Which Chinese Banks Have The Biggest Default Risk?

Tyler Durden's picture

With China’s credit-to-GDP ratio over 200%, it appears, as Barclays notes, that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth. Though they expect that the PBoC is likely to stabilize the interbank market in the near term (perhaps by more of the same 'isolated' cash injections), short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions. With the small- and medium-sized banks having grown considerably quicker than the larger banks, having been more aggressive on interbank business (i.e. alternative channels to get around lending constraints), the following banks are at most risk of major disturbance of the funding markets remain stressed leaving the potential for retail bank runs or greater fragmentation in the commercial bank market.

Via Barclays:

A tipping point

The current liquidity squeeze has roots in a gradual tightening of liquidity in the banking system earlier in the year, but the tipping point was the abrupt drop in FX inflows in May (and likely in June) precipitated by the global unwind of the carry trade and the crackdown on unauthorised FX inflows by Chinese authorities. As the level of excess reserves dropped, banks started to hoard cash, in our view.

Unlike the recent past, the PBoC has not injected funds into the system through reverse repos. On the contrary, by issuing small amounts of bills this week, the bank has signalled its tolerance for the deleveraging process that ensued. Based on our projections, we do not think the liquidity situation will improve in the coming weeks barring strong FX inflows, which we think are very unlikely in the current environment.

The distress in China’s fixed income markets is palpable.

In the absence of prompt policy action, we expect the sell-off in rates to spread to bonds and other fixed income markets. The market will clear over time, but not before a significant level of deleveraging, in our view.

The rout in the fixed income market started at the end of May and accelerated after the three-day Dragon Boat Day holiday (10-12 June), as liquidity conditions did not ease. We think a confluence of several factors has created the tension in the funding market, which has now spilled over into bonds and equities, in our view. The following sequence of events played a role, in our view:

  1. Tight liquidity has been building gradually this year. Banks’ reported excess reserves stood at 2% of deposits at the end of March, according to the PBoC, and we estimate that ratio dropped to 1.4% at the end of May. High deposit growth – a CNY4.2trn jump in March alone – which generated reserve demand of CNY1.47trn during January-May and OMOs that drained CNY478bn of liquidity in that period, were higher than the offsetting FX inflows of CNY1.57trn.
  2. FX inflows dropped sharply in May and are likely to have stayed low or turned negative in June, pushing the excess reserve balance into tight territory. The turnaround was very sudden and driven by global market volatility, in our view. Note that liquidity appeared flush, judging by low repo rates, as late as the second half of May.
  3. The hawkish policy response surprised the market. The PBoC has not responded to surging repo rates by injecting liquidity. Even though it let CNY252bn of repos expire in the first two weeks of June, this was not sufficient to break the trend. Moreover, the PBoC auctioned a token amount (CNY2bn) of 3m bills on 18 and 20 June, signalling tolerance for higher rates. In an unfortunate timing, the squeeze in the funding market came at the time when banks have been in the process of unwinding riskier wealth management products (WMPs) due to regulations introduced in March and require bridge financing for the assets behind those WMPs. Additionally, the rotation out of WMPs into deposits generates demand for reserves, which PBoC is not accommodating. 
  4. Facing with the quarter-end liquidity needs, banks are probably hoarding cash now, transmitting the stress into bond, FX and equity markets.

The growth rates of small and medium-sized banks were faster than the large banks (the “big 4” banks). Moreover, they have higher interbank assets as a percentage of total assets than the big banks.

We believe this was mainly because:

1) the small and medium-sized banks were more aggressive on interbank business, which was used as an alternative lending channel to get around the lending quota, and LDR and capital constraints; and

2) they are more dependent on interbank funding to support their business growth.


In particular, we believe some mid-sized banks, such as Minsheng Bank and Industrial Bank, are using credit risk product-based (such as, discounted bills and Trust Beneficiary Rights [TBRs]) reverse repos and repos to arbitrage regulatory requirements. Such assets, which we believe have a much higher default risk than bonds-based reverse repos/repos, grew rapidly at these banks over the past two years.

Minsheng’s reverse repo under discounted bills increased 376% y/y in 2012 and Industrial Bank’s reverse repo under discounted bills and TBR increased 61% y/y in 2012.


In our view, the regulators are more likely to tighten these products in future.


Source: Barclays

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LetThemEatRand's picture

So, the business model of sending our middle class to China so the plentiful Chinese can buy the cheap shit they make over there when the Western middle class is destroyed, is working though.  Right?

Manthong's picture

Default? What is this word?

At first it sounded Greek to me, but then I found out it has no equivalent in Greek.

Oh, and when their housing bubble bursts like an underwater nuke, it will make ours look like a fart in the bathtub.

LetThemEatRand's picture

But think of all the drones they will need to buy to help keep the billion starving peasants in line.  America.  Fuck yeah!

robertocarlos's picture

I'm not moving to China but I know what you mean, I think.

LetThemEatRand's picture

China is awesome.  They even have nets to catch you when you "fall" from your worker dorm.

Jim in MN's picture

Here, let me simplify for you:

The ones that are Communist.

max2205's picture

You trust those numbers?

Bennie Noakes's picture

Even if these banks were fine before, they are probably in deep trouble now thanks to this helpful analysis from Barclays.

Mr. Hudson's picture

China can print all the Yuan they want to. The Chinese people won't know the difference.

kliguy38's picture

golly gee that sounds vaguely familiar.........oh wait

chump666's picture

The Fed/ECB with their liquidity and money printing arrogance -  Don't fight China!  They have been tightening liquidity for months, also, buying up huge amounts of USDs (safe haven flows).  This is a pure deflation trade, gold smashed, commodities smashed China banking system collapsing, property market is done.

If gold sinks though 1200, we are going to enter an ice age.

Schmuck Raker's picture

Long skis.

Free your heels and your mind will follow.

NeverForgetSilver's picture

China has been suppressing stock market, housing market and draining liquidity for several years to avoid bubble. They may have reached a point that they need to relax a little.

Dr. Engali's picture

Uhmmmm the banks furthest away from the power structure.

Catullus's picture

Curve twisting: the new nut twisting.

q99x2's picture

Sustainable growth is needed to feed greedy pig middle men and parasitic banksters.

Atomizer's picture

List of U.S. executive branch Czars appointed under Obama administration. Connect the dots.


What is the definition of Czar? Follow the current appointees elected directly by O’bama. Don’t get upset, be happy that you know the real truth. The NSA scandal is going to expose many House, Senate, and Congress members. IRS & Bengazi disclosure will all fall into place. FYI

Mark_BC's picture

There is no such thing as sustainable growth.

Kirk2NCC1701's picture

Fair enough. Will you settle for Sustainable Seasons?

NeverForgetSilver's picture

There are plenty of rumours about Bank of China default and China to release 400billion yuan. BOC denied the rumour and has reported to the police for criminal investigation. There is also no confirmation that currency has been released by PBOC. Lets wait and see. Poeple tend to believe bad news in China. So far most are false.

robertocarlos's picture

I'm sorry I called the Chinese buyers of gold jewelry "idiots" the other day. I did not mean to offend the ZH stackers. I only meant I thought it would be cheaper next month, and I'm only guessing. I realize that when the price is too low there won't be any gold available at that paper price.

I'm the one who didn't think.

StarTedStackin''s picture

I am an ignorant fool when it comes to Chinese bank risk, yet the Amish men in my neighborhood ask me how I get my garden to grow so well.




my tip of the night is to only plant edible landscaping from now on.

Atomizer's picture

The WTO has been the hub of failure, tomorrow it will claim many other countries on borrowed promises to become a profitable industry.


How Chinese Subsidies Changed the World

JOYFUL's picture

It's a bright new day here in Asia, so I think I'll carry on with my musings of yesterday here... 3675742 [with the forbearance of our senior savant "Mr Steve" - in whose luminous presence I am acutely ashamed to let my dull knife be viewed!]

As we all know, China's export-driven economy is not immune to economic breakdown in the rest of the world. What the ordinary pundit fails to consider is that China's export-driven economic model is a stage in it's long term planning(probably because western-oriented thinkers are not familiar with 'long term planning' as a concept!) Their analysis of the present situation vis a vis China... therefore... cannot but be flawed.

The influence of western-trained/indoctrinated economic\financial sector personnel reached it’s high tide in China sometime in the last decade. Their MBA influence was all pervasive... and is tremendous still. BUT... the generation[s] becoming active now are indigenously educated... and the change over will start to show its' effects under the newly installed regime there. These types of changes are always incremental... slow to be noticed(at least from afar)... but proceed with great thoroughness to affect every aspect of the society in which they take place. Don't expect the current imitations of a decayed banking sector to last much longer in China... the underpinnings of a very different foundation are already being built... while the lazy uber-bears of ZH continue to drone on in antiquarian fashion!

A very specific context which will serve to flesh out this proposition is the ongoing awakening within China to the extent of it's  manipulation by agents of sionism... the head honchos of which global hegemonist project... after building fortunes from the opium trade in the C19th Far East ... returned to the scene of their previous criminal endeavours in the20th with a new scam... "Communism" ... to balance their "Capitalism" scam. Now a new generation of scholars are ripping the mask off of not just the  legacy of "Sassoon-style"  talmudist "trade"...  they are also making China aware of the controllers who guided monster Mao and ilk every step of their bloody long march to ascendance. http://jewishfaces.com/china.html

And while the efforts of the pseudo-Israelites to penetrate and dominate the Chinese government are still strong of the moment... the counter-current of nationalistic, and purposefully anti-sionistic Chinese is beginning to rise in it's own weight class... a new post-Maoist communism, post Deng("it's glorious to get rich!")capitalism crowd of intellectuals has stopped swooning to the beat of western[read talmudist]values*, and is exploring their own cultural past for clues about their future. Collision ahead!

Yes, the downturn of the economy will be catastrophic for many... in China as well as the rest of the world. But catastrophies are something that the Chinese have learned to live through. The capacity of others to do so is questionable. And it will indeed come down to who is best prepared to weather the storm as a society.

*the values of so called 'humanism' and 'reason'[the 'enlightenment' meme] imported into C20th China from the west began to run out of steam there in the 80s... as artists and the cultural elite began to question 'modernity' and began the long march back into times past... in search of the phoenix of a cultural collective unconscious to draw inspiration from. This same process... whilst subject to many fits and starts, false trails, and misunderstandings... now takes places in the realm of economics and the social sciences... a long march back in search of sustainable Sinified values... that can accomodate the particularities of the Han dragons twisting road between the crassly materialistic and the rarified mysticism that is the totality of it's soul. Only with these particularities in mind can we have a fruitful discussion here about the implications for gold, and sustainable economies in the future! A future which will decidely be non-western in impetus.


drivenZ's picture
"Which Chinese Banks Have The Biggest Default Risk?"


none of them...The governement will step in every time and they have the money to do so. 

CutOut's picture


What type of software do you use for your voluminous bot posts ?



Informed ZH readers remain curious as to why HEART repeatedly posts crap such as Boston Marathon bombing fake injuries/fake blood/crisis actors garbage which is 100% DISINFORMATION.

HEART intentionally conflates ridiculous,nonsensical Boston bombing speculation with credible information.
This a well known disinformation tactic designed to contaminate and discredit genuine factual content.
Thus HEART has confirmed he's a disinfo operative.

Boston Marathon bombing disinfo example #3616167

ZH is being targeted by FedGov spambots & human operatives saturating the comment sections with garbage and disinformation in addition to down voting certain posters.

They are not harmless trolls, they are professional operatives attempting to undermine and discredit ZH via multi nics & sock puppets.

Attacking this post by constant down voting speaks for itself: the shills exposed themselves.

Case closed.