shadows of doubt

China's Banks More Squeezed Than You Think

A peek into the shadows shows that deposit cover is falling short.

In their obsession with China's falling foreign-exchange reserves, investors may be ignoring a more painful Catch-22: a growing shortage of bank deposits. Left unaddressed, the lenders' liquidity squeeze could leave them dangerously exposed to fickle wholesale financing, while trying to ease the shortage could worsen capital flight.

Take Bank of Jinzhou Co. With just 0.3 percent of the $22 trillion in assets of the 35 publicly traded Chinese lenders, the bank appears remarkably liquid. Its 57 percent loan-to-deposit ratio in June was below the median reading of 67 percent. The Hong Kong-listed institution's 200 billion yuan ($30 billion) deposit base offered ample support to a loan portfolio only a little higher than half that amount.

Mind the (Right) Gap

Loans are steady, but Bank of Jinzhou's investments marked as receivables are racing ahead of deposits

Source: Bloomberg

Of late, however, liquidity in China has been a mere accounting artifact. Customers' deposits aren't sufficient to finance Bank of Jinzhou's 213 billion yuan in shadow loans, which are debt securities that the lender classifies as receivables. 1  To make up the shortfall, it has borrowed 142 billion yuan from other financial institutions. Of this, as much as 78 percent is short-term financing.  After adjusting for shadow lending, S&P Global Ratings pegged Bank of Jinzhou's loan-to-deposit ratio at the end of 2015 at 153 percent.

Bank of Jinzhou is hardly the only Chinese bank flirting with illiquidity: Almost all are sitting on a pile of debt masquerading as receivables.

As a result, deposits required to sustain one bank's bloated assets aren't popping up at another lender. In S&P's estimates, for the banking system as a whole, the true loan-to-deposit ratio has increased to 80 percent, a 10 percentage-point jump since 2013.

Broken Gauge

Official figures for China's loan-to-deposit ratio continue to show an ample liquidity cushion

Source: China Banking Regulatory Commission, Bloomberg

Even this might not be problematic if loans increased only a touch faster than the deposit growth rate of 11.5 percent. However, if the latter slows to 10 percent, and credit growth picks up speed to 15 percent (from 13 percent at present), the overall loan-to-deposit ratio would reach 100 percent by 2021, according to Peter Redward, principal at Auckland-based Redward Associates.

Banks' excess reserves would be depleted, and even less onerous reserve requirements wouldn't prevent them from becoming reliant for their financing on money, bond and equity markets. As Redward puts it:

In a country with a banking system the size of China’s, funding from these sources at a systemic level is likely to prove challenging.

One big challenge may be capital outflows. Expectations of a 5 percent depreciation in the Chinese currency are already baked into the consensus forecast for end of 2018. Deep cuts in reserve requirements could sink the yuan.

Doing nothing won't be much of an option, either. Let a liquidity problem fester, and before long it morphs into a solvency scare. China may yet sidestep a full-blown credit crisis, but not before missing customer deposits make their absence felt even more acutely.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. These securities are the bank's claims on trust companies, securities companies, insurers and asset managers.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Paul Sillitoe at

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