China has a maturity problem.
Companies in Asia's biggest economy are living for the moment as 4.3 trillion yuan ($653 billion) of local-currency bonds sold this year mature in one year or less. Meanwhile, ICBC and Bank of China have increased loans due within 12 months twice as fast as other advances.
This poses a few issues. For companies, mild financial trouble can turn into bankruptcy much sooner, especially in a slowing economic environment. For banks, liquidity risk may be understated.
Chinese lenders are focusing more on short-term loans partly because of global regulations that have pushed banks to more closely align their assets with liabilities. The net stable funding ratio requirement mooted by the Bank for International Settlements in 2010 has seen financial institutions around the world either sell long-term bonds so they can lend for a greater length of time, or shorten the duration of their facilities. Most of the money that ends up as loans in China originates from deposits, which are considered short term.
In that sense, banks are doing the right thing. The issue, however, is on the corporate side. Most liquidity-risk-management studies assume loans will get repaid once they mature. Banks don't calculate how much liquidity would be required should there be a lot of defaults.
There hasn't been a tsunami of missed payments, yet. But the number of companies in financial strife has already reached a record. Many defaults have been on short-term notes and there could be more pain ahead after a debt-market rout in April saw sales of 12-month commercial paper slump to the least in four years this quarter. If that repeats, it could cause ripples across the economy. To put a number on it: Nonbank corporations in China have some 5.1 trillion yuan in short-term borrowings.
China bears keep looking for the crack that's going to make the economy crumble. Short-term bonds are often considered safe, but when that market came to a halt in the U.S. in 2008, bank failures accelerated.
Beijing tends to pride itself on its ability to take a longer-term view of the world and plan accordingly. As the nation's companies, and banks, become increasingly shortsighted, it may be prudent for regulators to take a nearer-term view too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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