The increased cost to lenders of issuing so-called negotiable certificates of deposit will naturally deflate a market that jumped by 90 percent in February from a year earlier, according to Ping An Securities Co. Demand is also waning for the securities, used by Chinese banks as a way of leveraging up investments and expanding their balance sheets, with mutual funds cutting their holdings to the lowest level in at least a year in January.


"It's unsustainable for commercial banks to take such high costs," said Shi Lei, head of fixed-income research in Beijing at Ping An, a unit of China's second-largest insurer. "NCDs are now even more expensive than short-term commercial paper. It will be corrected as lenders complete their adjustments in the term structure of the debt."

Introduced by the People's Bank of China in 2013 as a fresh source of money for smaller lenders which have difficulty competing for savings against big state banks, NCDs have morphed into a way for them to fund purchases of each other's wealth-management products. That boosts refinancing risks in a banking system that will see a record 3.65 trillion yuan ($529 billion) of the notes maturing this quarter.

This hasn't escaped the attention of the authorities, with the PBOC looking at classifying NCDs as interbank liabilities, Caixin.com reported in January, a move that would quell growth in the market given limits on how much in interbank debt Chinese lenders are allowed to hold relative to their overall liabilities.

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