Tightening interbank liquidity

CHINA ADVISORY - Report 15 Jun 2018 by Andrew Collier

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Chinese banks have been caught in the middle of stronger regulations and rising pressure from new competitors, particulary the internet finance companies. Under new rules discussed late last year that banks are starting to put in place, guaranteed wealth management products have been forbidden, raising bank funding pressure. Meanwhile, online competitors – often with risky business models and lax regulation – are attracting depositors from the banks. Chinese banks have fought back by switching from WMPs to structured deposits – often utilizing financial tricks to evade the regulations.

The result of these forces has been rising interest rates, a continued flow of credit outside the grasp of the regulators, and financial risk moving – once again – off balance sheet to the P2P firms. The outcome is likely to be continued de facto interest rate liberalization, coupled with rising defaults in unregulated products.