Rising reserves

Ahead of their mid-term regulatory review in June, Chinese banks are busy drawing in cash to meet the central bank's requirements, amid worries over the repeat of a liquidity crisis that plagued the country in 2013.

In an apparent sign to ease market concerns, an official at the China Banking Regulatory Commission (CBRC) said Friday that the liquidity crisis will not occur again based on the current money market operation and data.

The Beijing News quoted the CBRC official as saying Friday that last year's liquidity crisis happened because of a rapid rise in interbank business.

In the money market, short-term funds had been invested in long-term assets and when cash was required to repay for short-term funds, the long-term assets could not be immediately cashed out, causing a short-term cash shortage and liquidity gap.

Ample liquidity

"Banks have drawn lessons from last year's crisis," the official said, ruling out the possibility of a cash crunch in June.

Last year's cash crunch in China's money market exposed the risks associated with interbank lending.

The overnight Shibor, or the Shanghai Interbank Offered Rate, a key gauge of liquidity for the country's banking system, soared to a record high of 13.44 percent on June 20, 2013 due to high interbank borrowing demand, compared with an average level of between 2 percent and 3 percent.

The money rate shot up again in December with the fixed seven-day repurchase rate, another gauge which measures liquidity, rising to 8.84 percent, a new high since June 2013.

Typically, the People's Bank of China, the central bank, would step in to inject money to ease the banking system liquidity pressure toward quarter-end. But the central bank did not intervene at that time, and instead allowed the money rate to soar.

Analysts said the message from the central bank was that the government would not automatically bail out banks and lenders need to bear the consequences of a liquidity squeeze if they rely on low-cost short-term interbank borrowing to fund payouts on maturing wealth management products (WMPs), part of a web of shadow banking, to sidestep the central bank's lending restriction and capital requirement.

Better prepared

"The situation this year is quite different as the banks have strengthened management of their liquidity. They have also made preparations to meet the requirement of the mid-term regulatory review," Zhao Xijun, a finance professor at Renmin University of China, told the Global Times Monday.

"As the economy slows down to adapt to restructuring and a new growth model, the central bank has tried to maintain the stability of the monetary policy while raising the bar for interbank business," Zhao said.

In a statement jointly issued by the central bank and banking, securities, insurance and foreign exchange regulators on May 16, commercial banks were required to limit the proportion of financing from the interbank business to less than one third of their total liabilities.

"The central bank has frequently used fine-tuning and open market operations to adjust liquidity in the money market in the first half of the year," Zhang Lei, a macroeconomic analyst at Minsheng Securities, told the Global Times Monday.

"The structure of transactions in the interbank market has returned to the condition before last June with overnight interbank lending being the most active," Zhang noted.

The overnight Shibor stood at 2.56 percent on Wednesday, far below the average of 3 percent.

As if to soothe the concern over liquidity squeeze, the central bank injected a net of 164 billion yuan ($26.22 billion) into the money market through open market operations in May, compared with only a net injection of 1 billion yuan in April.

Meanwhile, unlike last year when major banks vied to draw cash by rolling out high return WMPs, the return rates offered by some banks for WMPs have remained flat or even fell from the beginning of the year.

Industrial and Commercial Bank of China and China Construction Bank, two of the country's Big Five banks, offer WMPs with the maximum return rate capped at 5.5 percent, according to a list of WMPs currently being sold that were obtained by the Global Times Tuesday.

But the return rate of more than 6 percent was very common in the second half of 2013.

The highest return rate for a WMP, currently offered by China Bohai Bank, a smaller commercial bank, is 6.6 percent.

"The rate has actually dropped compared to the level a few months earlier because we are not short of cash right now," a staff member at a branch of China Bohai Bank in Beijing told the Global Times Tuesday.

Targeted easing

While the banking system has ample liquidity to meet the mid-term regulatory requirement, firms, especially small and medium-sized ones, are still struggling to obtain financing from banks.

The State Council, the country's cabinet, announced Friday it would cut the reserve requirement ratio (RRR) for banks which lend to the agricultural sector and small companies.

The announcement was read by some analysts as a precursor for a general RRR cut to boost credit to prop up a slowing economy.

"With sufficient liquidity in the money market, the central bank is unlikely to announce a general RRR cut very soon," Zhang said.

The current RRR cut is targeted at specific sectors such as agriculture and small companies because these sectors are facing difficulty in attracting funds and it's important to help these sectors as their development is crucial for stabilizing food prices and creating more jobs, according to Zhang.

"Not all firms are short of funds given the rapid increase of trust loans in recent months. The targeted RRR cut is aimed at solving the structural problems in lending and channeling money to sectors that are traditionally short of funding," Zhao noted.

In a sign of improvement in the credit structure, yuan loans extended to small and macro-sized enterprises grew 16.3 percent year-on-year by the end of March, 2.4 percentage points higher than other types of loans, according to the first-quarter monetary report released by the central bank in May.

Agriculture-related loans in both yuan and foreign currencies grew 17.7 percent, 4.0 percentage points faster than other types of loans, according to the report.

But long and medium-term loans to sectors which suffered overcapacity only grew 6.0 percent year-on-year by the end of March, down 1.5 percentage points from the end of 2013, it showed.