WSJ: China's government says there is no shortage to funds

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#1
Dog eat dog world out in China - time for cleaning up...

China's government says there is no shortage to funds

BY:TOM ORLIK From: The Wall Street Journal June 24, 2013 2:11PM
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CHINA'S government signalled little respite from the cash crunch that has afflicted its financial system since the beginning of June, suggesting tight conditions could continue to strain markets in the week ahead.

A commentary published yesterday by the official Xinhua news agency said there was no shortage of funds in China's financial system. Rather, it said, a combination of speculation and nonbank forms of lending often called shadow finance were contributing to the surge in short-term lending rates.

"It's not that there's no money, it's that the money is not in the right places," the commentary said.

In a separate statement yesterday, the People's Bank of China's Monetary Policy Committee made no direct reference to the surge in borrowing costs for banks and repeated commitments to maintaining a prudent monetary policy. Its repetition of boilerplate language on improving liquidity management and maintaining "steady and appropriate growth" of credit suggests China's monetary-policy makers see little urgency in easing the current stress in the financial system. The statement followed the committee's second-quarter meeting.

China's interbank market—where banks lend each other money to meet their daily needs—has seen a surge in borrowing costs over the past two weeks. The benchmark seven-day repo rate closed at 11.6 per cent Thursday before edging down on Friday. Surging rates have raised concerns about an overstretched financial sector and a growing mismatch between short-term liabilities and long-term assets in the banks.

The People's Bank of China has ample means at its disposal to ease funding conditions. Its failure to do so has been interpreted by economists and market watchers as an attempt to shore up long-term financial stability by imposing market discipline on reckless lenders, even if that comes at the expense of short-term pain for the banks.

The PBOC's inaction so far shows that the leadership "is determined to deflate the credit bubble led by runaway shadow-financing activities," said a senior executive at one of China's top four state-controlled banks. "On the other hand, the central bank will continue guiding the big four banks to lend to smaller banks to prevent any small banks from failing because of a lack of liquidity," the executive added.

Such covert moves to ease liquidity conditions might not be enough to bring rates down in the week ahead.

Fitch Ratings estimates 1.5 trillion yuan worth of retail investment vehicles known as wealth-management products will come due before the end of the month, placing more pressure on the banks to tap the money market for funds to repay investors. That—combined with a smaller volume of bills and repos maturing than in previous weeks and high demand for funds ahead of the end of the second quarter—could mean pressure for rates to stay high.

"We expect conditions on the interbank market to remain tight and possibly nervous in the coming weeks," said Louis Kuijs, China economist at RBS, in a note.

The cash crunch comes as concerns mount about China's growth outlook. Signs of further weakness in June, with the HSBC Purchasing Managers' Index falling to a nine-month low, added to fears that growth in the second quarter would fall below the first quarter's 7.7 per cent year-on-year rate.

Additional reporting: Yajun Zhang and Lingling Wei contributed to this article.
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#2
Mainly due to half-year end window dressing for the chinese banks, which likely will ease next week but it does reflect a tightening liquidity trend..
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#3
Banks must be cautious with liquidity in China, says OCBC

Published on Jul 10, 2013

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OCBC chief executive officer Samuel Tsien said his bank maintains yuan loans at less than 50 per cent of deposits, below the 75 per cent limit prescribed under commercial banking law in China. -- ST PHOTO: JAMIE KOH

OCBC says banks doing business in China will have to be more prudent with liquidity to weather any future crises.

The credit crunch on the mainland that started in the middle of last month is temporary and caught some lenders by surprise, OCBC chief executive officer Samuel Tsien, 58, said in a Bloomberg Television interview on Monday.

A money-market liquidity squeeze in China will probably cut the country's credit growth by about 750 billion yuan (S$156 billion) as its central bank continues to crack down on excessive lending, a Bloomberg survey shows.

Mr Tsien has focused on expansion in China, Taiwan and Hong Kong to offset waning profitability in the lender's home market of Singapore.

In China, "liquidity is something that cannot be counted on for certain," said Mr Tsien, who heads Asia's strongest bank, according to rankings compiled by Bloomberg Markets in May.

"You have to be prepared to have adequate liquidity to fund your assets."

China's State Council, headed by Premier Li Keqiang, pledged last week to improve the effectiveness of financial support for the economy, saying a misallocation of capital is hampering the restructuring of the economy.

The country's regulators are forcing trust funds and wealth management plans to shift assets into publicly traded securities, depriving property developers and local government finance vehicles of so-called shadow banking funds.

These central bank measures are aimed at reining in companies that borrow from banks and then lend those funds in the shadow market, Mr Tsien said. They do not target the banks or the economy, he said.

Banks, which earlier borrowed short term and lent long term to make profits from their excess liquidity, are now lending short term, said Mr Tsien, explaining that they are doing this to have funds immediately available if required.

That is why overnight rates have remained higher than average, he said.

OCBC's liquidity in China is "extremely good" because it mainly lends to state-owned enterprises, which depend on local lenders for most of their funding, said Mr Tsien.

That has helped his bank maintain yuan loans at less than 50 per cent of deposits, below the 75 per cent limit prescribed under commercial banking law in the country.

"We are more cautious," said the Shanghai-born Mr Tsien.

"But having said that, the sector that we've been focusing on in China has always been in the top end of the market."

The greater China region, which includes the mainland, Taiwan and Hong Kong, accounted for 7.2 per cent of OCBC's profit before tax last year, compared with 6.7 per cent in 2011, company filings show.

Mr Tsien also said Singapore's banks had enough safeguards to limit excessive mortgages to any one individual, even without the latest round of measures introduced by the Monetary Authority of Singapore to cool the property loan market.

Starting on June 29, the framework requires that lenders take the borrower's total debt into consideration when granting property loans.

Home loans should not exceed a total debt servicing ratio of 60 per cent and those that do will be considered "imprudent", the authority said said.

The exceptional cases where banks lent beyond that limit to individuals would be in "single-digit percentage points", Mr Tsien said.

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Background story

FOCUS ON TOP END

We are more cautious... But having said that, the sector that we've been focusing on in China has always been in the top end of the market.

- OCBC chief executive officer Samuel Tsien on why the bank's liquidity in China is "extremely good"
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