China's worst cash squeeze in at least a decade is credit positive for the banking sector overall but the crunch may hit smaller banks as their higher reliance on interbank funding could see their margins being eroded amid rising fund costs, according to Moody's Investors Service.
The People's Bank of China didn't inject funds into the money markets suffering from a shortage of liquidity. "We regard China's latest moves as credit positive for the health of the Chinese banking system overall," Hu Bin, senior analyst at Moody's, said in a credit outlook report yesterday.
"We interpret this development as a conscious decision by the central bank not to accommodate money markets at a time of seasonal tightness as it seeks to curb China's credit growth."
However, the report also warned that the smaller lenders, more dependent on the interbank market, face a higher risk. Mid-sized lenders got 23 percent of their funding and capital from the interbank market at the end of last year, compared with 9 percent for the big state-owned banks, according to Moody's.
In order to strengthen their liquidity buffers, these lenders may compete more aggressively for deposits to trim reliance on the interbank market. But doing so will cut their net interest margins.
The report also warned that bad loans may rise faster.
Chengguan, sometimes criticized for brutal force burdened by reputation
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