- the People’s Bank of China has injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market
- Tuesday’s injections followed missed interbank payments on Monday
- The institutions that missed payments included rural commercial banks
Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.
As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.
State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.
Reuters with a piece on new government guidelines released Monday and the response from firms to restructure debt
- Policymakers want to rein in corporate debt (Chinese companies sit on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP), according to the most recent figures from the Bank for International Settlements. )
- China Construction Bank Corp (CCB), the nations’ second-largest lender by assets, has been reported in two deals to help big, debt-laden state companies in as many days, and other Big Four banks are expected to follow soon.
Foreign exchange sales in China accelerated last month, according to the country’s currencies regulator.
New figures released by the State Administration of Foreign Exchange show China’s commercial banks sold a net $31.7bn in foreign exchange in April, up from net sales in of $12.8bn in June.
That marked a month-on-month rise of 47.7 per cent and brought net forex sales for the year to date to US$205.5bn, a rise of 38.1 per cent compared to the same period in 2015. Large monthly swings are not uncommon.
Indian banks’ asset quality and capitalisation are likely to remain under pressure in the next 12 months mainly because of tepid industrial activity and high leverage by some corporates, Standard & Poor’s said.
“We expect profitability of Indian banks to decline over the next two to three quarters because banks recently cut base lending rates, and their credit costs are likely to remain high,” S&P credit analyst Amit Pandey said.
“The asset quality and capitalisation of India’s banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors,” S&P said in its report- Indian Banks Face An Uphill Road This Year.
BAD LOANS For the year-ending March 2015, gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore in absolute terms, or 4.6 per cent of total advances. Six months later, this rose to 5.1 per cent. The stressed advances ratio — stressed assets is defined as bad loans plus loans that have been restructured by banks — increased to 11.3 per cent in September 2015 from 11.1 per cent in March. Private estimates of stressed assets, however, are significantly higher and vary between 17.5 per cent and a quarter of all bank advances.
Moody’s Investors Service says that banks in China (Aa3 stable) will face a higher degree of uncertainty — and therefore risk — amid increased volatility in interest rates, exchange rates, stock prices and fund flows.
“We also anticipate further increases in loan delinquencies, more defaults on corporate debt and some losses in wealth-management products, as more borrowers struggle to meet payments against the backdrop of high financial leverage and a downturn in their respective sectors,” says Christine Kuo, a Moody’s Senior Vice President.
“While the Chinese authorities will implement measures to mitigate financial market volatility and corporate default, the effectiveness of such measures will vary, because of the challenges of managing China’s large and complicated market,” adds Kuo.
Moody’s analysis is contained in its just-released report titled “Banks — China: Frequently Asked Questions about Chinese Banks amid Recent Volatility,” and is authored by Kuo.
Moody’s report says that the financial performance of Chinese banks over the next two years will be driven primarily by the evolution of their asset quality, which is in turn a reflection of their risk appetites.
MNI have a useful piece from China’s Securities Times on People’s Bank of China calls to restrict capital outflows
- Some local branches of the PBOC have called on commercial banks (including foreign banks) to strictly control the upper limit of net capital outflows
- & to not allow the outstanding value of net capital outflows to be more than zero at any time
- Aimed at avoiding large capital outflows, which could result in cross-border arbitrage
- To tighten liquidity in the offshore yuan market, to counter overseas short-sellers
The Securities Times citing bank sources
PBOC in interest rate move
- Cuts 1 yr deposit rate by 25bps to 1.50%
- Cuts 1 yr lending rate to 4.35%
- Will cut RRR by additional 50bps for qualifying institutions
- Cuts effective 24th Oct
- Says it is liberalising deposit rates for commercial banks and credit cooperatives
- Will increase regulation of interest rates
- Wants to improve the transmission mechanism of monetary policy
- Removes deposit rate ceiling for banks
AUDUSD takes a leap to 0.7297 from around 0.7260
Most headlines are saying the RRR cut is 50bps but Reuters are saying the cut is 25bps with an additional 50bps cut for the qualifying institutions. It looks like it’s just a cut from 18% to 17.5% for most big banks
Update: Reuters have corrected their headlines for the RRR and confirm with everyone else that it has been cut by 50bps
In 1999, the Federal Reserve, under Alan Greenspan, convinced the US Congress to repeal the Glass-Steagall Act, which had been passed in 1932 to eliminate banks’ abilities to offer loans far beyond the actual level of their deposits.
When I learned of this development in 1999, I anticipated that it was put through to allow banks to once again recklessly loan money and that the outcome would be essentially the same as what occurred in 1929 – a depression of major proportions.
Major depressions do not occur overnight. They go in downward waves, interrupted at intervals by false recovery waves. The first major event of what would become the Greater Depression took place in 2007 with the housing crash. A year later, right on cue, came the first of the stock market crashes.
Since then, the US Federal Reserve and the governments and central banks of much of the world have been involved in Band-Aid solutions to postpone further crashes, in spite of the fact that the economy is, in fact, a “dead economy walking.”
The Band-Aids have been many and various and, at some point, one of them will fail. The fact that they are all Band-Aids and not true solutions assures that, when the first one lets go, they will all fail in succession. Only at this point will the average person understand that we have been in the early stages of a depression all along.