Why are China's smaller banks shaking

The banks in China are shaking

The Chinese central bank wants to force the banks to discipline because it fears a bubble. Result: Suddenly there is uncertainty in the Chinese banking sector.

Vienna / Jil. “A sack of rice fell over in China” is a “slang metaphor for an unimportant event,” Wikipedia teaches us. It would be different with this phrase: “A bank fell over in China” would be a lot, but certainly not an unimportant event. Now it is not that far, but the fear of a tangible crisis suddenly has the "Middle Kingdom" under control. And of all things, the central bank should be “to blame”.

While the whole world had been waiting eagerly for the Fed's decision last week (a decision on the quantitative easing liquidity program that was only vague), the People's Bank of China seemed determined to force its banks to discipline. In short: the central bank let the banks know that they shouldn't hope for cheap central bank money in an emergency. The result: a sudden credit crunch in the interbank market ("Die Presse" reported).

The banks have also been asked to improve their liquidity management, said four people familiar with internal consultations to the Reuters news agency. "China's loans are at 200 percent of the annual economic output, which is why the central bank is trying, in consultation with the government, to initiate debt relief and realignment and put the economy on a more sustainable growth path," wrote the Barclays experts Yiping Huang and Igor Arsenin a study. The Australian bank Westpac also suspected that the liquidity bottleneck was politically wanted as a regulatory measure.

According to traders, China's central bank is determined to force banks to reduce their debt burdens themselves. In addition, banks are to be urged to limit the excessive sale of investment products in wealth management. The main focus is on the sale of bundled assets such as loan receivables that promise high returns to customers.

The Chinese central bank is in a quandary: The strong credit leverage brings with it the risk of a bubble. The real estate market in particular is now considered overheated. Then there is the question of how much the central bank has the lending business under control at all. The so-called shadow banking sector has grown in China in recent years without any control. Shadow banks are all companies that lend money in some way but are not banks and are therefore not subject to the rules for banks.


Small banks at risk

This creates additional risks, the rating agency Fitch recently warned. "Now they are trying a new approach to curb the shadow banking system," says Fitch expert Charlene Chu. "This new approach is more effective, but it also surprises the market."

At times, rumors caused panic that two of the world's largest financial institutions are said to be dependent on emergency loans from the central bank. The Industrial and Commercial Bank of China (ICBC) - the world's largest bank by assets - was forced to deny it, as was the Bank of China, the fourth largest lender in the People's Republic.

According to the Barclays paper, however, it is rather small institutions that are at risk. The CITIC Bank, Minsheng and the Industrial Bank Co. (not to be confused with the larger ICBC!) Are named - because they sit on risky assets.

("Die Presse", print edition, June 22nd, 2013)