Subscribe

China, wealth and weaker bonds

In early April reports suggested Chinese regulatory authorities were looking to tighten their surveillance of entrusted investments among different financial institutions.

" We estimate the overall WMP-related leverage in China’s interbank market has eased."
David Qu & Raymond Yeung, China Markets Economist & Chief Economist Greater China, ANZ

An increasingly popular form of investment by these banks is wealth management products (WMP). Increasingly cautious about the potential risks of WMPs, Chinese authorities began to regulate the sector in 2016.

With GDP growth no longer a major agenda item for the government this year, we expect the deleveraging campaign to exert upward pressure on China’s bond yields over the medium term. Thus we continue to be bearish on China Government Bonds.

EASED

ANZ estimates the overall WMP-related leverage in China’s interbank market has eased the middle of 2016. Furthermore, authorities are likely to continue to tighten further as financial deleveraging has become a policy priority in 2017.

Besides regulatory tightening, the People’s Bank of China (PBoC) has also begun to re-price the cost of short-term funding in the money market.

This deleveraging campaign will exert upward pressure on China’s bond yields and we expect the 10-year CGB yield to reach 3.80 per cent by the end of 2017.

Click image to zoom Tap image to zoom

CONVENIENT

By the middle of 2016, as much as CNY26 trillion had been raised through WMPs, equivalent to 18 per cent of all RMB deposits in the banking system, compared with CNY18.5 trillion (or 14 per cent of RMB deposits) a year ago.

WMPs have been convenient vehicles for banks to move loans off their balance sheets, typically in the form of entrusted investments and beneficiary rights.

In the past banks channelled funds to borrowers without being subjected to stringent regulatory requirements, such as the capital adequacy ratio (CAR) and liquidity coverage ratio (LCR).

Click image to zoom Tap image to zoom

Over the past few years WMPs have become an important source of funding for Chinese borrowers who have difficulty obtaining traditional bank loans, such as corporates in industries facing overcapacity problems, property developers, and other corporates facing funding constraints.

Click image to zoom Tap image to zoom

ANZ Research has developed a metric to estimate the overall WMP-related leverage in China’s interbank market. It found the level of leverage has eased to 112 per cent at the end of the first quarter of 2017 – down from a peak of 117 per cent in June 2016. That said some institutions still have relatively high leverage.

We believe the PBOC will continue to tighten this sector. Against this backdrop, the WMP funding chain will continue to be squeezed. Given their high exposure in the bond market, bond yields will likely be pushed up.

David Qu is a China Markets Economist and Raymond Yeung is Chief Economist Greater China at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

20 Apr 2017

Pressures and promise for banking in APAC

Andrew Cornell | Managing Editor bluenotes

Judging by the headlines of McKinsey & Co’s latest Asia-Pacific Banking Review, it’s becoming less attractive to bank in the region as an era when this part of the world was the most fertile for growth loses vigour.

06 Apr 2017

Is China’s impossible miracle possible?

Jason Qi | Director in Client Insights and Solutions at ANZ

According to the old wisdom, 2017, the Year of the Rooster on the Chinese horoscope, suggests we can expect to see miracles emerge from seemingly impossible situations.

03 Apr 2017

Challenges for Chinese tourism growth should prove temporary in NZ

Philip Borkin & Sharon Zollner | Senior economist & Associate Director, ANZ NZ

New Zealand tourism is on a tear with no sign of slowing, driven by ever-higher numbers of Chinese tourists, right? Actually, not quite.