Caixin View: Grace Periods in New Bank Liquidity Rules Show Regulators Wary of Credit Risks

On May 25, China Banking and Insurance Regulatory Commission (CBIRC) released rules to strengthen banks' liquidity management, adding three new indicators to its oversight framework:

1. The net stable funding ratio

• measures banks' ability to maintain a stable funding profile to meet their liquidity commitments and obligations arising from assets and off-balance sheet activities

• applies to lenders with assets over 200 billion yuan ($31.2 billion)

• is to be enforced from July 1, and must reach at least 100%

2. The high-quality liquid assets adequacy ratio

• evaluates whether lenders have high-quality assets that can be quickly converted into cash to fulfil short-term liquidity needs under stress scenarios

• applies to lenders with assets below 200 billion yuan

• must reach at least 80% by the end of this year and at least 100% by the end of June 2019

3. The liquidity matching ratio

• evaluates the maturity match of bank assets and liabilities.

• a low ratio indicates banks are making long-term investments with short-term funds

• applies to all lenders

• is to be enforced from the start of 2020, when it must be at least 100%

The final version of the new rules show substantially more leeway for smaller banks than the draft circulated last December did, particularly by extending grace periods for the second and third ratios. But we don't think this is just a compromise made by regulators for banks. Instead, it shows the watchdog is treading carefully to avoid increasing credit risks.

Many small and medium-sized banks would likely struggle to hit the liquidity matching ratio. For example, according to Caixin’s calculations, based on annual reports, four of the five rural commercial banks listed on the mainland have liquidity matching ratios below 100% last year, with the highest at just 95%. Data for the fifth was too limited to draw conclusions. The 1,000-plus non-listed rural commercial banks likely have even lower liquidity matching ratios, as they are not subject to as much regulatory scrutiny as their listed peers.

To comply with the new requirements, small and medium-sized banks will need to increase their deposit-to-loan ratio, and reduce their non-standardized, short-term interbank borrowing. These actions will all help bring more bank business back onto balance sheets. But implementing them too quickly could force banks to contract lending activities or rush to divest from existing investments in an attempt to boost the ratio quickly — this would strain the supply of financing, make refinancing difficult, and ratchet up credit risks. By postponing implementation, regulators have signalled a more moderate approach.

Chinese policy makers have repeatedly said they would be cautious in implementing measures to deleverage the financial sector, to avoid triggering new risks while dealing with old problems. The government will “prepare for the worst, seek progress after ensuring stability, and prevent risks that may emerge during the course of eliminating risks” in its crackdown on financial irregularities, according to Huang Hong, one of the vice chairmen of the CBIRC, speaking at a forum this week.

Regulators are right to be careful. Increasing numbers of companies are struggling to raise funds and defaulting on their debt as it is (See Caixin View May 27); and declining credit availability is putting extra pressure on small firms in particular. May's official manufacturing purchasing managers index (PMI) rose to 51.9, up from April’s 51.4 and marking the highest reading since September; but the PMI for small firms declined to 49.6 from April's 50.3, indicating a contraction in activity. This decline occurred even though the value-added tax rates were cut for the manufacturing industry to 16% from 17% at the start of May. We think increased caution in the credit market is likely a key reason for this.

Weekly Roundup

Get your daily briefing on updates across China's tech, media and telecoms sectors every morning from Caixin, in a new roundup launched this week. Take a look at the latest issue here.

Macro & Finance

Chinese stocks passed a major milestone on Friday in their bid to go global, as more than 200 of the nation’s biggest publicly listed companies were officially included in a group of widely tracked indexes published by U.S. giant MSCI Inc.

China’s official manufacturing purchasing managers’ index (PMI) rose to 51.9 in May, up from April’s 51.4, which marked the highest reading since September. The Caixin China General Manufacturing PMI stood at 51.1 in May, unchanged from April.

China has said the White House’s backtracking on its promise to call a truce in a potential trade war damages U.S. credibility, with state media blasting President Donald Trump’s administration as “mercurial” and warning that Beijing will defend the national interest “at all costs.”

The country’s first independently run credit bureau, Baihang Credit Scoring (BCS), officially opened last week. The bureau aims to fill a gaping hole in the country’s credit system by collecting data from online lenders and other nontraditional sources to rate people’s creditworthiness, much the way credit agencies do in the West. On the other hand, private companies such as Tencent Credit and Ant Financial Services Group’s Zhima Credit are no longer eligible to provide personal credit information services on their own.

China will cut import tariffs by more than half on a wide range of consumer goods starting in July, aiming to boost domestic consumption as an economic growth driver and help to balance its foreign trade amid heightened tensions with the U.S. A survey earlier showed Chinese consumers plan to spend more money on imported cosmetics, baby products, food and watches in the coming months.l

China’s top securities regulator may punish six mutual funds, five of which are scheduled to attend hearings on potential administrative penalties this week, for alleged insider trading by their managers, Caixin has learned from sources close to the matter.

Companies

Fallen financial tycoon Wu Xiaohui, founder and former chairman of Anbang Insurance Group Co. Ltd., has rejected his convictions for fundraising fraud and embezzlement, forcing a court to review the case. Anbang said ealier this week that it does not plan to sell off overseas assets, contradicting some foreign media reports.

State-owned Aluminum Corporation of China (Chinalco) is set to expand its smelting capacity after sealing a deal valued at over 100 billion yuan ($15.6 billion) with the government of southwest China’s Yunnan province.

The American Chamber of Commerce in China (AmCham China) said that while it appreciates China’s opening to foreign investors in certain sectors, it urges more communication between U.S. and Chinese authorities in high-tech and agriculture.

Ant Financial Services Group, the operator of Alipay, China’s biggest online payment platform by market share, has closed its latest funding round after raising $10 billion from both global and local investors, five people with direct knowledge of the matter said.

Calendar

June 5: Caixin releases the Caixin China General Services PMI and the Caixin China Composite PMI

June 7: The State Administration of Foreign Exchange releases foreign exchange reserves data for May

June 8: The General Administration of Customs releases import and export data for May

June 9: The National Bureau of Statistics releases consumer price index (CPI) and producer price index (PPI) for May