China’s Credit Crunch will hurt, but shouldn’t Cause meltdown: barclays

China’s liquidity troubles will likely spill over into the broader financial sector and the real economy, Barclays said in a new report, but the probability of a financial-system meltdown remains small. The People’s Bank of China released two statements in as many days as part of an effort to address spiking interbank borrowing costs and allay fears of a widespread credit crunch. In its most recent comments on June 25, the central bank said it would provide liquidity as needed to banks, which served to ease market concerns of a Lehman-style financial crisis. The Shanghai stock exchange composite index has fallen 15% so far in June as investors worry the cash squeeze will have a negative impact on growth. Jian Chang, a Hong Kong-based economist at Barclays, sees increased downside risks to his below-consensus economic growth forecasts for China in the second half of 2013. “regulations to rein in speculative and risky shadow banking activities look set to remain in place and banks will face pressures, with a large amount of wealth management products maturing,” Mr. Chang said. He expects this will lead to continued liquidity tightness for smaller banks struggling for deposits, waves of deleveraging, tougher financing conditions, and both defaults and failures of smaller financial institutions. “We would expect financing costs to increase and the availability of credit for the riskier borrowers to be curtailed,” the economist added. Despite the potential systemic risks, Mr. Chang noted the odds of a broader financial meltdown are small. He pointed out the large banks are well capitalized with healthy liquidity due to the 20% required reserves at the PBoC.