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China’s financial firms are exceptionally cash-rich as savers pile in
(Bloomberg) — Cash is so abundant in China’s financial markets that even traditionally liquidity-starved companies are swimming in cash.
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Non-bank institutions such as asset managers are navigating the final days of May as their short-term borrowing costs remain stable, after rising at the end of 10 of the last 12 months. This is because Chinese residents, unimpressed by falling bank deposit rates, began investing their savings in higher-yielding wealth and money market funds offered by these companies.
This could be a welcome development for policymakers, as cash-rich non-bank companies tend to buy corporate bonds rather than public debt, which would provide greater support to the private sector. In turn, it would boost China’s economy, which is suffering from weak demand due to fragile business sentiment and a prolonged housing crisis.
“The trend of retail investors transferring money to non-bank institutions has not ended and there is room for these institutions to buy even more bonds,” analysts at Industrial Securities Co., led by Huang Weiping, wrote in a note. “May to July is still a good window to buy bonds.”
Typically, non-bank companies face a small cash crunch at the end of the month or quarter because lenders tend to hoard cash to cover their balance sheets for regulatory checks. Liquidity shortages can also worsen when there is a lack of confidence in further policy easing.
This is no longer the case, as Chinese residents have withdrawn a record amount of savings from banks to avoid painfully low deposit rates and invested them in financial products run by companies like asset management companies to earn better returns.
Non-bank companies are able to achieve higher returns on their wealth management products by purchasing corporate bonds and debt sold by local government financing vehicles that provide higher yields than sovereign debt. Large commercial lenders, on the other hand, tend to focus on government and bank bonds.
The change is happening in a context of ample liquidity in the banking system due to years of monetary easing by the People’s Bank of China. The country is also stepping up fiscal stimulus, as local government bond issuance in May reached a seven-month high.
“There is still plenty of room for the size of wealth management products to grow further,” analysts at Huaxi Securities Co., led by Liu Yu, wrote in a note. “Most of the liquidity will eventually flow into the real economy due to the purchase of corporate bonds by non-bank entities.”
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Demand for this type of debt from non-bank companies has reduced the yield premium offered by top-rated five-year corporate bonds relative to similarly dated sovereign notes, official data shows. The yield spread between three-year AA LGFV bonds and corresponding government notes has fallen to an all-time low.
Beijing has recently sought to halt the bull run in long-term sovereign notes by warning of a reversal and suggesting that a mismatch between market prices and the economic outlook will be corrected. China’s issuance of special bonds could also drain liquidity and result in higher yields.
These factors should keep corporate bond and LGFV buyers on their toes as they are priced based on sovereign debt.
But for now, the ample money supply is expected to suppress yields.
“Weak liquidity conditions for non-banks will remain in place for some time,” said Qi Sheng, chief fixed income analyst at Orient Securities Co. “Overall, early-stage bonds will perform better than long-term bonds. And then credit will perform better than rates.”
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