A summary of recent regulations and monetary policy measures
Wholesale-funded banks with high shadow banking exposure under pressure.
The pace of releasing new regulations has accelerated notably. Three ruleswere unveiled by CBRC over the weekend. The direction is clearly on thetightening side: cracking down on shadow banking and reducing wholesalefunding. On the other hand, to hold the bottom line of no systemic risks, thePBOC has increased liquidity injections (by Rmb1.6tr in 2017, equivalent to110bps RRR cuts) and announced a few pre-emptive measures, e.g. atemporary RRR cut and relaxation in the automated pledging financing facility.As such, we expect financial deleveraging to continue but the process is likelyto be orderly, given the low risk of an uncontrollable “liquidity event”.
The CBRC released today The Guideline on Liquidity Risks of CommercialBanks, matching the Basel III standards of liquidity management (e.g. LCR andNSFR) and introducing new measures. We view it as a continuation of financialdeleveraging, as we expect this regulation to lower banks’ duration mismatch,cut off wholesale funding and reduce investment in shadow banking assets. Assuch we see a net positive over the longer run as it reduces systemic liquidityrisks. However, near term, the banks that are wholesale-funded and shadowbanking-centric are likely subject to NIM pressure. Among the banks we cover,joint-stock banks are more affected while big banks should benefit.
Tighter regulations: closing loopholes, but being more coordinated
What prompted regulators to issue such a regulation.
Since the first meeting of the Financial Stability and Development Committeeon 8Nov 2017–the “super-regulator” coordinating financial regulators–thepace of releasing new regulations has accelerated notably (Fig. 2). Thisweekend, the CBRC released 3regulations targeting entrusted loans, banks’concentration risks and shareholding management. These regulations, ingeneral, target a crack down on shadow banking by closing loopholes andreducing regulatory arbitrage. What makes this round of tightening differentfrom the past is that with the new committee leading, the regulations are morecoordinated and most have considerable grace periods. Starting with TheAsset Management Guideline (note), an overall guideline, the regulations aretargeting particular sub-markets/sectors one-by-one and step-by-step.
The leverage in China’s financial sector has increased notably in past years,characterized by rising duration mismatch and proliferation of shadow banking.
Monetary policy: higher rates but ample liquidity with pre-emptive measures
Liquidity risks in the system trended up accordingly and only recently havestarted to moderate given the ongoing financial deleveraging campaign. Tofurther contain liquidity risks, it is necessary to strengthen banks’ liquiditymanagement, especially for joint-stock banks and smaller city/rural banks.
PBOC has hiked OMO rates 25bps in 2017; we expect another 20-45bps in2018, but liquidity vol. should stay ample, as we believe that, while tightening,PBOC also needs to prevent systemic risks. Indeed, in 2017, PBOC injectedRmb1.6tr liquidity mainly via MLF and PSL, equivalent in size to 100bps RRRcut or sufficient to fund 10% of banking asset expansion. Recent relaxation onautomated pledged financing suggests smaller banks in temporary liquiditytroubles should have access to bigger-amt funding provided by PBOC. Alsotemporary RRR cut during Chinese New Year may release Rmb1.5-2.0trliquidity for 1mo., which should smooth liquidity tightness by then. We expectrelatively remote likelihood of bank run in wholesale funding market.
What are the regulatory changes.
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