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Free AccessREPEAT: China Banks Poised to Up Interbank Transactions
Repeats Story Initially Transmitted at 09:49 GMT Aug 9/05:49 EST Aug 9
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
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.