RETAIL BANKING | Roxanne Uy, China

How can Chinese banks handle the sudden surges of liquidity demand?

Find out what analysts have to say about reports of Chinese banks being threatened by worsening short-term liquidity.

Asian Development Bank: Ying Qian, Director of Public Management, Financial Sector and Regional Cooperation Division, East Asia Department

Short term bank liquidity can be affected by many factors, such as change in regulatory norms and foreign reserve swings. However, there seems to be a reversal of the monetary policy in the People’s Republic of China (PRC) from last year's credit control to this year's credit expansion. This will stimulate the lagging economy affected by the euro crisis. As banks lend more to borrowers, short term liquidity is drying up. And yet, overall liquidity in the system is still plentiful given that the central bank can lower the reserve ratio, buy back central bank bills, and inject cash to banks through reverse repos to free up liquidity it sterilized earlier. Further, the PRC’s economy is expected to cool down more, and demand for bank loans will decline.

Fitch Ratings: Mark Young, Managing Director, Head, Asian Pacific Financial Institutions

Short-term liquidity issues can be solved by borrowing from the interbank market, or if necessary from the PBOC, which is what has been happening for the past year. Longer-term, tighter liquidity means banks will have less funds to channel into new credit, and less flexibility in rolling over existing loans.

IG Markets: Justin Harper, Head of Research

Chinese banks are in a difficult position as they are a tool of the government, being forced to make decisions that may not make economic or commercial sense. For example, China’s big banks were forced to lend money to local governments and corporations to help spur economic growth when some were a high credit risk. This created a demand for cheap lending which many of the banks have struggled to maintain as the government cut supply.

But Chinese lenders rarely have to tap wholesale markets for funding needs. They rely heavily on deposits from savers and corporations to boost their reserves, which are then lent out to borrowers. Therefore, I think there is enough liquidity in the banking system to keep the banks afloat.

However, some of the smaller banks may struggle if there is an increase in bad loans. Many will be forced to roll these loans over as the borrowers can’t repay them, leading to reduced cashflows.

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