The People's Bank of China (PBoC) needs to place a greater focus on market stability with regard to the current liquidity problems facing the country's banking system, according to a senior figure from Bank of Communications.
The People’s Bank of China (PBoC) needs to place a greater focus on market stability with regard to the current liquidity problems facing the country’s banking system, according to a senior figure from Bank of Communications.
After decades of high growth, the Chinese economy is showing signs of slowing down with the first real stresses occurring last week as credit froze in the interbank market with the seven-day repo rate at one point spiking to 28%.
Market commentators have speculated that the PBoC was trying to limit the growth of China’s shadow banking market. However, speaking at the Risk China conference in Beijing, Liang Kui, senior manager in asset and credit management at Bank of Communications said the central bank needed to focus on other priorities.
“The authorities said we need to adhere to stability. People took for granted that the PBoC would intervene as the US and EU did with measures such as quantitative easing but this time it’s not the case,” he said.
The PBoC was forced to issue a statement on Tuesday saying it would provide a temporary support to any bank experiencing liquidity issues - a development that represented an about-turn from a statement 24 hours earlier which put the onus on banks to manage their liquidity risk internally.
According to Liang, the PBoC was taken by surprise by last week’s events. Liang said there is inconsistency among regulators in China. “The PBoC didn’t expect capital markets would have such a reaction but they should have anticipated it. It shows they are blind in making these decisions.”
“We have the state council, CBRC [China Banking Regulatory Commission], CSRC [China Securities Regulatory Commission] and each has one responsibility. I placed high hopes on the central bank here in China but as a result of the capital market reaction yesterday I lost my confidence.”
Chinese banks have been impacted by the spillover from the shadow banking sector and a macroeconomic slowdown that started last year. In 2009, tightening of interest rate policy led to restrictions in lending and coupled with strengthened supervision of Chinese banks under Basel II and Basel III, this led to the creation of shadow banks in China where smaller, lightly regulated institutions offered financing at high rates of interest to small and medium-sized enterprises (SMEs). Rates of lending are typically 15-20% and at tenors of less than a year.
According to rating agency Fitch, banks are directly or indirectly involved in three-quarters of all shadow finance transactions. Some commercial banks have exposures to trust and wealth management products that are linked to these SME loans.
“Banks can’t fund the demand for loans from SMEs but private investors have a need for returns. During the financial crisis the US Federal Reserve asked banks to make loans to this segment but banks were reluctant to do so because of the higher risk, which is similar to China,” says Liang.
Hu Yifan, chief economist and head of research at Haitong International, agreed that more action was required by Chinese authorities. “This is similar to the US prior to the financial crisis because of the bubble in the housing sector. The PBoC should intervene as China is slowing down and without a clear policy the economy can’t develop further,” Hu said.
“The US injected liquidity after the financial crisis and money flowed in a short period and money didn’t go into the real economy - more focus is needed on the real economy. The government believes it can tolerate lower growth but we cannot drop from 9% to 7% as there would be severe job losses,” she added.
Liang said that liquidity was not an issue for the majority of banks with smaller banks being subjected to higher interbank rates.
This article was first published on Risk