Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

As China's battle with leverage begins to bite, risk bites back

EconomyMay 08, 2017 07:10PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. As China's battle with leverage begins to bite, risk bites back

By Shu Zhang and Matthew Miller

BEIJING (Reuters) - A Chinese government campaign to cut leverage in the banking system and limit some risky activities appears to be working, but it is also pushing borrowers back towards alternative funding sources that carry similar risks to the financial system.

First-quarter official data shows banks cut the amount they lent to and borrowed from other financial institutions by 1.4 trillion yuan and 1.9 trillion yuan, respectively, to 21.7 trillion yuan and 30.3 trillion yuan. The growth in bank wealth management products (WMPs), a key component of shadow banking credit, slowed to 19 percent year-on-year, down 35 percentage points.

Bankers said the slowdown came as the People's Bank of China (PBOC) tightened liquidity conditions, which pushed up the cost of borrowing, and included off-balance-sheet WMPs in its macro-prudential assessment of banks' risk levels for the first time.

As deleveraging accelerates, rates rise in the interbank market, and lenders’ interest margins are taking a hit. The yuan's seven day repo rate <CN7DRP=CFXS>, an indicator of market interest rates, has risen to its highest level since early 2015, according to Thomson Reuters data.

China's central leadership has identified curtailing financial risks as a top priority this year after overall leverage rose sharply, and financial regulators have been instructed to keep on top of the task.

The China Banking Regulatory Commission (CBRC) has been targeting interbank activities and WMPs to determine whether banks are using those channels to disguise credit to loss-making "zombie firms" or businesses in restricted areas, such as real estate, according to an internal document dated March 28 and reviewed by Reuters.

CBRC also required banks to undertake self-assessments to report if their interbank liabilities exceeded a third of total liabilities, the document showed.

Lenders are under pressure to constrain the size of their interbank and WMPs business to avoid CBRC punishment, said an executive at a national bank's interbank department.

It has stirred up a flurry of activity in banks eager to keep on the right side of the regulator, which handed out 190 million yuan in fines involving 485 investigations in the first quarter.

"We are holding meetings, learning the spirit of the regulations, preparing materials for self-assessment and regulatory reviews," said a banker at a regional lender.

UNINTENDED CONSEQUENCES

Smaller banks tend to be more reliant on interbank activity and WMPs to grow their assets and profits, so they are likely to be most affected by the changes.

Industrial Bank Co (SS:601166), a mid-tier bank with large exposure to shadow banking and known in China's financial community as "the king of the interbank", has already blamed "significantly increased" cost of interbank liabilities for a squeeze on its margins in the first quarter.

The bank shrank its interbank investment by 115.6 billion yuan and interbank liabilities by nearly 170 billion yuan, it said.

While such figures show government policies are changing behavior, not all the changes will be welcome.

Central bank data shows that trust loans, entrusted loans and undiscounted banker's acceptances, which are common forms of shadow banking activity in China, jumped more than 2 trillion yuan in the first quarter, more than four times the year-earlier increase.

"There are indications that regulatory measures to curb system-wide leverage show unintended consequences; specifically, in reviving 'core' shadow banking activities that had previously been constrained by regulation," said George Xu, Associate Analyst at Moody's Investors Service.

Moody's said borrowers in sectors such as property, local government financing vehicles and industries struggling with overcapacity faced reduced access to traditional bank loans and were being driven to trust loans.

Even as the crackdown began last year, a Reuters review of listed banks shows aggressive lenders like China Minsheng Bank (SS:600016) (HK:1988) and China Zheshang Bank (HK:2016) continued to pile up loan-like assets categorized as asset management plans and trust beneficiary rights.

The CBRC has responded with a storm of at least eight new directives since late March.

The regulatory changes could further tighten domestic liquidity in the next six to 12 months, said Chen Long, China economist at Gavekal Dragonomics. That also posed short-term risks for domestic stock and bond markets, he said.

Shadow banking had grown so large after years of rampant growth, Chen said, that policymakers had to tread carefully in case over-strenuous attempts to rein it in caused a financial crisis.

"They cannot not regulate it, but they also cannot come down too hard on it," he said.

As China's battle with leverage begins to bite, risk bites back
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email