2013-09-15

Chinese Cash Crunch Could Return in September; Why Not Spend ¥8 million to Avoid a ¥10 million Fine?

Banks are worried about another cash crunch this month because conditions are similar to June (and in some cases worse), when overnight rates spiked into double digits.

银行拆借市场不安分 9月流动性再迎大考 (Google Translation at bottom)

My summary: the cash crunch could be back in September. It's quarter end coming up; banks may hike interest rates to attract deposits and meet reserve requirements. In June there was a 3-day holiday, the Dragon Boat Festival. Chinese people still rely heavily on cash and SHIBOR typically spikes around holidays. This month is Mid-Autumn Festival (September 19), another three day holiday and a much bigger holiday in terms of spending. Right after that is the national week-long holiday celebrating the founding of the PRC. This may lead to a "low tide" so to speak (to borrow Buffetts analogy), with the naked banks scrambling for cash.

Bank branches also have more freedom now to set interest rates, and there is even competition between the branches of the same bank. One bank branch president explained that the penalty for inadequate reserves is a ¥10 million fine. He said, why wouldn't I spend ¥8 million to buy deposits and save ¥2 million?

Off-balance sheet loans have also pushed up the loan-to-deposit ratio. One example was Ping An Bank, which made investments in financial products. These are the trust products that offer high yields, through high interest loans to people who cannot obtain bank credit. (Some may be subprime borrowers, but because China's banking system favors the SOEs, there are also credit worthy borrowers who cannot access bank credit. However, the system is clearly starved for capital because at the supermarket down the street from me, there's now a stall set up offering trust products with a minimum return of 13% interest. If the investor nets 13%, you can guess what they're charging to borrowers.) These investments are therefore technically loans, but the bank counts it as an investment. If these are counted as loans, the bank's loan-to-deposit ratio is understated and the loan reserves are overstated. In the case of Ping An Bank, the loan-to-deposit ratio may have jumped from 67% in June to 80.4% this month.

Finally, the article states that earnings are up at some banks, but down at three of the big state owned banks. A portion of the higher earnings came from cost cutting to salary and bonuses and from skirting banking regulations.

For English coverage, see this WSJ piece out last week: Investors Wary of Another China Cash Crunch
However, amid recent turmoil in some emerging markets and in light of a major Communist Party policy-setting meeting set for November, “China’s new leadership cannot afford to be hit by another unnecessary interbank liquidity squeeze,” Bank of America Merrill Lynch said.

“We should keep in mind that China’s central bank has a deep pocket to provide enough RMB liquidity if necessary,” the U.S. bank said, referring to the renminbi, the official name of China’s currency.

Since the turmoil in June, Chinese banks have also improved their own liquidity management and are much better equipped to deal with a possible crisis, it added.
As the Chinese article says indirectly, the banks are now aware of the risk and that should change behavior. A cash crunch may be less likely because of the bankers' fear, but if more people think like BoAML and expect a central bank backstop, then behavior won't improve and another crisis will come again, albeit perhaps by some "unforeseen" shock.

Here's another WSJ piece from a week earlier listing five reasons for a cash crunch. China Cash Crunch 2: Just When You Thought It Was Safe to Go Back in the Markets

The article lists 5 reasons for a cash crunch:

1. Capital Outflows
2. Quarter End Cash Demand (no mention of the holidays, solely focused on banks padding their ratios)
3. Wealth Management Products Due (this mentions maturity mismatch, but not banks themselves investing in these products)
4. Drawdown of fiscal deposits
5. Actions of the big banks

Between the Chinese and Western sources, there are a lot of reasons to be cautious over the next two weeks.

Google Translation of Chinese article below. 银行拆借市场不安分 9月流动性再迎大考
Restless interbank market liquidity and then meet in September exams

Economic Observer newspaper reporter Shi Yao Yao is holidays, went to the bank quarter assessment point.

Shanghai interbank offered rate (shibor) in 28 days varieties rate since September 6 onwards way line, rose to 5.48 percent from 4.48 percent high.

In this regard, an ICBC trader Zhao told reporters, shibor only official online transactions, currently 28 antennas under (Bank, between the various branches of interbank deposit) trading capital prices have risen to 6.27%. He believes that the September 16 ~ 18, 2011 three days before Mid-Autumn Festival, there will be inter-bank liquidity tensions.

A senior lending those funds Qianmou that "if there is once again banking institutions drive up prices, June panic situation will be staged again at the end of September."

Since July, the central bank has been through reverse repo "locked up long short", making short-term financial market liquidity and market interest rates and central bank policy to achieve "desirable" level, the stability of the financial market expectations.

However, an interview with reporters banking practitioners no one can guarantee that the end of June liquidity crisis will not occur again.

"Restless" factor

According Qianmou, as early as mid-May Industrial Bank sensed that the subsequent market liquidity may appear tight situation. "At that time the head office related departments on the one hand they began to ask for lending out money market, on the other hand began between banks with relatively higher price at grant funds, in order to test the market response."

In this regard, an Industrial Bank as counterparty banks responsible person stressed to reporters, ample liquidity in the interbank market, just bank panic caused June liquidity crisis.

The reporter has learned, resulting bank panic situation there are deeper reasons.

According to the Economic Observer reported, at present there are about inter-bank market daily 1.2 trillion to 1.4 trillion yuan of funds for commercial banks lending stock, but far more than the number of banks involved in the dismantling of market imagination. A number of traders told reporters, when the market price is shibor public based on the increase in interest rates of 1% to 2%.

ICBC head office Zhao told reporters, the official bank of Shibor group currently consists of 18 commercial banks to form, but the inter-bank trading rates far higher than their offer.

"This is because as long as the Commercial Bank agrees and authorizes its affiliates can independently participate in the interbank deposit (buy deposits) transactions which only 18 banks but all authorized commercial bank branches to the market at the same time to borrow money. "he told reporters.

This means that as long as there is a bank branch at a high price to borrow money, it will lead to another branch of the same money a higher price. But this two bank branches is available at all branches of the "crowd" competing for capital under the end, the scale of growth in other branches from their own point of view, the behavior will inevitably competing for funds.

Many an interview with reporters that the bank practitioners before commercial banks in deposit and lending rates in unison under the control of the business situation of the times no longer exists.

Qianmou told reporters, according to his understanding of the bank earlier event of default occurs, the majority appear in transactions between branches.

In this regard, there are state-owned lines branch president rather reluctantly told reporters, facing head office assets, deposit appraisal, under pressure from high interest lending or deposit it directly in the market to buy it is quite upset.

"The scale of the end of June, loan ratio assessment is not up to the branch where I want to be fined 10 million yuan or more, if you can spend eight million yuan to buy deposits, which in turn, we are not also save $ 2 million?" He told reporter explained.

There banking analyst told reporters, according to their understanding of the situation from the market and 2013 semi-annual report reactions situation, China and Bank of Communications mobility compared to other state-owned big firms are more tense.

"On one hand, compared to other interbank liabilities Interest rate (banks and other financial institutions Deposits and borrowing funds) interbank deposit rates below (Deposits and Placements) level, which two banks are upside down; the other hand, Chinese banks loan to deposit ratio was 75%, while it reached 81% of the Bank. "banking analysts believe that the two banks at the end of June to the market needs to borrow money to meet regulatory targets.

Rising Head Office

Since entering in September, although the inter-bank money market and short-term liquidity remains stable, and seven overnight repo rates have remained slight fluctuations; still ample supply of short-term funds, but the cross-quarter demand for funds is still weakened, indicating that institutions have begun advance preparations quarter liquidity position. "The end of September, the loan to deposit ratio assessment not affect market liquidity culprit. Because even bank deposits in the central bank strict credit control, the commercial banks can not significantly increase lending, we are taboo individual banks expensive absorb liquidity mobility of our own influence. "one joint-stock Bank department official said.

The lending of funds by senior Qianmou believe that the current market liquidity, size piece of "cake" will not become large, the banks management should not be thinking about how to grab the cake.

Zhao think that compared to the previous state accusing him of capital adequacy, joint-stock banks in the deposit base is weak but still have to make more profitable business dominant ideology, the use of funds mismatch model to make money on the liquidity demand is very strong.

"June's liquidity crisis on the other hand is a joint-stock banks from non-standard credit (short-term funds for long-term use of credit) under a liquidity drying up, desperate to seek matching funds resulting from market volatility." Zhao said.

According to analyst estimates Goldman Sachs Gao Hua, Ping An Bank to invest in other financial institutions, financial products in the first half year and the chain surged 335 percent, 76 percent, to 159 billion yuan, and its size is about 20% of total loans if these assets and credit-related may cause the loan to deposit ratio is underestimated and the amount of loan than to be overestimated. If these investments are regarded as a loan, then the first half of Ping An Bank in 2013 after adjusting for the amount of loan ratio will decline 30 basis points to 1.48 percent, after adjustment loan to deposit ratio will be increased by 13.5 percentage points to 80.4%. Ping An Bank semi-annual report shows that the end of June the bank loan to deposit ratio of only 67%.

A joint-stock bank trader told reporters, compared to the state accusing him of branches involved in financial transactions, is a joint-stock commercial Head Office in more involved in the transaction.

This can range from bank-reported data to be confirmed.

Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank Head Office revenues compared to the same period the proportion of total revenue has fallen sharply. CITIC Bank in this regard income rose from 17% to 22%, Ping An Bank rose from 33% to 38%, Industrial Bank rose from 9.2% to 19.6%. "Compared to the same scale and allow branches to complete the deposit growth, Head Office to do so, on the one hand save a lot of branches of artificial salary and bonus expenses; other banks to circumvent the strict central bank deposit ratio control, By increasing the size of a way to increase revenue, but for hundreds of one hundred billion yuan deal size, the need for adequate liquidity to match. "he explained.

And this is before the joint-stock Bank who head for the end of September fluidity view the reason is not optimistic.

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