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
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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