Analysts welcome PBOC's tactical interbank injection

Cash boost for interbank market brings relief for smaller banks, but analysts see central bank keeping up pressure for improved loan books

PUBLISHED : Wednesday, 22 January, 2014, 12:54am
UPDATED : Thursday, 13 February, 2014, 9:28am

The People's Bank of China's decision to pump cash into the interbank market in the lead-up to the Lunar New Year has been a timely shower for smaller, local banks reeling in a credit drought and should keep them from going under in the near future.

Some economists said the central bank had fed "just enough" cash into the interbank market to make sure that banks would still face pressure to improve their loan portfolios in the wake of a rapid rise in higher-risk trust loans and wealth management products.

Despite some instant relief from a credit crunch, they said the PBOC would continue to let interbank rates hover at higher levels to discourage commercial banks from frivolous lending that had helped fuel property price bubbles and excess production capacity.

Mark McFarland, the global chief economist at British private bank Coutts, said he did not expect a huge amount of cash would be injected into the interbank market in the 10 days to the Lunar New Year holiday, starting on January 31, unless there were potentially serious problems with the proceeds from large trust products not being repaid.

"The PBOC appears to be trying to feed just enough liquidity to satisfy immediate needs without being seen to be a lender of the first resort for errants," he said. "By adding just enough, the PBOC keeps two-way risks in play and forces banks to better manage their loan portfolios."

McFarland said it was unlikely Beijing would allow a "significant bankruptcy" in the near term as the PBOC was rolling out its statutory loan facility to smaller banks while planning a deposit insurance scheme. That means bankruptcies would probably happen later rather than sooner.

The PBOC pumped 255 billion yuan (HK$326.8 billion) into the interbank market after interbank rates jumped on Monday. But the largest single-day injection of funds in almost a year still saw the seven-day repurchase rate - a barometer of interbank funding availability - close higher at 6.6 per cent yesterday, up from 6.32 per cent on Monday.

The injection was crucial in the lead-up to the Lunar New Year holiday, when funding needs grow. Companies race to raise funds to pay wages, bonuses and bills while an estimated tens of billions of yuan in trusts loans or wealth management products are due on January 31.

Nomura chief economist Zhang Zhiwei said he believed the central bank would continue to contain credit growth in the first quarter while implementing tight regulation of shadow banking - non-conventional lending activities deemed off banks' balance sheets.

"The central bank is very concerned about potential liquidity risks in the interbank market leading to the Lunar New Year holiday and financial risks in smaller banks," he said. "Defaults in the corporate and shadow banking sector are likely to rise."

Bank of America Merrill Lynch economist Lu Ting said Beijing was likely to allow banks to clean up more non-performing loans and allow some trust products to default. But it would prevent bond products, particularly those issued by state-owned enterprises or local government funding vehicles, from defaulting, he said.

He said 3 billion yuan in trust loans to a coal miner, underwritten by China Credit Trust and distributed by Industrial and Commercial Bank of China, was destined to default when they matured on January 31. The miner collapsed recently, but ICBC has said it has no intention of bailing out investors.

Lu estimated a third of the mainland's outstanding 4.6 trillion yuan in trust loans would mature this year.

Mizuho chief economist Shen Jianguang said many trust loans or wealth management products would default this year.