China Banks:Shadow banking curbs taking effect

Monetary data indicated a slowdown in shadow banking following regulatory tightening. On-balance sheet lending is strong and well above expectations. We are largely positive on the loans and TSF data.

New loans of RMB870.8b in May were better than the expected RMB750b. Mortgage loans, FAI loans and bill financing all showed signs of recovery in May, led by the PBOC’s call to support mortgage loans and the central government’s mini-stimulus in infrastructure and affordable housing. State-owned banks are still active in mortgage loans while smaller banks are shifting credit resources to SME lending.

Trust loans showed weakness while bond issuances remained strong. The PBOC, CBRC and CSRC have been more hawkish towards shadow banking by tightening regulations on interbank business, trust companies and subsidiaries of fund firms. We expect bond issuances will keep a strong momentum so as to hedge the tightening impact caused by shadow banking curb.

Deposits draining caused by internet MMF should be relieved in the short term. We noted that the return offered by internet money market funds (MMF) such as Yu-e-bao had fallen below 5%, and are now less attractive than banks’ WMP at 5.5%-6.0%. We expect some money will flow back to banks’ WMP from internet MMF. This can also partly explain the strength of deposits in May, aside from seasonality factors.

More liquidity injection by the PBOC will prevent a credit crunch in June. We noted that the PBOC hwasme more active in liquidity management recently and had injected into the interbank market in the past five weeks, resulting in stable shibor and repo rates. Banks have also prepared more liquidity for the coming quarterly end. Thus, we believe a liquidity crunch is unlikely.

Banks’ share performance is likely to benefit from the macro-economic stabilization efforts. The selected RRR cut, the PBOC’s relending facility and the forthcoming loosening of LDR regulations are painting the picture of monetary loosening. Further loosening including broad RRR and rate cuts are likely if there is further slowdown in the economy. Such measures are likely to stabilize banks’ asset quality and benefit their share prices.