The banking sector in China is currently experiencing significant pressures related to deposit growthAs a response, financial institutions have increasingly turned to interbank certificates of deposit (ICDs) as critical tools for enhancing their liabilitiesThe cumulative net financing scale of these certificates has reached unprecedented heights this year, with many banks approaching their issuance limits.

Recently, banks such as China Construction Bank, Bank of China, Huaxia Bank, and Bohai Bank have made headlines by raising their ICD issuance allowancesThis shift reflects a substantial adjustment in the liability structure of the banking system, driven not only by a loss of deposits but also by soaring government bond issuance that has inadvertently widened liability gaps for banksProfessionals in the industry anticipate that the issuance limits for ICDs will only continue to rise in the upcoming year.

ICDs serve as vital financing instruments for banks looking to bolster their liabilities

Traditionally, banks rarely utilize their full issuance capacity for ICDs; however, the current climate has compelled large state-owned and joint-stock banks to reach near their maximum limitsFor instance, on December 20, Huaxia Bank announced a new issuance plan yielding an additional 36.6 billion yuan in ICD capacity, bringing its total to 436.6 billion yuanJust three days earlier, China Construction Bank updated its plan, increasing its total issuance limit to 1.6379 trillion yuan, a rise of 339.4 billion yuan or approximately 26.13% from the start of the year.

Similarly, the Bank of China modified its 2024 ICD issuance plan, raising its limits from 1.0088 trillion yuan to 1.2703 trillion yuan, an increase of roughly 26%. Other institutions like Suzhou Bank, Sichuan Bank, Bohai Bank, and Hengfeng Bank have also raised their respective issuance limits by percentages ranging from 7% to 21% over the course of the year.

The statistics tell a compelling story: currently, China’s state-owned and major commercial banks have seen their ICD utilization rates exceed 90%, nearing their ceilings

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Other banks, including Everbright Bank and Minsheng Bank, have surpassed an 80% utilization rate, whereas last year, only three banks managed to breach that barrier.

This increased reliance on ICDs has drawn a consensus among industry authorities, who suggest that the pressing obligation for banks to fill burgeoning liabilities stemming from deposit attrition propels this trendData from Wind indicates that, as of the end of November, 392 financial institutions had disclosed their ICD issuance seasoning for 2024, totaling 27.31 trillion yuan—up 7% from the previous yearMeanwhile, the balance of ICDs in circulation stood at 17 trillion yuan, making up 65% of the annual threshold, also posting a 7% uptick year-on-year.

As per statistics compiled by China Merchants Securities, there has been a noted rise in the usage rates of ICDs this year across various bank categories

For example, the overall utilization rate for state-owned banks hits 79.14%, a jump from last year’s 67.57%. Joint-stock bank utilization stands at 67.12%, up from 56.97%, while city commercial banks post a rate of 61.67%, increasing by 7.47 percentage points from the previous yearAgricultural commercial banks lag behind but still report an increase to 45.44% from last year’s 43.77%.

Additionally, by December 24, the cumulative net financing scale of ICDs for the year had skyrocketed to 4.20866 trillion yuan, marking a record high in recent yearsFinancial analyst Sun Binbin from Tianfeng Securities observes that the current demand for certificates demonstrates a historical pattern of rapid accumulation of balances; however, it is atypical for banks to adjust store limits that frequentlyHistorically, state-owned banks have generally preferred boosting their capacity in the following year rather than mid-year.

Jiang Peishan, the chief fixed-income analyst at Western Securities, emphasizes that within a broader context, there still exists a sufficient ceiling for total ICDs

Using issuance figures from earlier that year reflects an overall usage rate of 67.4% across banks—though distinctions can be made among the types of banksState-owned banks tend to utilize their limits more extensively, whereas city and agricultural banks retain considerable allowances.

The current financial ecosystem has cultivated hefty demand for ICDs as a short-term financing solutionThese certificates are lauded for their liquidity and relatively low credit risk, making them attractive to financial institutionsNotably, when liquidity becomes tight, ICDs serve as pivotal tools for banks and other financial organizations to alleviate pressure and manage their cash positions.

A critical factor influencing the surge in ICD issuances is indeed traced back to deposit losses this year, which have left considerable gaps in banks' liabilitiesCommercial banks primarily derive their liabilities from various sources, with deposits serving as the cornerstone

However, due to policy alterations involving reduced deposit interest rates and market reforms, observed growth rates in deposits have substantially decelerated, striking particularly hard at large state banks which now seek to plug their funding vacuums via ICDs.

Analyst Liu Feipeng from Postal Savings Bank shares insights on the suspension in corporate deposits, citing pessimistic market outlooks and diminishing investments as driving forces that compel businesses to withdraw current accountsThis is mirrored in macroeconomic data showing a year-on-year reduction in the narrow measure of money supply (M1).

Moreover, this reduction in corporate deposit yields has urged companies to amortize loans prematurely, contributing to declining year-on-year lending growth, thus exacerbating the downturn in deposit figuresThe overarching liquidity constraints resulting from deposit outflows highlight banks’ vulnerabilities, naturally steering institutions to turn towards higher-yielding ICD financing to mitigate against falling deposit rates

The mechanisms set forth by policy stipulations restrict bank lending appetites and could further throttle credit availability.

Another significant impetus for the soaring ICD financing is the rapid acceleration of government bondsThe tendency of banks to fill the void left behind by burgeoning government bond issues demonstrates a clear need for ICDs, where institutions rely heavily on them to counterbalance their middle-to-long-term liquidity demands.

Jiang Peishan notably correlates the timeline of intensified government bond issuance with the wave of policy regarding “manual interest supplementation.” As bonds began flooding the market in May, it became evident that banks, particularly state banks, would leverage ICDs to absorb these government instruments while ensuring liquidity stability.

As per the issuance narratives, it is apparent that state-owned giants have ramped up net issuances from May onwards, closely reflecting the notable upticks in government securities issuance periods throughout the year

This trend of over-reliance on ICDs amidst ebbs and flows of deposit mobilization only underlines the crucial role that these instruments will play moving forward.

Industry analysts predict that banks will likely continue to increase their ICD issuance limits in parallel with ongoing liabilities constraintsWang Xianshuang, a bank analyst with China Merchants Securities, anticipates that following a challenging year on the liability front, banks will likely enhance their certificates’ filing limits while adhering to regulatory requirements next year.

Additionally, the recent rollbacks in interbank interest rates and lower government bond yields have induced a downward trajectory in ICD issuance yieldsMany major and joint-stock banks are now issuing 1-year ICDs at approximately 1.60%, a decline of 10 basis points from earlier in the monthThis variability in yields reflects the broader financial environment and indicates an ongoing adaptation to liquidity pressures faced by the banking sector.