Investors are worried about another cash crunch in China this month following June’s unprecedented crisis, as the end of the quarter and two public holidays approach.

Sep 11, 2013

Investors Wary of Another China Cash Crunch

SHEN HONG

Investors are worried about another cash crunch in China this month following June’s unprecedented crisis, as the end of the quarter and two public holidays approach.

But analysts say Beijing has enough financial resources and the resolve to avoid another credit crisis, though borrowing costs will almost certainly rise over the next two weeks due to banks’ need to meet capital requirements and consumers’ demand for cash to pay for holidays.Although China’s money market interest rates have fallen significantly in the past two months, “investors are still quite concerned about liquidity conditions in late September, with some people even fearing a repeat of the June interbank turmoil,” Bank of America Merrill Lynch said in a research note.

On those investors’ minds are a near-certain growth in demand for cash among consumers ahead of the mid-autumn festival Sept. 18-21 and the weeklong National Day holiday in early October, as well as banks’ need to meet loan-to-deposit ratio requirements as the end of the quarter nears.

There is also the possibility of capital outflows if the U.S. Federal Reserve announces next week that it will begin scaling back its monetary stimulus, and that only a small amount of loans from commercial lenders to the central bank is due to mature this month.

The seven-day repurchase agreement rate, a benchmark of interbank borrowing costs, dropped to 3.49% Wednesday, down from 3.75% at the start of the month. It hit a record 30% in an isolated trade on June 20, and averaged nearly 12% when the cash crunch was at its worst.

The rate is now much closer to the 3.3% it had averaged this year before the credit squeeze started in late May. However, given that it stood as high as 4.7% in late September a year ago, when monetary conditions in China were relatively loose, it is likely to rise above 4% later this month, traders say.

“Funding conditions will definitely become tighter toward the end of this month but there won’t be another credit crunch,” said Chen Long, an analyst at Bank of Dongguan.

The Chinese central bank has also improved its liquidity-management skills since June’s cash crunch, Mr. Chen said. “Investors have also become much better prepared for such seasonal volatility in liquidity conditions,” he said.

The People’s Bank of China allowed interbank lending rates to spike in June in the hope of reining in aggressive and reckless financing by banks. That left some small- and medium-size banks caught short of cash to repay investors in wealth-management products, which have exploded in popularity recent years as investors sought higher yields.

However, amid recent turmoil in some emerging markets and in light of a major Communist Party policy-setting meeting set for November, “China’s new leadership cannot afford to be hit by another unnecessary interbank liquidity squeeze,” Bank of America Merrill Lynch said.

“We should keep in mind that China’s central bank has a deep pocket to provide enough RMB liquidity if necessary,” the U.S. bank said, referring to the renminbi, the official name of China’s currency.
Since the turmoil in June, Chinese banks have also improved their own liquidity management and are much better equipped to deal with a possible crisis, it added.

About bambooinnovator
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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