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MNI (London)
--PBOC Grants Higher Credit Quotas To Some Lenders: Source 
--Chinese Banks' Risk Appetite Sharply Lower
     BEIJING (MNI) - The People's Bank of China (PBOC) is increasing liquidity
injections in an effort to ease tight credit conditions and stabilize the
economy. However, as Chinese financial regulators continue to implement
'de-risking' measures, the impact of these liquidity injections has so far been
minimal, as major refinancing channels are restricted and lenders' risk appetite
is relatively depressed, sources have told MNI.
     "The efficacy of monetary loosening has been reduced, as it is serving to
increase banks' liabilities at a time when their assets are under strict
regulation -- which means that although the water is accumulating in the pool,
the floodgate is controlled," a source familiar with the situation told MNI,
adding that the inefficiency of monetary policy is exacerbated in a period of
economic slowdown.
     Amid a backdrop of corporate defaults and slowing economic growth, the PBOC
has been endeavouring to bolster liquidity via RRR cuts and other policy tools
this year, resulting in lower money market rates. Even so, China's total social
financing (TSF), a key measure of credit and liquidity in the economy, grew at
its slowest pace in over a decade in June, resulting in a slump in investment
and adding to concerns over the economic outlook.
     "The current scenario is a bit like a liquidity trap -- adequate liquidity
is not boosting the economy," the source said.
--SHADOW BANKING
     The regulatory crackdown on shadow banking is a key cause of the
refinancing difficulties that are being experienced by lenders. Since February
2017, the shadow banking sector has started to shrink. So far, almost all shadow
banking channels have been shut down, which primarily hurts small and
medium-sized firms.
     According to Wind, a Chinese financial data provider, there were 25
corporate bond defaults in H1,2018, totalling CNY25.3 billion, and rising by
47.13% y/y. Sixteen out of the 25 companies (or 64%) were privately owned.
     "The PBOC has relaxed credit conditions and some commercial banks have been
given higher quotas," another source close to the PBOC told MNI.
     However, the source is concerned that with lenders having to use a large
proportion of their expanded quotas to shift shadow banking loans back to their
balance sheets, increasing these quotas will do little to boost funding to the
real economy.
--RISK APPETITE
     While there is a shortage of liquidity in the real economy, the interbank
market is well-supplied thanks to the PBOC's largesse. The benchmark 7-day
interbank repo rate fell below 2.5% in early July -- the first time it has
dipped lower than the PBOC's 7-day repo policy rate (currently at 2.55%) since
2016, indicating ample liquidity.
     Increased liquidity provision and higher credit quotas are, however, having
little impact against the backdrop of a decline in banks' risk appetite. This is
similar to what occurred following the U.S subprime lending and European debt
crises, when the implementation of QE had a limited impact in encouraging
lending.
     "The loans to property companies and local government funding vehicles have
been blocked by regulators, so even if we get more quotas, we cannot find good
debtors," a manager in a joint-stock bank in an east coast city told MNI.
     He added that expanded credit quotas are not sufficient to offset the
losses associated with the crackdown on shadow banking.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com
[TOPICS: MAQDS$,MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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