The move shows that there is growing concern among Chinese policymakers that persistent weakness in credit demand is undermining the effectiveness of monetary easing and creating distortions in short-term funding markets.
Commercial bills are widely used by Chinese companies for short-term financing and trade settlement. Banks frequently buy and re-discount these instruments to manage liquidity, meet regulatory lending targets, and deploy idle capital.
However, as China’s economic recovery has lost momentum, banks have found it increasingly difficult to generate sufficient demand for conventional corporate and household loans. Rather than allowing liquidity to remain unused, many lenders have instead poured money into the bill market, driving yields sharply lower.
One source said regulators intervened after bill re-discount rates fell “too fast and too low” as banks rushed to buy bills in bulk.
The person said such pricing was beginning to undermine regulators’ broader efforts to guide market expectations and maintain orderly financial conditions.
Another source said policymakers were also concerned that sharp movements in bill rates had increasingly become an informal gauge of underlying credit conditions, allowing investors to speculate on the strength or weakness of China’s banking system and loan growth.
The latest guidance reveals the challenges facing Chinese banks despite repeated monetary easing by the People’s Bank of China (PBOC).
Lower policy rates and ample liquidity have not translated into stronger borrowing because businesses remain cautious about expanding investment while households continue to reduce debt amid prolonged weakness in the property sector and uncertain economic prospects.
Reuters reported last month that the PBOC had instructed some commercial banks to increase lending, an unusual step that highlighted policymakers’ frustration with persistently weak credit creation. Official data has reinforced those concerns. New bank lending rose less than expected in May after contracting in April, indicating that earlier policy support has yet to revive borrowing demand.
The prolonged downturn in China’s property market continues to weigh heavily on household confidence and mortgage demand, while private-sector companies remain reluctant to take on new debt despite lower financing costs.
Against that backdrop, the bill market has become a substitute for genuine loan growth. Banks can purchase commercial bills to expand their balance sheets and deploy excess funds without taking on the longer-term credit risks associated with traditional lending.
However, regulators appear increasingly concerned that this practice is masking underlying weakness in credit demand while distorting money market pricing.
The latest guidance also signals that Chinese authorities are placing greater emphasis on the quality of credit growth rather than simply the quantity of lending. Instead of allowing banks to meet lending targets through financial market transactions, regulators appear intent on encouraging institutions to channel more credit into the real economy.
The move is telling investors that despite multiple rounds of monetary easing, China’s biggest challenge is no longer the availability of liquidity but the lack of willing borrowers. Analysts now believe that until confidence in the property market, private investment, and consumer spending improves, banks are likely to remain flush with cash but constrained by weak loan demand, limiting the effectiveness of further monetary stimulus.