Divyang Shah, Senior IFR Strategist
What is striking is that there are many similarities if one replaces Wealth Management Products (WMPs) with sub-prime debt, tighter liquidity, higher money market rates and a search for those banks that might have had central bank assistance.
The desire to find out if individual banks had received targeted injections of liquidity are similar to the market focus on which banks had tapped the Fed or BoE emergency lending facility post-Lehmans.
Remember how the ECB was very early in the game in providing liquidity to the banks but in the current environment the PBOC is intent on keeping the liquidity taps off.
The difference between Lehmans and China is that the former had its roots in a loss of faith over sub-prime debt that was used as collateral in the money markets while the latter is simply about a central bank that does not want to play ball. But the causality could work the other way in that concern over China’s money markets could feedback into concern over WMPs.
Fitch estimates that more than Rmb1.5tn of WMPs mature in the last 10 days of June. Given that the money markets are effectively shut banks could find it difficult to repay and create a loss of faith and lower demand for WMPs. The issuance of new WMPs as well as interbank borrowing were sources of repaying maturing WMPs so it’s easy to see the potential for things to spiral out of control.
Punishing banks for irresponsible lending is a risky game for China/PBOC as it could be the trigger for a bursting of the credit bubble.
The problem for the PBOC is that if they provide liquidity assistance then this may do little to solve the underlying problem. Even if the PBOC comes in with more liquidity this is the time to stay cautious as any loss in confidence on WMPs could still lead to unintended consequences.
