Interbank Lending Soars to Record Highs in China

Snore. No one wants to read about an impending Chinese banking crisis — because it’s chicken little. Events such as this occur once every 10-30 years, so why even bother talking about it. Well, under that context, someone worried about it might argue its been almost 9 years since the ’08 financial crisis and nothing has changed — things have gotten worse.

Chinese banks are tossing active hand grenades to one another, lending to and for to one another, buying wealth management products — having a grande olde time.

If the country could withstand a 321% debt to GDP debt burden by 2020, so be it. More power to them. Ten thousand blessings.

But in the event liquidity dries up and failures start to occur in the great wall’d land of dog eating savages, the details might begin to mean something.

So here it is.

China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis.

Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent.

Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half, while the Bank for International Settlements also warned lenders are at risk from surging leverage.
“Contagion risks are definitely rising,” said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. “The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.”

The higher the reliance on wholesale funds, the greater the risk of a liquidity crunch, said Christine Kuo, a Hong Kong-based senior vice president at Moody’s.

“When banks face fund withdrawals by other financial institutions, this will in turn prompt them to call back their own funds,” she said.

Banks are also buying each others’ wealth-management products and accounting for the transactions as investment receivables. A record 26.3 trillion yuan of WMPs were outstanding as of June 30, doubling over two years, China Banking Wealth Management Registration System data showed. Investment receivables at 25 listed Chinese banks grew 13.4 percent in the first half to 11 trillion yuan, earnings reports show.

China Minsheng Banking Corp.’s receivables surged 77 percent in the first half, while its short-term borrowings and repos more than doubled in the past two years, company filings show.

Industrial Bank declined to comment and China Minsheng didn’t reply to an e-mail seeking comment.

“Banks’ use of wholesale funds to buy WMPs only makes the contagion risks higher,” said He Xuanlai, a Singapore-based analyst at Commerzbank AG.