Asset managers are not expecting China’s central bank to increase liquidity in markets any time soon, as regulators apply pressure to the country’s shadow banking system.
The Shanghai interbank offered rate (Shibor) – the rate at which banks offer loans and China’s equivalent of Libor – hit a record high of 13% on Monday, and the People’s Bank of China has given no indication it will cut rates in the near future, say fund executives.
The PBoC’s crackdown comes amid concerns that the country’s loan market has grown too fast and too soon, with the central bank hoping that high Shibor rates will curb the expansion.
Traders fled stock markets yesterday, sending the Shanghai Composite below 2,000 for the first time in 2013 and leaving the index down 13% year-to-date.
On Monday, the PBoC issued a statement saying “liquidity in our country’s banking system is staying at a reasonable level, [and] financial institutions should manage their liquidity and profitability at the same time”, in a clear indication that it does not plan to move to boost liquidity.
“We would expect the liquidity to remain tight near term, given the central bank is [focused on] deleveraging, especially in shadow [financing] areas,” says Raymond Chan, Allianz Global Investor’s Asia-Pacific CIO. The rate hike is a “deliberate regulatory crackdown on some shadow banking financing channels”, he adds.
Tightening credit will curb lending practices but will also stifle GDP growth in the market, which has been on the decline from double digits to around 7.5% today.
“China will likely enforce this tight liquidity situation for quite some time,” says Frederic Lamotte, CIO at Crédit Agricole Private Banking. “This basically means there will be much higher financial risk, lower economic growth prospects and subsequently lower corporate growth as well.”
The tightening of credit could ultimately lead to a number of small-to-medium size banks collapsing, with Lamotte expecting a few smaller players to go bankrupt, although he maintains that it will be positive for the industry as a whole.
Lamotte argues that one or two small defaults would be good for the industry as it would lead to an uptick in mergers, which will in turn mean there will be fewer banks to regulate, a bonus as far as the PBoC is concerned.
“I think we are entering a turbulent area that will last a year-and-a-half to two years,” Lamotte adds.
However, most analysts and fund managers do not believe the Chinese banking system is due for an imminent collapse.
For example, Paul Chan, Invesco’s Asia ex-Japan CIO, is confident that the PBoC and the China Banking Regulatory Commission (CBRC) will be able to handle a potential credit crunch as both entities have adequate capital and reserves to keep the system stable.
“I am not predicting a collapse of the banking system. The problem is still early. If they step in now, they can resolve it,” Chan says. “The difference from [the situation in] the US is that when the market realised the problem, it was already too late. Plus, China has enough capital to recapitalise the banks.”
CN Benefit, a Chengdu-based wealth management consultancy, agrees that a large-scale default is unlikely, but believes costs will become an issue. Fang Rui, analyst at CN Benefit, argues that commercial banks will cope with tightening credit by rolling over existing products, borrowing from the interbank market and selling the bonds.