BEIJING/SHANGHAI (Reuters) - China’s securities watchdog has told several large non-bank financial institutions to lend in the interbank market to smaller non-bank firms to help ease any cash shortfalls, sources with direct knowledge of the matter told Reuters on Monday.
The moves to head off potential instability among smaller financial institutions comes as Beijing faces pressure to boost bank lending to help cushion the economic impact from the higher tariffs on Chinese imports imposed by the United States.
China’s money markets were rattled after regulators took control of Inner Mongolia-based Baoshang Bank on May 24 due to “serious” credit risks.
As a result, the central bank has injected cash into the banking system to reassure lenders, and regulators have repeatedly downplayed the risks at small financial institutions.
Yet some smaller non-banking institutions still suffered from a shortage of funds last week after being denied loans in the interbank market, traders said. Financing costs for smaller financial institutions have also spiked since the Baoshang takeover.
During a meeting on Sunday, Li Chao, vice chairman of China Securities Regulatory Commission (CSRC), urged large non-bank institutions not to cut off smaller non-banks as counterparties in the interbank market.
Managers from seven major securities firms and two fund companies attended the meeting in Beijing, the four sources said.
According to the minutes, confirmed by the sources, Li also told them to increase their lending quota for short-term bonds and offer more financing tools to support small securities firms.
Regulators also eased rules that would allow select brokerages to issue debt more easily, and said China’s top five lenders would provide funding support to the country’s top five brokerages.
The minutes showed that regulators are aware that the risk of illiquidity in the bond market had spread to non-banks, and that there was a rising sense of “distrust” between financial institutions following Baoshang’s takeover.
CSRC did not immediately respond to a fax request by Reuters seeking comment.
After the Baoshang takeover, investors are scrambling to revamp the way they evaluate negotiable certificate of deposits and other instruments once believe to be ultra-safe, traders and fund managers told Reuters.
“Previously, investors were seeking high yields, now, avoiding risk is the top priority,” a Shanghai-based mutual fund manager said, who declined to be named. “Under the current circumstances, if you’re not sure to buy or not to buy, just avoid buying.”
Although small banks and other lenders are not by themselves seen as a systemic financial risk, the concern is that enough of them have largely funded themselves via short-term money market borrowing, posing a collective danger if one or two fail.
“CSRC is worried about further risk contagion, and want to strengthen the communication with the market,” a senior official of a major brokerage told Reuters.
Asked about how the firm would support the smaller non-banks after CSRC came out urging support, the source said: “As for us, we’ll wait and see how strong is the support from regulators, especially the funding back-ups.”
Reporting by Cheng Leng, Samuel Shen, Xiaochong Zhang, Zheng Li and Ryan Woo; Editing by Simon Cameron-Moore and Jacqueline Wong