China Financial Daily:Interbank WMP Balance Started to Fall in 1Q17

Interbank WMP balance started to fall in 1Q17(Caixin, May 20)

    Interbank wealth management products (WMPs) have started to see decline ingrowth and shrinking proportion as percentage of the total bank WMP balance,Caixin reported, citing personnel in banks’ interbank department. According to2016China Bank WMP Report, interbank WMP balance was Rmb5.99tr at theend of 2016, doubling from 2015and accounting for 20.6% of the total bankWMP balance (vs. 12.8% in 2015and 3.3% in 2014). A typical interbankbusiness chain is where one bank issues interbank CD to purchase interbankWMP issued by another bank, and the latter will use the proceeds to invest inbond market (likely with leverage). However, due to rising interbank rate andtighter regulation, interbank WMP as percentage of the total WMP dropped byaround 3ppts qoq in 1Q17and may continue to shrink, according to anestimate by industry expert in Caixin’s report. Shanghai banking industry sawoff balance sheet business balance growing only 34% yoy in 1Q17, muchslower than 50% yoy growth for interbank WMP in 2016.

    Deutsche Bank’s view: This is another evidence of the fact that financialdeleveraging will continue. As we highlighted in our report Slower pace butunchanged direction, despite the recent softer tones from regulators, it doesnot mean that financial deleveraging will stop and we believe it is just half waythrough. We expect the deleveraging to continue, as the goal of bringing downfinancial leverage has not been achieved and the government’s tolerance levelhas not been hit. If measured by the credit-to-deposit ratio, financial leverageremained elevated at 114% as of March 2017vs. the 81% it should be intheory (i.e., 1minus reserve ratio); we think the regulator may try to bringdown the ratio to around 100-105%. We believe it is unlikely for now to seenotable property price correction or bank run in the wholesale funding market ,which would be triggers for any government action.