Liquidity feeding expansion of shadow banking in China: Natixis

April 5, 2017

HONG KONG - The dark cloud over the PBoC is that The massive injection of liquidity is feeding the further expansion of shadow banking in China, casting a dark cloud over the People’s Bank of China, says global asset manager Natixis. “(It) spikes concerns of contagion risk and, ultimately, financial stability,” Natixis says.

“In that regard, the PBoC has stepped up its efforts to safeguard financial stability by a quarterly Macro Prudential Assessment (MPA).

“(The) banks’ funding strategy for some time has aimed at substituting the reduction in the deposit base, due to capital outflows and a search for yield in the shadow banking.

“Both the potential lack of high quality collateral for good functioning of the money market, coupled with the limits being imposed by MPA point to liquidity strains continuing, if not worsening, with increasing counterparty risk because the situation is very different across banks.

“This is why we expect the PBoC to shift gears, to pump liquidity more forcefully again and/or soften its macro-prudential zeal (as exemplified by MPA).

“Chinese banks are not ready for tight monetary and regulation at the very same time. A softer tone on either or both sides is even more important as counterparty risk creeps up among China’s risk officers.” www.natixis.com (ATI).