China's worst cash crunch in at least seven years is an indicator of shadow lending gone awry and a banking crisis may appear earlier than expected if liquidity remains tight, according to Fitch Ratings.
"We are starting to see some issues emerging [in liquidity]," said Charlene Chu, a senior director of Fitch's financial institutions group. "It will be very important over the next month or so to see how that plays out. If that doesn't go away, some of this may be moving ahead faster and earlier than we thought."
Mainland banks have raised funds through issuing wealth management products, but those funds are mainly off the balance sheet with lower liquidity. This led to shadow banking.
Chu said repayment for those wealth management products would kick off this month and next and she expected that to mount pressure on mid-tier and joint-stock banks.
"Triggers and timing are the biggest questions related to China," she said. "We are going to have banking-sector problems. Those can manifest either in a crisis or slow growth."
Three-quarters of the non-loan credit transactions involved banks, Fitch said, and the banking system was not immune to problems arising from shadow finance.
Almost four out of 10 market observers expect shadow finance to lead to a banking crisis on the mainland in two to three years, according to a poll conducted at a Fitch conference yesterday.
Mainland finance companies are calling for the central bank to resume capital injections as the country's slowing growth and speculation that the United States will rein in monetary stimulus curb global demand for the nation's assets.
Yuan positions at local financial institutions accumulated from sales of foreign exchange rose 66.9 billion yuan (HK$84.6 billion) last month, the central bank reported on Friday. That was the smallest gain since November last year.
"[The tightening is] emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance and the crackdown on some shadow channels," Chu said.
She said the outlook on the mainland's sovereign rating would be stable, while ratings for smaller financial institutions were under downward pressure.