Minsheng Bank tells the story of Beijing's credit worries

Thu Jun 27, 2013 4:57am EDT
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By Lawrence White and Michael Flaherty

HONG KONG (Reuters) - The funding crunch prompted by China's central bank was meant to teach a lesson to the Chinese banks that continue to embrace risky lending tactics.

A look at the funding and loan figures at mid-sized lender China Minsheng Banking Corp. (600016.SS: Quote) helps explain why the People's Bank of China (PBOC) made its move.

The PBOC's refusal to inject cash into the money market system last week caused a spike in inter-bank lending rates. Suddenly, banks used to borrowing at 3 percent saw the rate at which their peers would lend to them jump as high as 25 percent.

The move, which came as an economic slowdown weighs heavy on China's financial system, sent a clear and painful message to banks overly-reliant on short term funding: clean up your act.

Over the last few years, Minsheng has tapped several lending methods to try and bolster its returns, including heavy usage of something called a reverse repo, which allows a bank to mask the amount of money it is putting at risk.

The bank nearly doubled the amount of high-yield investment vehicles it sells, known in the industry as "wealth management products". Minsheng's borrowing has prompted concern from analysts, and illustrates the type of banking behavior the PBOC is trying to stamp out.

"Its business model in recent years of leveraging up the balance sheet with interbank transactions has run its course and is now at risk of unwinding," Citigroup said on Wednesday in a research note on Minsheng.

Minsheng's lending figures reveal a heavy percentage of loans needing to be repaid to meet short-term cash outflows -- around 40 percent by one estimate, compared with zero for some of China's biggest lenders.   Continued...

People walk past a branch of China Minsheng Bank in Beijing, June 27, 2013.REUTERS/Jason Lee