(Yicai) Nov. 14 -- The issuance of interbank certificates of deposits reached a six-month high in China last week, as banks acted to bridge the funding gap resulting from a surge in central and local government bond sales, bolstering expectations for another cut in the reserve requirement ratio, or that portion of assets banks must not lend out.

Nearly CNY900 billion (USD123.5 billion) of interbank CDs were issued last week. China has sold about CNY1.2 trillion (USD164.6 billion) of special refinancing bonds so far this year, while CNY1 trillion of treasury bonds need to be issued by the end of this quarter.

As an active liability management tool for lenders, interbank CD issuance mainly serves to supplement funding sources to support a bank’s asset portfolio expansion, address its liquidity requirements, take advantage of favorable interest rates to maximize returns, and lower costs.

Banks need to act in advance to replenish funds in light of the significant funding pressure coming at the end of this quarter, liquidity assessment indicators, and the CNY4 trillion of CDs due before the end of the year, an asset manager in a joint-stock bank told Yicai.

A total of CNY1.25 trillion of reverse repurchase agreements will expire on Nov. 17 as well as CNY850 billion of medium-term lending facility loans tomorrow, so the market is closely watching China’s central bank to see whether it boosts the MLF or lowers the RRR for a third time this year.

The People’s Bank of China cut the RRR by 25 basis points to 7.4 percent on Sept. 15 following a reduction of 25 bips on March 27.

China is likely to continue to increase policy support for further RRR cuts to tie in with large-scale government bond issuance and might slash interest rates by at least 10 bips, Wang Tao, head of Asia economics and China chief economist at UBS Investment Bank, said to Yicai.

“Due to structural factors and weak market confidence, the effectiveness of traditional stimulus measures has been weakened,” said Li Wei, senior economist at Standard Chartered Bank China. “Therefore, we believe that government policies need to be further relaxed to support a sustained economic recovery.”

The PBOC may lower interest rates on MLF loans this quarter and in the first three months of next year, each time by 10 bips, according to Standard Chartered. It is also likely to reduce the deposit reserve ratio of large and mid-sized banks by 50 bps this quarter to release a little more than CNY1 trillion of funding to soak up the additional government borrowing.

Editor: Martin Kadiev