From the FT today:
The China Banking Regulatory Commission is looking to establish three new hard caps on the interbank market, according to the draft of what is known as “document no. 9”. First, lending to any single financial institution should not exceed 100 per cent of a bank’s net capital. Second, lending to non-bank financial institutions should not exceed 25 per cent of a bank’s net capital. Third, lending to all financial institutions should not exceed 50 per cent of a bank’s total deposits.
FTAlphaville has more from Stephen Green et al at Standard Chartered and Australians will recognise some of the dynamics:
Big banks are well funded through their vast branch networks and their relationships with government and state enterprises. Smaller banks have a much tougher time and have therefore traditionally relied on interbank sources for 10-15% of their funding, compared to 5-10% for the big four banks. However, smaller banks have doubled down on this funding play since early 2012, and its share has risen to around 20% of all funding sources. There has been no clear reversal of this trend since the PBoC’s June 2013 liquidity squeeze, which we believe was partly aimed at reducing this leverage by forcing up borrowing costs. Some of this interbank leverage is driven by banks’ desire to hold high-yielding assets funded by interbank borrowing.
…These new rules will affect the interbank market, particularly the few shareholding banks which are particularly extended in the interbank market. Some of them will likely have to stop new activity, given they would have already hit the ratios laid out in No. 9. However, other banks will likely still have space to grow their interbank assets, given the current low level of activity.
If the CBRC also requires that higher levels of capital need to be held against FAHURA [Financial assets held under repurchase agreements] assets (the level of capital depending on the quality of the underlying collateral, for instance), then this would also reduce incentives for such interbank structures, and slow overall credit growth.
It is unclear whether the CBRC will grandfather outstanding products and let them run to maturity in order to avoid a messy unwinding process, whether it will offer a timeline for unwinding, or simply ban new business. With a significant amount of NBFI assets on their books (we estimate CNY 2.5tn), banks could not easily re-absorb such assets on their normal loan books without exceeding the maximum LDR and using up a lot of capital. The underlying assets are also illiquid. Thus, any new regulation will need to be carefully thought through in order to avoid causing an interbank liquidity crunch. If implemented effectively, the rules would likely slow de facto credit growth. Much will come down to the forcefulness of CBRC implementation.
Although implementation of the No. 9 document will inevitably be gradual, it could result in less credit available for small and medium-sized real estate firms and LGIVs. Small developers are unable to obtain formal bank credit and could become more reliant on entrustment loans from corporates and other sources. LGIVs are also being squeezed by reduced access to the interbank bond market.
Having said that, banks are likely already preparing for No. 9. Some are undoubtedly busy setting up structures before the regulations hit. The yields generated by these assets are extremely attractive. One shareholding bank in Beijing told us that its response to the potential impact of the new regulations is to explore how to innovate around them. Stay tuned for the next stage in the expansion of the interbank market.
Yes, well, the more the story changes the more it stays the same.
Meanwhile, from the WSJ, bad loans in the property sector are being voraciously consumed by a new kid on the block:
China Cinda Asset Management Co., which long ago outlived its original role as a “bad bank,” is about to launch an initial public offering of up to $2.46 billion even as it borrows billions more in an effort to reinvent itself as a lender to cash-strapped Chinese firms, an exchange filing on Monday shows.
The IPO highlights a change in strategy that has seen Cinda emerge as one of the fastest-growing institutions in China’s financial sector, and a major player in the country’s property market. In its traditional role, Cinda used government-backed funds to buy nonperforming loans from Chinese banks that often needed many years to resolve. Now it is betting on faster turnarounds, borrowing from banks to help companies with cash-flow problems, and expecting a payback within three years.
Its initial filing on Monday with Hong Kong’s stock exchange showed that those bets are getting bigger, with the firm’s total assets almost doubling between the end of 2010 and the end of June this year. While Cinda’s new approach promises lucrative returns, it also carries risks: Given the Chinese economy’s slowing growth, companies that are short of cash today may take longer than anticipated to repay their loans.
…So far, the biggest beneficiaries of Cinda’s new approach are property developers. In an effort to cool a frothy real-estate market, Beijing directed China’s banks and then its trust companies — a type of wealth-management firm — about three years ago to pare back on new lending to developers, leaving many real-estate firms strapped for cash. Cinda stepped in. In the 18 months covering 2012 to mid-2013, the amount of credit Cinda had extended to the real-estate sector rose by 47 billion yuan. That equals roughly 40% of the amount of new financing China’s more than 60 trust companies — the sector’s usual nonbank lender — had extended to the property sector over the same period. In 2010, only 625 million yuan worth of credit extended by Cinda had gone to real estate.
It’s still hard to say where all of these moves leave growth prospects. It looks like the Chinese banking system is thoroughly hooked on property and is reinventing itself every few years to keep the party going with regulators doing their best to keep up.
