No relief for banks from costs, rates

While short-term borrowings are dearer, interest rates haven't moved much since 2015, piling on pain

China's drive to reduce financial system risks is squeezing the nation's banks. Caught between policymakers' intensifying efforts to raise short-term borrowing costs, and benchmark interest rates that haven't moved since 2015, Chinese lenders have few options but to absorb much of the higher costs.

The gap between the three-month Shanghai Interbank Offered Rate and the one-year lending rate has narrowed to 17 basis points, the narrowest since July 2011. This has exacerbated a trend that started when the People's Bank of China began guiding money rates higher in August to reduce leverage in the financial system, prompting a surge in bond yields.