REPORT ON THE INTERBANK LENDING & BOND SYSTEM IN FEBRUARY 2004

Rates continued to decline with sharp contrasts in lending and bond markets

In the 20 trading days of February 2004, the trading volume in the national interbank market increased by 5.92 percent month-on-month to 1.2818 trillion yuan from 6,035 deals. The turnovers for credit lending, bond repo and cash bonds were 130.254 billion, 897.201 billion, and 254.381 billion yuan respectively. Compared with the previous month, the daily trading volume for credit lending fell by 20.22 percent; the turnovers for bond repo and cash bonds went up by 10.23 and 9.17 percent respectively.

With a loose fund supply, the weighted rates for credit lending and bond repo continued to retreat, falling by 5.86 and 8.17 percent. Cash bond deals rallied over 55 percent. Daily deals for credit lending showed negative growth.

Lending rate knocked down with shrinking turnover

February 2004 was a dull month for the national interbank credit lending market. It concluded 704 deals, with a turnover of 130.254 billion yuan. The average daily deals have been shrinking since January. Average daily turnover stood at 6.513 billion yuan, 1.650 billion yuan or 20.22 percent less over last month. The lending rate was knocked town by a margin of nearly 30 bps to close the month at 2.12 percent, indicating a loose fund supply at present.

The eight tracked credit lending varieties recorded mixed performances this month. Most varieties with varieties over one month traded actively. The growth of IBO1M and IBO4M maturities even ballooned by over100 percent. Except overnight lending, all short-term varieties decreased. The polarization among trading maturities showed that the financing strategy of market members had shifted from short-term to mid- and long-term in the face of low interest rates.

Repo rates headed lower with active short-term varieties

In February the national interbank bond repo market traded actively. 3,137 deals were concluded with a turnover of 897.201 billion yuan. Average daily volume maintained rapid growth, climbing 10.23 percent to 44.860 billion yuan, 4.162 billion yuan more than the previous month. The repo rate headed lower with a loss of 60 bps, falling by an average of three bps each day until it hit back to the history low of 2.05 percent at the end of February.

Short-term repos advanced considerably in terms of turnover. The R001 and R007 went up by 27.81 and 47.62 percent respectively during February. Mid- and long-terms traded less actively, with turnovers shrinking to different extents. With the repo rate touching record lows time and again, the tendency toward short-term repos showed uncertainty in the market about future rate movements and stronger awareness of interest rate risks.

Bond deals rallied and financial bonds traded actively

In the 20 trading days of February 2004, the bond market rallied with 2,194 deals valued at 254.381 billion yuan. The average daily volume of 12.719 billion yuan registered a year-on-year rise of 211.93 percent and a month-on-month rise of 9.17 percent. With the recurring record interest rate lows, the bond market flourished. Trading deals increased greatly and average daily deals reached over 100, up 83.01 percent year-on-year and 55.85 percent, or 30 deals, month-on-month.

135 bonds were traded in the interbank market this month, including 36 T-bonds, 63 financial bonds, and 32 central bank papers. Among them, two bonds, namely 03CDB24 and 03GB01, witnessed more than one hundred deals. The ratio of T-bonds to central bank paper and financial bonds was 3:5:12, showing that financial bonds were actively traded, accounting for more than half of the grand total.

Institutional financing

In February, state-owned and joint stock banks ranked first with a total lending near one trillion yuan, up 16.78 percent from the previous month. City commercial banks ranked second with slight growth. Foreign-funded banks, trust and investment companies, and financial firms recorded negative growth in their lending.

The structure for borrowing remained unchanged. City commercial banks stood out as the largest borrower with a volume of nearly 600 billion yuan. Urban and rural credit cooperatives registered remarkable month-on-month rises of 105.99 percent and 57.23 percent respectively. Combining lending and borrowing, city commercial banks and rural credit cooperatives are the top net borrowers in the market.