Persistent tight liquidity conditions in China's financial sector could constrain the ability of some banks to meet upcoming obligations on maturing wealth-management products (WMPs) on a timely basis, Fitch Ratings said in a statement released over the weekend.
"We estimate that more than 1.5 trillion yuan ($245 billion) in WMPs - substitutes for time deposits - will mature in the last 10 days of June," Fitch said on Friday.
Issuance of new products, and borrowing from the interbank market, are among the most common sources of repayment for maturing WMPs, and the recent interbank liquidity shortage may make it difficult for banks to pay for the matured products, according to the rating agency.
China's mid-tier banks, also known as joint-stock banks, are likely to face the most difficulty, with an average of 20 to 30 percent of total deposits in WMPs. This compares with 10 to 20 percent for State-owned and city rural banks.
WMP payouts will exert further upward pressure on interbank interest rates, which hit all-time highs on June 20. The seven-day interbank repurchase rate has averaged close to 7 percent since June 6, more than double the average from January 1 to June 5.
The recent tightening in liquidity was sparked by a drop in foreign-exchange inflows and seasonal tightness associated with the mid-June holiday, quarter-end prudential requirements, and fiscal deposit submissions, Fitch said.
But it has intensified, as the People's Bank of China (PBC) has largely refrained from intervening. State banks are the primary beneficiaries of foreign-exchange inflows, and the drop in these flows is a key reason why recent tightness is being felt even among the largest lenders in the country.
The authorities have the ability to address the liquidity pressures, but their hands-off response to date reflects in part a new strategy to rein in the growth of shadow finance by constraining the liquidity available to fund new credit extension, Fitch noted.
"We expect this approach to be more effective and swift in slowing shadow activity than previous efforts," it wrote.
"But such an approach also increases repayment risk among banks, and raises the potential for a policy mis-step and/or unintended consequences," it warned.
The agency projected that broad credit growth will decelerate more noticeably for the rest of 2013.
Fitch's adjusted total societal financing, based on the PBC's total societal financing metric, is set to remain on a par with 2011-12, about 18 trillion yuan.
An estimated 10 trillion in new credit had already been extended by end-May with 2 trillion yuan per month on average in the first five months, leaving just over 1.1 trillion in average new credit per month for the rest of the year.
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