A big part of credit creation has taken the form of wealth management products, some of which have involved the country’s somewhat unhealthy real estate market as well as local government-funded projects. This has posed significant risks to the financial system.
Given the fast development and lack of transparency in China’s shadow banking system, inappropriately managed wealth products could significantly deteriorate a bank’s asset quality and, ultimately, lead to further need to recapitalise.
China’s banking sector liquidity crunch seems likely to have a significant impact on the behaviour of financial institutions and could eventually slow the pace of growth in its shadow banking activity.
If the interbank interest rate remains high for an extended period, it could ultimately lead to higher financing costs for businesses, harming the growth of China’s already slowing economy.
By leaving the Shibor rate high, the central bank is taking a risk. But the move also demonstrates its determination to reform its financial system and place it on a sustainable long-term footing.
One would assume that the central bank is aware of the risk in taking these steps and will ensure it won’t go too far.
Richard Gao is portfolio manager at Matthews Asia
