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RETAIL BANKING | Roxanne Uy, China
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Why are Chinese enterprises net withdrawing money?

Could it be that they are keeping their money elsewhere - perhaps in CNY accounts in Hong Kong?.

ABF: Based on recent reports, Chinese enterprises are net withdrawing money from their bank accounts which seems unusual as they used to have more deposits before - does this mean they are making less profits? Could it be that they are keeping their money elsewhere - perhaps in CNY accounts in Hong Kong, or they are expanding super fast and need the money for working capital and cant get trade finance for their inventories, or they are making less profits? What do you think is the reason behind Chinese enterprises' net withdrawals?

Fitch Ratings: Charlene Chu, Senior Director
The decline in enterprise deposits is often attributed to the migration of corporate savings into wealth management offerings. Although certainly a contributor, the fact that a large portion of WMPs are brought on-balance-sheet at quarter-end to boost loan/deposit ratios suggests that quarterly enterprise deposit data may be less distorted than perceived.

A common complaint from banks and borrowers in 2011 is that overly tight monetary policy has tied up too much liquidity, leading to a credit crunch in some parts of the economy. In many respects, this is true. The 600bp rise in deposit reserve requirements (RRR) since 2009 to 21% for major banks has indeed locked up CNY4.4trn in cash that would be free if the RRR remained 15.5%. Yet more than 60% of this drain has been offset by a contraction in central bank sterilisation bills, resulting in a net withdrawal of just CNY1.7trn by end-September 2011.

In fact, an examination of the combined amount of Chinese banks‟ required reserves and holdings of central bank bills shows that the average 15.9% share of banking sector assets tied up in liquidity management operations in 2011 is lower than the 16.2% average from Q108 to Q311, and is well below the peak of 17.7% in H109.

Nevertheless, although fewer funds overall are currently tied up with the central bank, a much larger share – 85% compared with 50%-60% pre-2010 – is coming from required reserves rather than purchases of central bank bills. This is critical because bill holdings can be sold if a bank is facing liquidity strains and in need of cash. In contrast, deposit reserves are 100% illiquid and cannot be drawn down, unless a bank can demonstrate a decline in its deposit base.

Deloitte Consulting: Mohit Mehrotra, Regional Head of Financial Services, Strategy & Operations
Real return on short term bank deposits is in negative territory due to rising inflation in China. In such a scenario there is limited motivation for enterprises to keep money in bank deposits. This situation has led to increase in adoption of sophisticated treasury products that allow investors to get considerably higher returns and enable banks to better manage their liability books. Any change in regulations to deal with this situation will also pose unique challenges for banks in managing their off balance sheet items that will be created due to adoption of these products.

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