MNI SOURCES: Lending Still Weak Despite PBOC Liquidity Support

--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

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