China cash crunch hints at early banking crisis

China’s worst cash crunch in at least seven years is an indicator of shadow lending gone awry and a banking crisis could appear earlier than expected if liquidity remains tight, according to Fitch Ratings.

“We are starting to see some issues emerging” in liquidity, Charlene Chu, Fitch’s head of China financial institutions, said yesterday in Hong Kong. “It will be very important over the next month or so to see how that plays out. If that doesn’t go away, some of this may be moving ahead faster and earlier than we thought.”

The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 6.03 percent in June, the most since the National Interbank Funding Center began compiling a weighted average in 2006. The Agricultural Development Bank of China scaled back the size of two bond offerings today by 31 percent as the liquidity crunch squeezes demand for the securities.

Chinese finance companies are calling for the central bank to resume capital injections as slowing growth and speculation that the United States will rein in monetary stimulus curbs global demand for the Asian nation’s assets. Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital flows into China, rose 66.9 billion yuan ($10.9 billion) in May, the central bank reported June 14. That was the smallest gain since November.

The tightening is “emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels,” Chu said.

She earlier estimated China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding increases in the ratio before the banking crises in Japan and Korea. In Japan, the measure surged 45 percentage points from 1985 to 1990 and, in Korea, it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011.

Morgan Stanley lowered China’s 2013 economic growth estimate last week to 7.6 percent from 8.2 percent, joining banks including UBS AG and Barclays in cutting projections after weaker expansion in exports, industrial output and new lending last month.

Bloomberg