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Banking & Finance

Beijing's war on financial risk seen creating instability

Banks' cash grab hurting companies and stocks by driving interest rates higher

The Shanghai Composite Index has slumped 5% from a November peak.

SHANGHAI -- President Xi Jinping's campaign against financial risk is causing problems for businesses, sending banks scrambling for cash, driving up borrowing costs for companies and stifling a stock market boom.

Market players here took note when Shanghai Pudong Development Bank issued nearly 74 billion yuan ($11.2 billion) in interbank deposit certificates Dec. 4. The second-tier bank has raised 380 billion yuan this way since November.

Some believe that the bank has increased fund procurement through this channel because the government issued a guideline for banks to curb the growth in lending and fundraising to hold down financial risks in the country. Some banks were heavily promoting wealth management products to customers to generate sales. But authorities have also clamped down on this channel, noting such financial products carry high investment risk. 

Since other banks are facing the same situation, Shanghai Pudong Development Bank is far from the only financial institution now relying heavily on interbank deposits. Chinese banks overall had issued more than 20 trillion yuan in interbank deposit certificates since the beginning of this year as of Wednesday, a sharp increase from 2016's 13 trillion yuan. The rush to secure capital has pushed up borrowing rates, with the three-month Shanghai Interbank Offered Rate now hovering at just above 4.9%, the highest since February 2015.

The rise in rates has dented fundraising by other businesses. The prospect of higher interest payments has led companies such as state-owned Jiangsu Communications Holding to opt against floating new bonds. Corporate debt issuance this year is expected to total around 3 trillion yuan, down nearly 30% from 2016's 4.2 trillion yuan.

Higher rates also mean lower bond prices, which have inflicted heavy paper losses on major banks that built up substantial bond holdings as a way to put surplus assets to work. If the government continues reining in lending growth to keep the financial system healthy, the economy is likely to suffer.

The measures against financial risk also are casting a shadow over a stock market that has seen more than 400 initial public offerings this year. The Shanghai Composite Index climbed steadily from midyear to November but has since reversed course, falling 5% from its most recent peak last month to around a four-month low.

Unusually, regulators denied all three initial public offering applications they reviewed at a meeting in late November, while only one of four was approved Dec. 19. Newly listed stocks, which typically see a significant post-listing pop, have attracted a flood of speculative money. Market players see the sudden tightening of IPO standards as an effort to deter speculation. 

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