Liquidity concerns abate for most Chinese lenders

While monetary easing has helped reduce liquidity pressures for lenders in China, market insiders and analysts said banks need to strengthen their management to avoid long-term risk as well as a repeat of last year's credit crunch.

The People's Bank of China's recent moves to launch targeted reserve requirement ratio cuts have helped release lenders' liquidity.

Recently, the Shanghai Interbank Offered Rate, a barometer of liquidity, has remained low, while yields on wealth management products have stayed flat.

"If you look at the (WMP) rate now ... you know that the money crunch is not going to repeat itself this summer," said Li Yuke, a 32-year-old interior designer, while perusing a website that gives information on yields for WMPs offered by hundreds of banks.

June 29 is usually a day on which few bankers sleep easily, because at the end of June, lenders must ensure they have sufficient deposits to pass regulatory inspections. Those inspections affect lenders' credit and profits throughout the year.

On June 20, 2013, the Shibor soared to a record 13.44 percent, raising concerns over the health of the Chinese economy and financial system.

"Some lenders defaulted in the interbank market, and almost every bank struggled to bridge the gap between too much lending and too few deposits. It was a nightmare," recalled Lu Cheng, a wealth product manager in Shanghai.

Analysts said that last summer taught the banking sector a lesson, and regulators and lenders alike have kept their eyes on the balance sheets and strengthened risk management.

The central bank has opted for selective easing aimed at specific sectors and targeted stable, lower interbank interest rates so far in 2014, according to Barclays Research.

Since late January, the central bank has ensured ample liquidity in the banking system. In March, regulators established a relending program of 50 billion yuan ($8 billion) to support financing for micro and small enterprises.

In April, the government announced a 200 basis point reserve ratio cut for county-level rural commercial banks and one of 50 bps for rural cooperatives.

Lenders were also told to prioritize mortgage lending and charge reasonable rates and quicken loan approvals in May.

"In our view, cutting interest rates would be a better policy than broad-based reserve ratio cuts, given the high leverage in the economy and weak demand on the one hand, and ample liquidity and unresolved implicit guarantees and 'moral hazard' on the other.

"Although lending rates have been liberalized, a symmetric cut to both deposit and lending rates should transmit to the real economy," said Jian Chang, an economist and analyst with Barclays Research in a note.

Other data have also shown that China's lending tensions have eased.

"Our China credit impulse estimate held steady at around 28 percent of GDP last month. May's pickup in yuan-denominated lending and M2 growth, together with low interbank rates and declining marginal borrowing costs, suggests that liquidity and credit conditions have been easing," said Wang Tao, chief China economist with UBS AG.

However, some sectors have still experienced financial stresses. Analysts warned that risks may emerge in the future.

According to Kai Hu, a Moody's Investors Service Inc vice-president and senior credit officer, tight credit conditions are creating financial stresses for certain sectors such as steel, mining and property, and especially for smaller, private enterprises.

In the property sector, for example, "we note that developers are facing significant slowing sales growth, rising inventory levels, and weakening liquidity," said Hu.

Jimmy Leung, PricewaterhouseCoopers LLP"s China banking and capital market leader, said lenders need to watch nonperforming loans, which may increase in 2014 amid slowed economic growth and transforming and upgrading in some sectors.

Lenders need to strengthen their risk and liquidity management, said Leung.

Staff at lenders said they have not shaken off the pressure of securing enough deposits to let their employers to lend as much as possible and meet regulators' requirements regarding loan-deposit ratios and reserve ratios.

"Liquidity management is a long-term task. After June 30, there will be December 30 and June 30, 2015. The exams never end, and the pressure lingers," said Lu, the wealth manager in Shanghai.