Sunday, May 31, 2015

2015-04 Interest Rate Trends

In April 2015, the short-term state sector and long-term private sector showed divergent trends.

The overnight Shanghai Interbank Offer Rate (Shibor) ended April at 1.69%, significantly lower than the 3.18% seen at the end of March. The trailing average rate for April is 2.07%, which means the short-term interest rate is now significantly below the trailing average.

The Wenzhou Comprehensive Index ended April at 19.75%, which is 75 basis points higher than March’s close. The trailing average rate for April is 20.18%, so the current rate is still lower. The spread between the current month end value and the trailing average value has narrowed, however, from March’s 93 basis points to April’s 31 basis points.

Some significant events happened in April to drive these movements. The top three institutions for private lending all reported higher non-performing loans, mostly driven by loans to small private businesses. According to a recent Bloomberg article:

China Minsheng Banking Corp., the nation’s first private lender, has retreated from its small and micro lending business after bad loans from the segment surged about 140 percent in 2014 from a year earlier. […] China Merchants Bank Co.’s bad debts from micro lending more than doubled last year, while China Citic Bank Corp. said its increase in nonperforming loans was mainly due to a “significant” increase in credit risk of private SMEs and sole proprietorships engaged in manufacturing and trade.

Additionally, China’s first private bank began operations at the end of March. According to a recent Global Times article:

Wenzhou Minshang Bank, one of China’s first five pilot private banks, started operations on Thursday, a move which analysts said will help finance the country’s cash-starved small businesses and spur reforms in the financial system. […] The bank completed its first credit business on Thursday, offering a credit loan with 300,000 yuan ($48,285) to Jiangda Electronic Co, a Wenzhou-based electronics and aluminum foil producer.

It is possible that as the small and medium sized businesses with higher credit quality are brought into the formal banking system, the informal credit system is left only to lend to firms with lower credit quality, thus pushing up the risk premium.