Chinese banks have yet to feel the brunt of deleveraging campaign

Lenders have been turning to negotiable certificates of deposit to offset interbank borrowing.

Bloomberg reports that Chinese banks were able to weather through the squeeze of interbank borrowing by turning to negotiable certificates of deposit, effectively insulating them from the severest downturn of shadow banking crackdown, according to a report by UBS.

Also read: China regulator carries out inspection to sniff out shadow banking activity

NCDs issued by banks grew by $235b (1.5t yuan) in 2017, offsetting the 1.3t yuan decline in interbank borrowing which might help explain why the credit tightening that started in early 2017 hasn’t proved any more painful for the banking sector, UBS added.

Even though asset growth has slowed sharply, there was also no marked improvement in deposit franchise of banks as deposits as a percentage of liabilities only increased 4 bp in 2017 from a year earlier to 71.84%.

“We believe many market watchers have overestimated the rate of progress” in credit tightening, according to a note by UBS analyst Jason Bedford. “A meaningful re-balancing of the banking sector will be a long, drawn out process.”

A separate report notes that banks have also been ramping up the issuance of structured deposits with derivative features as a way of giving depositors high-yield products to sidestep the intensified scrutiny brought about by the ongoing crackdown. In fact, issuance of structured deposits surged almost 47% to a record $1.4t (8.8 yuan) in the year through March with more than 1.8t yuan of new stockpile added this year alone.

Here’s more from Bloomberg:

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