China’s Regulators Wary of Interbank Lending to transfer loans off their balance sheet

Updated September 5, 2013, 8:07 a.m. ET

China’s Regulators Wary of Interbank Lending

RICHARD SILK

China’s regulators are on the lookout for risks posed by the rapid growth of interbank lending, a vice governor of the central bank said Thursday. The interbank market all but seized up and interest rates rose to almost 30% in late June, after capital outflows exacerbated a seasonal spike in liquidity demand. The People’s Bank of China proved reluctant to supply cash to the market, surprising an industry that had gotten used to regular liquidity support. “The rapidly expanding interbank market has brought new challenges for implementing monetary policy and avoiding financial risks,” said Hu Xiaolian at a conference in Beijing. “For example, some banks have been using the interbank market to transfer loans off their balance sheet.”Liability mismatches create the potential for hidden dangers when banks rely too much on borrowing from other financial institutions, Ms. Hu added.

Regulators have struggled to control the rapid expansion of lending, with banks selling “wealth-management products” to their customers to effectively circumvent controls on deposit rates and using complex interbank transactions to disguise the level of their loans.

These tactics have fueled the growth of the money supply, Ms. Hu said. The M2 measure of broad money grew 14.5% in the year to the end of July, ahead of the government’s 13.5% target.

“An important lesson of the international financial crisis is that the rapid growth of ‘shadow banking’ is to a large extent not consistent with supervisory policies,” Ms. Hu said.

To ward off the danger posed by high debt levels, China needs to better coordinate supervision of the financial system, Ms. Hu said. “Overcapacity and the very high level of debt in some sectors have the potential to cause hidden financial risks,” she said.

“The main risk lies in the close connections between the banking system, the money market, the credit market, the capital market and the insurance market.”

Last month China announced that a new body, headed up by the People’s Bank of China, would be set up to coordinate financial supervision. Several agencies, including the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, are responsible for policing different industries.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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