Smaller lenders look to reduce interbank liabilities
Some small- and medium-sized commercial banks reduced quotas that they reported to China’s central bank concerning their plans to issue interbank negotiable certificates of deposit (CD) this year, as they tried to improve their liability structure by cutting their interbank liabilities.
Guiyang Rural Commercial Bank Co Ltd reported to the People’s Bank of China, the central bank, to set a quota of 9 billion yuan ($1.3 billion) on its planned issuance of interbank negotiable certificates of deposit this year, down by 35 percent from the level of the previous year.
The quota reported by Shanghai Huarui Bank Co Ltd, one of the first batch of five pilot private banks nationwide, fell by 30 percent yearon-year to 4.9 billion yuan during the same period.
Quotas reported by Tianjin Rural Commercial Bank Co Ltd and Jiangsu Zijin Rural Commercial Bank Co Ltd also dropped by more than 20 percent year-on-year, based on their CD issuance plans posted on the website of the National Interbank Funding Center.
Small- and medium-sized banks are under pressure to downsize their interbank business, said Xiong Qiyue, a researcher with the Bank of China Research Institute.
“Regulators are looking forward to guiding small- and medium-sized banks to return their focus to their main business and strengthen their functions to serve the local economy. This will weaken banks’ urge to further increase their assets and will cause a decline in their demands for interbank negotiable certificates of deposit,” Xiong said.
“Furthermore, as credit rating differences intensified among smalland medium-sized banks, financing costs became high for some of them, reducing their interest in issuing CDs,” he said.
Earlier this banking and month, China’s top insurance regulator said it will strengthen regulation of the quality of assets and liabilities of banks and insurers to make sure that their liabilities, especially those of small- and medium-sized financial institutions, remain stable.
“In the past, many banks tried to expand their business scale as soon as possible, relying on interbank funds as a type of liability. However, interbank funds lack stability. When market conditions worsen, liquidity problems will emerge at banks whose interbank funds account for an unduly large proportion of their liabilities,” said Zeng Gang, deputy director-general of the National Institution for Finance and Development.
After Chinese regulators took over the troubled Baoshang Bank Co Ltd last year, increased differentiation of channels and costs among banks to replenish liquidity had an impact on banks where a large part of liabilities are interbank liabilities, Zeng said.
“The core of liability management is to strengthen banks’ liquidity management and make their liability structure more reasonable. Stable core liabilities will account for a desirable proportion of banks’ total liabilities, whereas interbank liabilities will be reduced moderately. This will ensure that bank liquidity will not be overly affected by market changes,” he said.
Wen Bin, chief researcher at China Minsheng Banking Corp, said the action of some banks to cut their quotas on the issuance of interbank negotiable certificates of deposit has a lot to do with the current monetary policy of the country.
China will keep monetary policy prudent, flexible and appropriate this year. It is widely expected that the People’s Bank of China will further cut the reserve requirement ratio and the benchmark interest rate.
The central bank will launch policies and use monetary instruments, including the targeted mediumterm lending facility, to encourage small- and medium-sized banks to lend to small and private businesses, Wen said.
“As the central bank will increase liquidity and corporate borrowing costs will fall, the pressure on banks to satisfy their liquidity needs by issuing interbank negotiable CDs will be less heavy than before,” he said.
“Besides, under regulatory guidance, financial institutions will step up support for the real economy, the part of the economy that produces goods and services, especially by increasing medium- and long-term loans. However, the duration of interbank negotiable CDs is short. This may create a maturity mismatch risk. So it is necessary for banks to adjust their assets and liabilities with the aim of making reasonable arrangements,” he said.
The opening-up in the Chinese financial industry entered a new phase, with the first wholly-owned foreign insurance holding company, Allianz (China) Insurance Holding, being unveiled in Shanghai on Thursday.
The Germany-based company received official approval in midNovember from the China Banking and Insurance Regulatory Commission (CBIRC) to commence operations of its insurance holding company in Shanghai.
Public information showed that the registered capital of Allianz (China) Insurance Holding reached about 2.7 billion yuan ($392.5 million). Some 2 billion yuan is financed by Allianz SE in Germany.
Sergio Balbinot, chairman of Allianz (China) Insurance Holding, explained that the large population, the rise of the middleincome group and the low penetration rate of commercial insurance all point to large room for growth in the country.
Oliver Bate, chief executive officer of Allianz SE, said that up to 30 percent of the newly generated premium in the world will be coming from China in the next 10 years.
Having a presence in the Chinese market is crucial to the sustainable growth of Allianz, and this will now be made possible by China’s steady opening-up of its capital market, he said.
While the detailed agenda of the new insurance company could not be released at this time, Bate said that they would like to bring their expertise in protection, risk management and reinsurance into the Chinese market. The number of changes that the Chinese government is enacting in areas such as health insurance, pension and annuities is on Allianz’s radar, he said.
Allianz’s know-how in asset management has been stressed by Bate when it comes to the German insurer’s outlook on the Chinese insurance market.
As China’s economic growth is more consumer-led and now has more risk exposure to the outside world, Chinese individuals would need to invest more strategically outside of the country and diversify their investments, he said.
On the other hand, investing in China has been highly lucrative over the past three decades given the large number of market opportunities and the constantly strengthening renminbi, Bate explained.
China has accelerated its opening-up in the insurance sector with 34 detailed policies introduced in April 2018. Those policies relaxed rules on foreign ownership, insurance intermediaries and asset management.
The CBIRC said the limit on foreign ownership of life insurance companies has been completely lifted on the first day of this year.
Industry giant AIA will likely be the first wholly-owned foreign life insurance company in the country, according to public information released on Jan 9. Prior to that, three asset management companies of foreign insurers began operations last year.
A survey from UBS showed that the presence of foreign insurers in China is still at a very early stage when compared to other Asian markets.
Global insurance leaders account for 50 to 80 percent of the market share in countries like the Philippines, Malaysia and Singapore. They only take up 8 percent of the market share in China.
Kelvin Chu, an analyst for Asian insurance and diversified financials at UBS Securities, said that one or two foreign insurers are able to compete with local insurance companies in the first-tier Chinese cities, accounting for 3 to 6 percent of the local market share.
“Although China is the world’s second largest life insurance market, taking up 15 percent of the world’s annual premium, the market saturation and insurers’ penetration still remain at a low level. It is for sure that China will need an ample supply of commercial insurance to cater to the rising need of consumers,” said Chu.