China's chief banking regulator Shang Fulin soothed a jittery market on Saturday, saying there is more than "sufficient" liquidity in the interbank market. He also pledged to strengthen debt risk control.
The statement by the chairman of the Chinese Banking Regulatory Commission again reiterated the "credit crunch" that pushed money market rates to historical heights recently is not due to insufficient capital supply. It was more a matter of liquidity management problems among Chinese banks, analysts commented.
"Liquidity tightening appeared over the last few days because of many factors. But, overall, liquidity in our banking system is not a problem," Shang said in a speech at the Lujiazui Forum in Shanghai.
Total excess reserves in China's banking system have reached 1.5 trillion yuan ($240 million), more than twice the amount necessary for normal payment and settlement needs, Shang said.
"There are some defects in the liquidity management in commercial banks, as well as their business structure. It must be treated carefully," he stressed.
Many analysts believe the central bank's refusal to inject liquidity into the market in mid-June when the interbank interest rate was spiking was a punitive measure to contain banks' carrying trades that created potential risks.
Bank-issued wealth management products totaled 8.2 trillion yuan by the end of the first quarter, of which 70 per cent went into the real economy, Shang said. He noted that the authorities will prevent arbitrage activities by controlling the gross volume of WMPs and strictly supervising investment schemes and accounts, based on regulations issued in March.
However, it is still unclear how much of it was to regulate the banks, since some have rolled out massive amounts of WMPs to replenish liquidity after the recent credit squeeze.
The average yield of WMPs has been climbing for four weeks, according to Bankrate, a WMP aggregate site, and some are now double China's benchmark deposit rate.
"It has been three months since the March regulation was introduced, but there has been hardly any bank in China that has actively implemented what it requires," said Jimmy Leung, banking and capital markets leading partner of PwC China.
Shang said there would also be regulations targeting local government financing vehicles and real estate financing, but risks in these sectors are under control.
He pledged that local borrowing would be closely monitored and controlled to "alleviate hidden risks".
Outstanding bank loans to local government financing vehicles totaled 9.59 trillion yuan at the end of the first quarter, Shang said.
According to JPMorgan Chase, the shadow banking sector in China, which is vaguely defined but mainly includes trust companies and WMPs' investment with clients' capital, is now as much as 36 trillion yuan.
To prevent and reduce financial risks, Shang said, the authorities should simplify the structure of the finance sector, carry out reform based on the real economy, strengthen supervision over related-party transactions, control leverage and enhance information disclosure.
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