Sunday, April 5, 2015

2015-02 Interest Rate Trends

In February 2015, short-term, state-sector and long-term, private sector interest rates continued to converge.  The overnight Shanghai Interbank Offer Rate (Shibor) ended February at 3.44%.  That is a considerable increase from January’s rate of 2.81%.  The trailing average for February since the start of the index is 2.46%, meaning this year’s February is 98 basis points higher than average.

The Wenzhou Comprehensive Index ended February at 19.74%.  That is one basis point lower than the ending rate for January, and 31 basis points below the trailing February average, which stood at 20.05%.

At 3.41%, the Shibor overnight rate is higher than the yield on a 12 month term deposit, which stood at 3.00% at the end of February.  Both represent loans to the same financial institutions, so credit quality is the same.  In a normal interest rate environment, the short-term yield should be lower than the long-term yield, but this not a normal interest rate environment.

The highest-yielding maturity for Shibor loans in February was the one-month rate at 5.08%.  The prime lending rate was 5.60% in February, so the minimum spread was only 52 basis points.  The yield curve significantly flattened since the same time last year.

The Chinese state-sector is experiencing higher borrowing costs, a flattening yield curve, and compressed spreads.  This will most likely lead the central bank to inject more money into the capital markets to delay the cleansing effects of a market correction.  This will lead to further downward pressures on the renminbi against major foreign currencies, especially the U.S. dollar.