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June 25, 2013 7:00 pm
It is official: the Chinese central bank does not want to trigger its own credit crisis.
After two weeks of starving the financial system of cash and telling banks to clean up their own mess, the People’s Bank of China struck a much more emollient tone on Tuesday.
In a volte-face that bore more than a passing resemblance to Mario Draghi’s “unlimited” bond-buying pledge last year at the European Central Bank, the Chinese central bank promised to provide liquidity support to any financial institution strapped for cash. What is more, without naming any names, the central bank said it had already provided such support.
When money market rates in China last week spiked to double digits and the country’s interbank market froze, there had been talk about whether Beijing was nearing its Lehman moment. Instead, the central bank’s commitment to backstop every bank ensures that there will be no spectacular collapses and no imminent meltdown.
“Market interest rates are likely to decline significantly in the remaining week, which will help stabilise the market and the real economy,” said Liu Ligang, an economist with ANZ, the bank.
The obvious catalyst for the central bank’s change in tone was the market turmoil. The stock market tumbled 10 per cent over the past week and had fallen a further 6 per cent on Tuesday before sharply reversing direction to end nearly flat when rumours spread of a more supportive stance from the central bank.
Likely of even more concern to the government was the dislocation in China’s bond market.
China Development Bank, a lender fully owned by the government, had to scrap a debt sale on Monday when it realised that it would not be able to sell its paper at a reasonable price.
There were also fears that China’s growth slowdown could prove much sharper than expected. Economists had previously forecast a gradual ebbing of Chinese growth towards 7.5 per cent over the next few years, down from the heady 10 per cent pace of the past decade. In the midst of the cash crunch, some analysts saw 6 per cent as a real possibility but that would have been tough to accept in Beijing.
“The current growth rate is quite close to the floor that new leaders have indicated they will tolerate,” said Lu Ting, an economist with Bank of America Merrill Lynch.
Beyond the market and economy, there was another, less-noticed factor at play. The central bank’s decision to let interbank rates rise was in large part aimed at limiting the growth of shadow financing flows. By reining in credit growth, it hoped to curb banks’ use of off-balance-sheet lending vehicles.
However, its actions were beginning to produce the exact opposite of its intended effect. Strapped for cash, banks were pushing out huge numbers of risky, high-yielding “wealth management” investment products to attract depositors.
Last week there was an 18 per cent jump in the number of banks selling wealth management products and a 67 per cent increase in the overall number of products sold, CN Benefit, a wealth management survey found.
Industry surveys had shown a gradual increase in returns on wealth management products since the start of the market strains. Average yields had risen to about 4.5 per cent from 4.2 per cent over the past week, the CN Benefit survey showed.
But the Financial Times found a much steeper increase at eight banks it surveyed this week. Every bank was selling short-term products with yields of at least 5.4 per cent and several were in excess of 6 per cent – almost double the benchmark deposit rate in China.
This was partly due to banks passing on the higher markets rates, but the key reason was to get the new clients and with it the liquidity they needed, analysts said. “Every bank has turned crazy,” said a manager at Bank of Jiangsu, a midsized lender.
The flood of new products was also cannibalising cash from other parts of the Chinese financial system. “People are pulling money out of stocks to buy wealth management products,” said Le Xia, China economist with bank BBVA.
With the central bank explicitly promising to stand behind all lenders, their rush to raise cash through off-balance-sheet products will lose some of its impetus, but the problems of the shadow banking industry remain.
Additional reporting by Emma Dong in Beijing and Naomi Rovnick in Hong Kong
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