(Yicai) Aug. 11 -- The rediscount rate for bank acceptance bills -- the discounted interest rate charged by a central bank when it buys commercial bills from banks before they mature -- has stayed at around 0.5 percent in China since late last month, reinforcing concerns about the strength of borrowing last month.

The six-month rediscount rate for bank acceptance bills issued by major state-owned and joint-stock lenders remained at 0.5 percent yesterday, while that for three-month bills has held at 0.51 percent since last week, according to data from the Shanghai Commercial Paper Exchange.

Because bills have the dual characteristics of both “credit” and “funds,” bill rates have long been regarded as a leading indicator of the health of bank lending. A pronounced decline in rates toward the end of a month often signals weak demand for credit.

Unlike in the past, when bill rates could fall to zero during months of relatively weak lending, rediscount rates for bank acceptance bills have had a 0.5 percent floor since July under guidance from regulators.

The floor is a uniform requirement imposed on financial institutions by the authorities, a source at a city commercial bank in East China told Yicai. Regulators are said to have instructed some institutions not to conduct rediscount business for bank acceptance bills at rates below 0.5 percent since July in an effort to curb the practice of banks buying bills at very low prices to boost their reported lending volumes, the person said.

While 0.5 percent is not technically a “loss-making threshold,” regulatory guidance could nevertheless help reduce the negative effects of intense competition among institutions to boost lending volumes, a source at another city commercial bank said to Yicai.

Although the decline in new corporate loans was smaller than that in household loans, total new corporate short-term and medium-to-long-term borrowing in June was CNY790 billion (USD117.1 billion) lower than a year ago, while new on-balance-sheet bill financing rose by CNY525.3 billion. So bill financing made a much bigger contribution to new lending than in the same period last year, an unusual development for June, traditionally a major month for credit issuance.

June was the third straight month of a year-on-year increases of more than CNY400 billion in bill financing. Among new corporate loans, bill financing was CNY860.7 billion higher in the first half compared with a year earlier.

The ongoing role of bill financing as a “replacement” for other forms of lending also indicates that credit demand in the real economy has yet to fully recover, according to industry insiders. Analysts generally anticipate the pace of social financing to have remained stable last month, while the overarching trend in bank lending remains one of “slower growth but better quality,” with new lending likely to have fallen seasonally from the previous month.

Still, market expectations are becoming more optimistic about a recovery in credit demand and broader economic activity. The start of the peak construction season, faster deployment and use of funds from new policy-based financial instruments, and rising expectations for additional stimulus measures are all expected to support borrowing.

July’s meeting of the Politburo, the Communist Party’s top decision-making body, sent a clear signal of support for “stable growth,” said Wang Yifeng, chief financial analyst at Everbright Securities. Looking ahead, the more effective implementation of existing policies and preparations for additional measures should create new support for an expansion in credit activity, potentially easing pressure on year-on-year credit growth to a degree, he said.

Editor: Futura Costaglione