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FXPRIMUS Market Brief of the Week: More Stringent Rules to Curb Chinese Shadow Banking Activities May Come

SINGAPORE, SINGAPORE -- (Marketwired) -- 02/24/14 -- In FXPRIMUS' Market Brief of The Week for 24 February, the brokerage firm's Senior Economist, Jimmy Zhu, looks at Chinese banking regulators' comprehensive exercise in curbing shadow banking.

Economic Insights

Chinese Equities Slumped on Slowing Home Prices, Liquidities Withdrawal

Chinese banking regulators have been carrying out a comprehensive examination on its wealth management products. The China Banking Regulatory Commission (CBRC) required banks in different provinces to provide solutions on ways to curb shadow banking activities. The cross-sector inspections intend to find out the root problem, even if it will get legal jurisdictions of the banks involved.

Chinese lenders, including Agricultural Bank, Bank of Communications, China Merchants and Citic, suspended loans to developers for supplies and constructions until the end of March, or even longer according to news or rumours these days. This may make it harder for developers to refinance maturing bonds and trusts, which could create financial-system risks if there are any. Developers have 33.7 trillion Yuan of offshore bonds. About 6.6 trillion Yuan property trusts may mature in 2014. We know that this group of companies are very active in shadow banking sectors, supported by issuance of large amount of wealth management products.

The People's Bank of China (PBOC) also redeemed 450 billion Yuan of reverse repos from banks last week, showing its determination to maintain stable Chinese money markets following January's 23% jump in new loans. The central bank injected the same amount of liquidity during previous two weeks. Reverse repos emerged as the PBOC's key policy tool in managing short-term market liquidity. From the reaction of money markets, investors did not view it negatively, as the 7-day repo rate recently dropped.

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Since third quarter last year, we have been talking about relevant regulatory authorities to rectify shadow banking industry, and relevant rumours spread like wildfire. Subsequently it has been exposed by the media on strengthening of shadow banking issues related notice (No. 107 & 108 documents).

China's efforts to deleverage its economy may be threatened by a jump in Yuan loans. New Yuan loans surged 23% YoY last month to 1.3 trillion Yuan, helping to boost total outstanding loans to 30 trillion Yuan from 14.3%, possibly because the bank regulator aimed to maintain market funding amid a trust-loan slump. Still, any growth above 14% for all of 1Q could boost the loan-to-GDP growth multiplier to 1.9x from 1.8x in the last two quarters, based on estimated consensus. China's social financing only increased 1.4% YoY in January to 2.6 trillion Yuan. Trust loans tumbled 49% and corporate bonds fell 85%, overshadowing the 23% jump in new loans. Trust loans and bonds' share of social financing also dropped to 5.9% from 17.1% last year. A government clampdown on shadow banking and tight liquidity may weigh on corporate funding this year.

The spread between three-month Shibor and Overnight Index Swap has widened to 170 Basis Point (BPS) from 104 BPS three month ago and 115 BPS six months ago because of a surge in Shibor. The interbank rate jumped to 5.6% from 4.65% three month ago and 4.69% six months ago because lenders are asking for higher risk premiums, which suggested concerns about possible insolvencies. The PBOC's acceptance of money-market volatility may heighten these fears.

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