China: Surge in SHIBOR due to New PBOC Restrictions on WMPs: Citi

China looked as though it was on the verge of a financial collapse last night. Indeed, today the carnage has continued with gold down over 5 percent as asset prices drop. But have no fear says Simon Ho, CFA of CitiGroup. What happened?


Simon was in Hangzhou and Shanghai this week meeting bankers. He believes the current interbank tightness is partly the result of PBOC’s restrictions on WMPs, aimed at curbing improper activities/shadow banking. Interbank liquidity will likely ease in July. He sese recent share price weakness as a buying opportunity – with the sector on about 0.95x FY13E P/B, valuations have just fallen below the recent trough in 3Q12. Prefer CCB and BOC – big banks have stronger capital and liquidity. Smaller banks are more vulnerable; MSB is most vulnerable given its large interbank business and need for interbank funding.

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More on China, Shibor and what happened from Citi

New PBOC restrictions on WMPs – Quarter-end liquidity shortfalls in WMPs have in the past been directly funded by the parent bank. But since April/May, the PBOC has prohibited banks from funding their WMPs. Banks are now routing liquidity to their WMPs via other banks and are raising liquidity earlier than before to ensure adequate funding. This has contributed to the pressures in the interbank market.

“Fake deposits” have created pressure – Another activity is the transformation of interbank deposits into customer deposits by banks by channeling the funds through insurance products. This is a grey area, in our view. But high interbank rates would naturally curb this activity.

Financial system is outgrowing the LDR ceiling – This bout of interbank tightness is symptomatic of two bigger forces: (1) diminished capital inflows; (2) financial system has been leveraging up to fund China’s investment growth and LDR is in fact more like 80-90% if off B/S and shadow banking are included. And so the conflict with the outdated 75% LDR regulatory ceiling is becoming greater as shadow banking grows.

Environment still challenging for SMEs – Loan demand still soft in the region; loan pricing has been on a declining trend. No significant improvement in asset quality. But trust companies still see strong financing demand from LGFVs / property companies.

However, as stated above nothing to fear and look at this as a buying opportunity.