Chinese banks race to stay liquid, funded ahead of PBOC risk inspection

Thu Mar 30, 2017 5:11am EDT
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By Samuel Shen and Engen Tham

SHANGHAI (Reuters) - As China's banks prepare for a rigorous quarterly inspection of their books by the central bank, the ructions in money markets and an explosion in inter-bank borrowing show how addicted they are to risky methods of funding and investments.

For the first time since it was launched last year, the Macro Prudential Assessment, or MPA, will include off-balance sheet wealth management products to give authorities a better sense of potential risks to the financial system.

Wealth management products (WMPs), often linked to shadow banking, have seen explosive growth in the last few years even as authorities try to contain risks from a rapid build-up in debt.

Banks which fail the assessment are believed to face stiff penalties, though the results are not publicly released. The People's Bank of China (PBOC) will conduct the MPA at the end of this month.

Ahead of the review, Chinese banks have rushed to make their books look healthier, hoarding cash and curbing lending.

That has tightened cash conditions more than usual heading into the end of the month and the quarter. Short-term rates CN7DRP=CFXS have trebled to as much as 9 percent in a few weeks, pushing up bond yields and rattling the stock market.

Some lenders have rushed to buy more liquid assets and sold-off riskier loans.

"Ensuring liquidity is the priority now ahead of the MPA,” said Qiu Gaoqing, an economist with Bank of Communications.   Continued...

FILE PHOTO: A woman walks at the Bund in front of the financial district of Pudong in Shanghai March 5, 2015. REUTERS/Aly Song