SHANGHAI, March 30 (Reuters) - The cost of borrowing short-term cash against bonds at China's stock exchanges more than tripled to as much as 32 percent on Thursday as smaller financial institutions scrambled for funds before a central bank health-check on the banking industry.
The surging interest rates for one-day bond repurchase agreements, or repos, at the exchanges mirror a similar but more modest trend in China's interbank market over the past week.
The one-day repo rate at the Shanghai Stock Exchange shot to as high as 32 percent - jumping from Wednesday's range of 6 to 13 percent and to its highest level in three months - while the rate at the Shenzhen bourse touched a six-month high of 26.812 percent.
Exchange traded repos are used by non-banks, corporates and retail investors to borrow or lend cash against bonds, and the rates on these market-determined repos are often more volatile than interbank repos that are under the central bank's jurisdiction.
"It's scary. It shows smaller financial institutions are desperate for funds but big banks are unwilling to lend, so they're coming to the exchange market seeking money from retail investors," said Xia Haojie, bond analyst at Guosen Futures in Shenzhen.
Chinese banks are racing to spruce up their books, hoarding cash, paring risky investments and curbing lending ahead of a rigorous quarterly inspection of their books by the central bank known as the Macro Prudential Assessment, or MPA.
For the first time since it was launched last year, the MPA will include off-balance sheet wealth management products to give authorities a better sense of potential risks to the financial system.
Because of the MPA process, "onshore banks refrained from lending to corporate and non-bank Financial institutions to reduce their credit exposure," Ken Cheung Kin Tai, analyst at Mizuho Bank, wrote in a note on Thursday.
"On the other way round, it is more difficult for these parties to acquire loan funding from onshore banks. Instead, they raised short-term funding through the Shanghai Stock Exchange (SSE)."
Interbank borrowing costs have also been trending higher. Last week, the seven-day repo rate - a closely-watched indictor of interbank borrowing costs - jumped to a near two-year high of 3.0883 on a trade-weighted basis.
But the seven-day repo rate eased this week, falling to 2.8121 on Thursday. (Reporting by Samuel Shen and John Ruwitch; Editing by Richard Borsuk)