China: Shrinking interbank to benefit yuan loan growth – ING

China’s clamping down of interbank activities has changed the way banks and NBFIs structure their products, which should benefit yuan loan and trust loan growth, according to Iris Pang Economist at ING.

Key Quotes

“Total credit growth, in terms of total social financing, should slow on a monthly basis in July, but we expect the drop to be moderate (INGf: CNY1340bn; cons: CNY1000bn; prior: CNY1780bn). Although it is usual to have low credit growth after a quarter-end, we believe that stronger economic activity, both in manufacturing and service sectors, provide adequate support for loan demand.”

“Breaking down total credit, recent regulatory objectives would favour yuan loan and trust loans. Regulators have urged banks and non-banks financial institutions to refrain from creating excessive interbank activities because that would increase borrowing costs for economic activities. Under the tightened monitoring in the interbank market, banks should move part of their money market funding to grant loans directly to borrowers. This will speed up yuan loan growth (ING f: CNY1100bn; cons: CNY800bn, prior: CNY1540bn). And trust loans would substitute for interbank lending in some underlying securities of wealth management products.”

“On deposits, we expect M2 to grow 9.2%YoY in July, which is lower than the consensus of 9.5% (prior: 9.4%). Banks would like to increase their net interest margin by pushing the loan-deposit ratio higher through limiting deposit growth. That’s why we believe the divergence of M2 and loan growth could continue.”

“After the 5th Financial Working Conference, regulators will execute measures to reduce risks and leveraged activities in the banking and financial sectors. We maintain our view that the PBoC will at least keep the current liquidity tightness to push up interest rates gradually.”