China Banks Poised to Up Interbank Transactions After Slow H1

     BEIJING (MNI) - The shrinkage of interbank transactions that occurred in

the first half of 2017 under tightened financial regulations is likely to

reverse course due to the central bank's liquidity bias turning to neutral from

tight. 

     As of the end of June, interbank assets and liabilities of commercial banks

in Beijing had decreased 29.8% and 13.5%, respectively, from the end of 2016,

while the amount of funds raised by the issuance of wealth management products

(WMPs) dropped 33.8% compared with the first half of 2016, according to data

released by the Beijing Banking Regulatory Bureau.

     Regulators have targeted interbank transactions as a main contributor of

the country's high leverage ratio and financial risk profile, since the

off-balance-sheet WMPs -- part of China's "shadow credit" financial world --

comprise a significant part of interbank transactions.

     As Xie Ping, the former deputy manager of sovereign wealth fund China

Investment Corporation, said in an interview with the state-run Xinhua News

Agency, "Interbank transactions have increased the complexity of the financial

system, and the cross-market and cross-products businesses they generate pose a

big challenge to regulators."

     According to the People's Bank of China's latest survey of 193 banks

throughout the country, the annual average growth of equity and other

investments by banks, mainly investing in WMPs, entrusted products and other

asset management products, jumped 60.4% from 2012 to 2016, 3.9 times faster than

the growth of bank loans.

     In the same period, the average growth of banks' off-balance-sheet assets

rose as much as 60.2%, 40.6 percentage points faster than that of balance sheet

assets, the PBOC survey showed.

     However, the fast expansion of interbank transactions slowed abruptly in

the first half of this year as regulators accelerated the crackdown on such

transactions.

     "It is a hard time for interbank transaction divisions in banks, as

relevant profits have shrunk over 40%, when they used to account for almost half

of our net profits," a person working at a joint stock bank told MNI. "The WMPs

have been reduced sharply, particularly the off-balance-sheet ones. Currently,

only some small banks are still issuing them" in an effort to survive, the

person said. 

     Regulations on interbank accounts have continued to tighten since last

year. According to Caixin, a prominent Chinese financial magazine, the central

bank conducted inspections of over 2,600 banks' interbank transactions from

September 2016 to January 2017. The PBOC found 40 of the banks in violation of

interbank transaction rules, and ordered them to rectify their interbank

businesses within a period of six months.

     The violators included state-owned banks, joint-stock banks and city

commercial banks, according to Caixin.

     "We would like to stop relevant [interbank] transactions rather than taking

the risk of violating regulatory rules," the person at the joint stock bank

said, "or we could see a harsh punishment."

     Regulators have already punished some banks for rules violations. In July,

the Guangzhou branch of Shanghai Pudong Development Bank was fined by the China

Banking Regulatory Commission due to "violating the rule of prudential operation

on interbank transactions." The penalty was as much as CNY20 billion, which

spooked the market and interbank traders.

     "We are losing jobs, and some of my colleagues have been transferred to

other divisions," an interbank transaction trader in Guangzhou told MNI. "Before

2017, we could make profits fast and easy, but the good times have ended. But I

don't think it's possible for the authorities to eliminate the interbank

business entirely. After clearing the tangled and illegal interbank interests,

transactions of standard products, including money market funds and bonds, will

recover," he said.

     In fact, there are already some signs interbank transactions have

recovered, particularly at non-banking institutions. In July, for example, the

issuance of negotiable certificates of deposit (NCDs) raised a net CNY450.5

billion -- the highest level since February, when NCD issuance peaked at

CNY951.8 billion.

     Zhang Ming, a banking analyst with Huachuang Securities, told MNI that

although the amount of interbank transactions will not return to their high

levels at the beginning of this year, they are likely to see an increase. 

     "The low money market rate, caused by the large [liquidity] injections of

the PBOC since June, is the main contributor to the increase of interbank

transactions," he said. "It is a game between financial institutions and the

central bank, and the front bets are that the PBOC will not further tighten

regulations under the principle of maintaining liquidity stability."

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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