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China Banks Brace for June Cash Squeeze as Fund Costs Jump

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  • China Banks Brace for June Cash Squeeze as Fund Costs Jump

China’s deleveraging dilemma — how to squeeze excess liquidity out of the financial system without spurring a full-blown cash crunch — is facing its toughest test.

June is traditionally a tight time for banks because of regulatory checks, and this year, lenders are grappling with an official campaign to reduce the level of borrowing as well. Wholesale funding costs climbed to the most expensive in history, and the 30-day Shanghai Interbank Offered Rate has jumped 51 basis points this month to the highest level in more than two years.

While China’s deleveraging drive has spurred losses for investors in the nation’s stocks and bonds, policy makers have so far avoided a panic sell-off, and Nomura Holdings Inc. says that the authorities will step in to prevent any crises. Global money managers have a stake in how June plays out as well, with the 2013 funding crunch helping push the S&P 500 Index to its biggest loss in eight months.

“The combination of factors will lead to a more severe situation than in the past couple of years,” said Ji Linghao, a Shanghai-based bond analyst at Huachuang Securities Co. “The central bank should have a bottom line: it mustn’t allow a system-wide crisis because it is trying to mitigate financial risks.”

The debt market has been hit especially hard by the campaign to reduce the level of borrowing, with companies canceling a record 200 billion yuan ($29 billion) of debt sales in the last two months. A potential Federal Reserve interest-rate increase next week is adding to the pressure amid concern the People’s Bank of China may follow suit.

Surging Costs

The one-month interbank rate known as Shibor rose to 4.59 percent on Friday, the highest since April 2015. That surpasses both the one-year cost of 4.41 percent and the Loan Prime Rate — which banks offer to their best borrowers — of 4.30 percent.

Policy makers will maintain a tightening bias — although in a manageable and calibrated manner — and interbank rates could rise by another 40-50 basis points, Morgan Stanley economists led by Robin Xing wrote in a June 4 report.

Yield Imbalance

China’s bond yield curve has inverted for the first time since 2013’s cash crunch, and the second time in data going back 2006. The one-year sovereign yield surged 20 basis points this month to 3.66 percent, three basis point higher than the 10-year yield. The curve probably won’t normalize in the short term, said Qin Han, an analyst at Guotai Junan Securities Co.

Thinning Buffers

Chinese banks’ excess reserve ratio, a gauge of liquidity in the financial system, fell to 1.65 percent at the end of March, according to data from the China Banking Regulatory Commission. The index measures the money that lenders park at the PBOC above and beyond the mandatory reserve requirement, usually to draw risk-free interest.

“Major banks don’t have much extra funds, as is shown by the excess reserve data,” analysts at China Minsheng Banking Corp.’s research institute wrote in a June 5 note. Lenders have become increasingly reliant on wholesale funding and central bank loans this year, they said.

Issuance Shortfall

Sales of negotiable certificates of deposit in May lagged maturities by 302 billion yuan, data compiled by Bloomberg show. A record 1.6 trillion yuan of such debt is coming due this month. Refinancing of the short-term wholesale funding tools will be more challenging amid tighter liquidity conditions, according to a Moody’s Investors Service report last month. Recently enhanced regulatory checks potentially affect the demand for bonds and money-market instruments such as NCDs, said Frances Cheung, a Hong Kong-based rates strategist at Societe Generale SA.

Capital Outflows

Net outbound cross-border payments made by Chinese banks on behalf of corporate and individual clients climbed to 279.1 billion yuan in the first four months of this year, according to the latest available data. A probable Fed rate increase may speed up the departure of capital. The yuan’s 6.5 percent slide in 2016 created a vicious circle of capital outflows and bets on further currency weakness, prompting officials to introduce tighter capital controls.

The PBOC may strengthen capital controls, keep interbank rates relatively high and act against yuan depreciation expectations in case of Fed tightening, Nomura economists Zhao Yang and Wendy Chen wrote in a June 2 report.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Continue to Slide: Drops Over 1% Amid Surging U.S. Stockpiles

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Crude Oil

Amidst growing concerns over surging U.S. stockpiles and indications of static output policies from major oil-producing nations, oil prices declined for a second consecutive day by 1% on Wednesday.

Brent crude oil, against which the Nigerian oil price is measured, shed 97 cents or 1.12% to $85.28 per barrel.

Similarly, U.S. West Texas Intermediate (WTI) crude slumped by 93 cents or a 1.14% fall to close at $80.69.

The recent downtrend in oil prices comes after they reached their highest level since October last week.

However, ongoing concerns regarding burgeoning U.S. crude inventories and uncertainties surrounding potential inaction by the OPEC+ group in their forthcoming technical meeting have exacerbated the downward momentum.

Market analysts attribute the decline to expectations of minimal adjustments to oil output policies by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known collectively as OPEC+, until a full ministerial meeting scheduled for June.

In addition to concerns about excess supply, the market’s attention is also focused on the impending release of official government data on U.S. crude inventories, scheduled for Wednesday at 10:30 a.m. EDT (1430 GMT).

Analysts are keenly observing OPEC members for any signals of deviation from their production quotas, suggesting further volatility may lie ahead in the oil market.

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Energy

Nigeria Targets $5bn Investments in Oil and Gas Sector, Says Government

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Crude Oil - Investors King

Nigeria is setting its sights on attracting $5 billion worth of investments in its oil and gas sector, according to statements made by government officials during an oil and gas sector retreat in Abuja.

During the retreat organized by the Federal Ministry of Petroleum Resources, Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, explained the importance of ramping up crude oil production and creating an environment conducive to attracting investments.

He highlighted the need to work closely with agencies like the Nigerian National Petroleum Company Limited (NNPCL) to achieve these goals.

Lokpobiri acknowledged the challenges posed by issues such as insecurity and pipeline vandalism but expressed confidence in the government’s ability to tackle them effectively.

He stressed the necessity of a globally competitive regulatory framework to encourage investment in the sector.

The minister’s remarks were echoed by Mele Kyari, the Group Chief Executive Officer of NNPCL, who spoke at the 2024 Strategic Women in Energy, Oil, and Gas Leadership Summit.

Kyari stressed the critical role of energy in driving economic growth and development and explained that Nigeria still faces challenges in providing stable electricity to its citizens.

Kyari outlined NNPCL’s vision for the future, which includes increasing crude oil production, expanding refining capacity, and growing the company’s retail network.

He highlighted the importance of leveraging Nigeria’s vast gas resources and optimizing dividend payouts to shareholders.

Overall, the government’s commitment to attracting $5 billion in investments reflects its determination to revitalize the oil and gas sector and drive economic growth in Nigeria.

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Commodities

Palm Oil Rebounds on Upbeat Malaysian Exports Amid Indonesian Supply Concerns

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Palm Oil - Investors King

Palm oil prices rebounded from a two-day decline on reports that Malaysian exports will be robust this month despite concerns over potential supply disruptions from Indonesia, the world’s largest palm oil exporter.

The market saw a significant surge as Malaysian export figures for the current month painted a promising picture.

Senior trader David Ng from IcebergX Sdn. in Kuala Lumpur attributed the morning’s gains to Malaysia’s strong export performance, with shipments climbing by a notable 14% during March 1-25 compared to the previous month.

Increased demand from key regions like Africa, India, and the Middle East contributed to this impressive growth, as reported by Intertek Testing Services.

However, amidst this positivity, investors are closely monitoring developments in Indonesia. The Indonesian government’s contemplation of revising its domestic market obligation policy, potentially linking it to production rather than exports, has stirred market concerns.

Edy Priyono, a deputy at the presidential staff office in Jakarta, indicated that this proposed shift aims to mitigate vulnerability to fluctuations in export demand.

Yet, it could potentially constrain supply availability from Indonesia in the future to stabilize domestic prices.

This uncertainty surrounding Indonesian policies has added a layer of complexity to palm oil market dynamics, prompting investors to react cautiously despite Malaysia’s promising export performance.

The prospect of Indonesian supply disruptions underscores the delicacy of global palm oil supply chains and their susceptibility to geopolitical and regulatory factors.

As the market navigates these developments, stakeholders remain attentive to both export data from Malaysia and policy shifts in Indonesia, recognizing their significant impact on palm oil prices and market stability.

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