RRR Cut Boost Liquidity in Q2, But Bad Loans Up As Well

A few related stories out in the past few days. First, the PBOC issued its Q2 monetary report. It is signaling credit growth was high in Q2, causing analysts to curb their RRR cut forecasts going forward.

China Central Bank Signals No Broad Monetary Easing

The People’s Bank of China warned that the country’s credit and money supply have increased rapidly and indicated that it will refrain from broader monetary easing to support growth.

“The total debt level has been rising relatively quickly,” the PBOC said in its second-quarter monetary policy report on Aug. 1. “Our existing money supply and credit are already relatively large and their growth is also high.”

Nomura Reverses Prediction On PBoC's Universal RRR Cut

The PBoC plans to continue its examination of commercial bank loans to small and micro-enterprises and the agricultural sector, and will look to adjust banks' reserve requirement ratios (RRRs) as it feels appropriate.

However, the report did say that "monetary policy is the aggregate policy and the structural adjustment function is only supplemental. Targeted RRR cuts, if implemented over a longer time frame, will also cause problems".

Overall, we feel the monetary policy stance is being adjusted slightly more towards neutral – as the accumulation of policy easing measures has been significant and growth is picking up – but it remains loose.

We no longer expect an across-the-board RRR cut in the third quarter, but expect the government to lower total financing costs through targeted measures and reforms in the third quarter.

One reason why those cuts may not materialize is that they didn't work as planned in Q2. Small and medium businesses did see more credit, but only a portion of the credit that was supposed to go to SMEs actually got there. One reason why credit didn't flow as full speed: banks are worried about credit risk.

降准2000亿仅部分投小微 钱都去哪了 (Only A Portion of the ￥200 RRR Cut Went to Small Business, Where Did the Rest Go?)

"If this area of ​​risk is higher, the rate of bad debts soared how to do? That the bank will reduce the capital invested in this area."

Speaking of bad loans:

上半年银行不良继续扩散 山东浙江“吃紧” (First Half Bad Loans Continue Spreading, Shandong and Zhejiang are Hard Pressed)

Data CBRC released at the end of July, as of the end of June, the balance of non-performing loans at commercial banks amounted to 694.4 billion yuan, an increase of 102.4 billion yuan over the start of the year and up 11 consecutive quarters; NPL ratio was 1.08%, up 0.08 percentage points from the beginning of the year.

Zhejiang and Shandong lead the way in terms of credit deterioration.

According to CBRC data, Zhejiang regional commercial bank non-performing loans and non-performing loan ratio in 2012 and 2013 annual ranking first in the country. Banking Bureau, Zhejiang latest data show that as of the end of June 2014, the province's non-performing loans and foreign currency banking financial institutions 135.6 billion yuan, an increase of 15.67 billion yuan over the beginning; NPL ratio 1.96%, up 0.13 percentage points from the beginning of the year.

In the first half of this year, Zhejiang Province bad loans continued the upward trend last year. The end of 2013, Zhejiang Province, banking institutions and foreign currency non-performing loan balance of 119.97 billion yuan, an increase of 24.82 billion yuan over the beginning; NPL ratio 1.84%, up 0.24 percentage points from the beginning of the year.

On Shandong, the first half of this year, the bad Shandong province banking financial institutions loans 81.537 billion yuan, an increase of 16.731 billion yuan over the beginning of the NPL ratio 1.57%, up 0.22 percentage points from the beginning of the year.

Contrast in the first half of last year, the first half of this year, Shandong Province bad new loans nearly five times last year.

CBRC Vice Chairman Yan Qingmin also warned that some industry risk is showing, mutual guarantee problems are serious, accelerating the spreading of risk. Additionally, steel trading debt problems are still emerging.

CBRC Vice Chairman Yan Qingmin recently wrote that part of the industry exposures, mutual interconnection between corporate financing problem is serious, accelerated risk spread. Affected by events such as the Yangtze River Delta region of steel trade, as the industry continued to lengthen the time the state of downturn, the Pearl River Delta and other regions of the steel trade enterprise credit risk starting to show.

Yan Qingmin said that real estate risk is caused mainly due to rising bad loans, non-performing loans would severely restrict banks to support the real economy, effectiveness and sustainability, to accelerate the write-off of bad loans.