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Announcement:

Moody's: China's banking system faces systemic risk from significantly higher dependence on wholesale funds

 The document has been translated in other languages

29 Aug 2016

Hong Kong, August 29, 2016 -- Moody's Investors Service says that the significantly faster pace of asset growth for Chinese banks other than the country's big four, suggests that much of the current asset growth in the Chinese banking system is supported by wholesale funds and not deposits.

"The increasing use of wholesale funds constitutes a systemic risk because it raises interconnectedness in the system, and makes transmission of unexpected shocks more pronounced," says Christine Kuo, a Moody's Senior Vice President.

"With an increasingly larger number of banks now more actively engaged in the interbank financial product business, the banks are becoming more sensitive to the risk of potential counterparty failure, which could magnify any collective reaction to negative news and trigger a sharp tightening in system liquidity," adds Kuo.

Moody's also explains that the banks' most liquid assets are largely in the form of interbank assets, which means they will need to withdraw funds from other banks to meet their own funding needs, which could in turn cause contagion.

Moody's analysis is contained in its just-released report on Chinese banks titled "Banks - China: Increasing Reliance on Wholesale Funds Makes Midsize and Small Chinese Banks More Vulnerable to Confidence Shocks," and is authored by Kuo.

Moody's report points out that a rising credit risk among many mid- and small-sized Chinese banks is their deteriorating funding profile, a reflection of the fact that their usage of wholesale funds — in particular short-term funds — has been increasing in recent years.

In contrast, the big four banks in China (Aa3 negative) are not dependent on the interbank market and are mostly fund suppliers, reflecting their strong deposit franchises and more prudent growth strategy.

Moody's explains that for individual banks, the increased use of short-term wholesale funds will expose the banks to the higher risk of tenor mismatches and funding disruptions. The situation is exacerbated by the fact that many banks channel these short-term, confidence-sensitive funds to support illiquid assets, including loans as well as investments in loans and receivables.

Moody's says that investments in loans and receivables are a growing asset class on the banks' balance sheets, and carries significant risks of their own. Aside from balance-sheet volatility, the costs of funding these liabilities also tend to be higher for smaller banks, reflecting their higher risk premium, which is also a negative from a profitability perspective.

Moody's says that while China's central bank will likely inject the needed liquidity into the market to address systemic risk — should a bank's funding problem become contagious — banks that are more dependent on confidence-sensitive wholesale funds could still be vulnerable to a spike in funding costs and substantial roll-over risks, which could in turn undermine their credit standing.

China's big four banks are Industrial & Commercial Bank of China Ltd (A1/A1 negative, baa2), China Construction Bank Corporation (A1/A1 negative, baa2), Agricultural Bank of China Limited (A1/A1 negative, baa3) and Bank of China Limited (A1/A1 negative, baa2).

Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1036132.

The report may also be found through Moody's topic page "China's Trilemma: Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's Trilemma include:

• Regional and Local Governments — China: Key Factors Shaping Standalone Credit Strength

• Regional and Local Government (RLG)-Related Issuers -- China: Moody's Support Assumptions for Entities Owned by Chinese RLGs

• Measures to Cool Rising Property Prices in Nanjing and Suzhou, China, Are Credit Negative for Developers

• China Credit: Spillover from Potential Dislocation in Onshore Bond Market Would Be Limited

• High-Yield Non-Financial Companies -- China: Most Rated Companies Can Manage Foreign Currency Debt Exposure

• China Credit Market: Wuhan Guoyu's Liquidity Crunch Tests Investor Protection in China

• Chinese Proposal to Regulate Banks' Wealth-Management Products Is Credit Positive

• China Ports: Slower Economic Growth Is Challenging the Sector

• China City Construction's Default Will Impede Offshore Issuance

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Christine Kuo
Senior Vice President
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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