China Financial Daily:Escalating scrutiny on shadow credit,Banks’off B/S &CIRC action

Local regulators including Shanghai and Guangdong recently required banks toconduct self-check on off-balance sheet exposure, Reuters reported, citingpeople familiar with the matter. Local banks need to report off B/S credit sizeas of April including but not limited to off B/S WMPs backed by nonstandardizedcredit, credit guarantee, credit line, and financial derivatives. Thisechoes the Circular No. 27 issued earlier to require a centralized managementtotal on and off B/S credit underwriting. We think this is another effort for theregulator to control banks’ shadow credit which grew by a 46% CAGR in 2012-1Q16 to Rmb21trn, or 10% of total banking assets. We discuss shadow creditof banks in details in our recent note (Chinese Banks – No more hiding behindshadow).

    CIRC has suspended insurance asset management subsidiaries’ channelbusiness starting from end of May, and requires self-check on such businessregarding investment, credit and operational risks, STCN reports, citing peoplefamiliar with the matter. Insurers’ channel business size currently is overRmb1trn and above 85% is for channeling interbank deposits. Insurance AMsubsidiaries will help convert banks’ certificate of deposits (CDs) to interbankdeposits, package the interbank deposits into insurance asset managementplans and sell back to banks. Interbank deposits generate 1-3% higher yieldthan CDs but are counted into denominator in LDR calculation with zerorequire reserve requirement (RRR). The regulator requires self-check reportbefore end of July and insurance companies need to rectify channel businessto prevent related risks, according to the report. On our estimate, total banks’shadow credit amounted to Rmb21trn as of 1Q16, and such insurance channelonly accounted for less than 5% of total shadow credit of banks.

    PBOC conducted Rmb290bn of Medium–term Lending Facility (MLF) in May,including Rmb175bn 3-month MLF at 2.75% yield and Rmb115bn 6-monthMLF at 2.85% yield. With Rmb147.8bn MLF matured in May, MLF outstandingbalance stands at Rmb1.64trn as of end May. Besides, PBOC grantedRmb570mn of Overnight Standing Lending Facility (SLF) in May at 2.75% yield,resulting in SLF outstanding balance of Rmb400mn as of end May.

    Additionally, PBOC grants net Rmb108.8bn of PSL to 3 Policy Banks in May,leading to end-May outstanding PSL at Rmb1.5trn, according to PBOC’sstatements. In total, PBOC injects net liquidity of Rmb251bn via MLF, SLF andPSL in May 2016, compared with net liquidity injection of Rmb144bn in Apriland Rmb150bn in March 2016.