China Regulator Says Bank Reserves Enough to Weather Cash Crunch

China’s banking regulator, in his first public comments since the country’s worst cash crunch in at least a decade, said the operations of its lenders won’t be disrupted because they’ve built up sufficient cash reserves.

Banks had about 1.5 trillion yuan ($244.4 billion) of cash reserves as of June 28 that could be used for payment and settlement needs, more than double what is usually required, Shang Fulin, chairman of the China Banking Regulatory Commission, said in a speech in Shanghai yesterday.

“The tight liquidity condition on the interbank market has been easing in the last few days,” Shang said at the annual Lujiazui financial conference. “This type of situation won’t affect the banking sector’s smooth operations.”

Chinese bank stocks jumped June 28 after People’s Bank of China governor Zhou Xiaochuan pledged to maintain market stability following a cash squeeze that sent money-market rates to a record. Among buyers of the shares was Temasek Holdings Pte, Singapore’s state-owned investment company, which said June 28 it raised its stake in Hong Kong shares of Industrial and Commercial Bank of China Ltd. to 8.07 percent from 7.92 percent.

Shares of ICBC (601398), China’s largest lender by market value, gained 2.7 percent in Hong Kong June 28. The stock jumped 5.5 percent in Shanghai, the most since November 2010. ICBC’s Shanghai shares had fallen 8.9 percent this month through June 27 as higher interbank rates spurred concerns that tighter liquidity would hurt economic growth.

Liquidity Management

The cash crunch on the interbank market exposes “deficiencies” in commercial banks’ liquidity management and their business structures, Shang said. The next phase of reform in the banking sector will focus on supporting the real economy and risk prevention, he said.

The one-day repurchase rate touched a record 13.91 percent on June 20 before tumbling on signs targeted injections of funds were being used to ease the cash crunch.

The slowing pace of economic growth in China remains within a “reasonable” range and the economy is stable, the PBOC’s Zhou told the same forum June 28 in his first comments since the cash crunch. Zhou also sought to soothe concerns of a further deceleration of growth, saying he’s fully confident in China’s economic prospects and financial system.

China’s banks have been stable and healthy this year, the CBRC’s Shang said. They had set aside 2.8 yuan for every one yuan of soured assets at the end of May as the industry’s non-performing loan ratio rose to 1.03 percent, he said.

Outstanding Loans

The nation’s economy is in a transitional phase and risks associated with slowing economic growth, loans to local governments as well as the property sector are “controllable,” Shang said.

The nation’s banks had 9.59 trillion yuan of outstanding loans to local government financing vehicles at the end of March while loans to the property industry stood at 13 trillion yuan at the end of April, he said. The nonperforming loans ratio was at 0.14 percent at the end of March, Shang said.

A recent review by the National Audit Office indicated that total local government direct and guaranteed debt may have risen 13 percent to 12.1 trillion yuan by the end of 2012 from the end of 2010, according to Moody’s Investors Service, citing its own calculations based on data in the auditor’s report that showed a 13 percent increase in the debts of a sample of 36 local authorities.

The banking sector’s non-performing loans climbed by 33.6 billion yuan in the three months ended March 31, to 526.5 billion yuan. That sixth straight quarterly gain marked the longest deterioration streak in at least nine years, according to data released by the banking regulator.

Wealth Management

“Some people have compared our local government debt to European debt, but there’s a big difference -- our debts are accumulated for production not for consumption -- most of them have assets as guarantees and the overall risk is controllable,” Shang said.

The value of wealth-management products sold by banks was 8.2 trillion yuan at end of March, Shang said. More than 70 percent of the funds raised through wealth-management products had been invested in the real economy, he said.

The CBRC will ask banks to isolate their wealth-management businesses from their loan businesses as it seeks to tighten control of wealth-management products, he said.

Regulators have sought to curb Chinese banks’ increased use of interbank borrowing and short-term deposits in the form of wealth-management products to finance long-term loans and investment in trusts, some of which are held in off-balance sheets. The crackdown may damage the economy by shrinking the non-bank funding that smaller companies rely on, Barclays Plc said on May 20.

‘Reasonable’ Liquidity

China’s State Council ordered the CBRC to solicit opinions from financial institutions on how to make more efficient use of credit, Hexun.com reported June 25, citing an unidentified person close to the matter.

There’s a “reasonable” amount of liquidity in the financial system and banks should control risks from credit expansion, the PBOC said in a statement dated June 17 and distributed June 24. Financial institutions, especially large banks, should work with the central bank in stabilizing the market, the central bank said.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net; Jun Luo in Shanghai at jluo6@bloomberg.net; Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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