(The following statement was released by the rating agency)
BEIJING/LONDON/HONG KONG, June 21 (Fitch) Persistent tight liquidity conditions
in China's financial sector could constrain the ability of some banks to meet
upcoming obligations on maturing wealth-management products (WMPs) on a timely
basis, Fitch Ratings says. We estimate that more than CNY1.5trn in WMPs -
substitutes for time deposits - will mature in the last 10 days of June.
Issuance of new products, and borrowing from the interbank market, are among the
most common sources of repayment for maturing WMPs, and the recent interbank
liquidity shortage complicates both. China's mid-tier banks, also known as
joint-stock, are likely to face the most difficulty, with an average of 20%-30%
of total deposits in WMPs. This compares with 10%-20% for state-owned and
WMP payouts will exert further upward pressure on interbank interest rates,
which hit all-time highs on 20 June. The seven-day interbank repurchase rate has
averaged close to 7% since 6 June, more than double the 1 January-5 June average
of about 3.3%.
The recent tightening in liquidity was sparked by a drop in foreign-exchange
inflows and seasonal tightness associated with the mid-June holiday; quarter-end
prudential requirements; and fiscal deposit submissions. But it has intensified,
as the People's Bank of China (PBOC) has largely refrained from intervening.
State banks are the primary beneficiaries of foreign-exchange inflows, and the
drop in these flows is a key reason why recent tightness is being felt even
among the largest lenders in the country.
The Chinese authorities have the ability to address the liquidity pressures, but
their hands-off response to date reflects in part a new strategy to rein in the
growth of shadow finance by constraining the liquidity available to fund new
credit extension. We expect this approach to be more effective and swift in
slowing shadow activity than previous efforts, which have focused predominantly
on rules and regulation. But such an approach also increases repayment risk
among banks, and raises the potential for a policy mis-step and/or unintended
Should authorities retain this policy stance, we would expect broad credit
growth to decelerate more noticeably for the rest of 2013, following an
unprecedentedly active Q113. We project our measure of broad credit -
Fitch-adjusted total societal financing, which builds from the PBOC's total
societal financing metric - to remain on a par with 2011-2012, at more than
CNY18trn. But there is significant scope for the reality to be below forecast -
should tight liquidity conditions persist or worsen into H213.
The CNY18trn figure may appear high, although an estimated CNY10trn in new
credit had already been extended by end-May, leaving just over CNY1.1trn in
average new credit per month for the rest of the year (January-May: CNY2trn per
month). This credit deceleration will create a further drag on economic growth,
which has been slowing down steadily since early 2010.
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The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Chinese Banks: Issuance of Wealth Management Products Moderates
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