Liquidity risk may return on interbank asset fluctuation in 1Q12
A key factor behind the improved liquidity environment and M2 growth in
4Q11 was the stronger-than-expected rebound in interbank assets led by
the growth in Interbank Entrusted Payments (backed by domestic letters of
credit). Such assets are equivalent to short-term loans but are recorded as
interbank assets, and are not subject to loan quotas and loan-to-deposit
ratio requirements. Regulators are increasing scrutiny of this business after
the robust growth of 4Q11 (up Rmb400-500bn) and increase in participating
banks. We believe they might require banks to either: 1) book general
provisions and RWAs, which could reduce incentives and lead to slower
growth, or 2) record these assets as normal loans, which could remove the
incentive for these transactions and lead to unwinding of such assets.
M2 growth to slow in 1Q12 if interbank rules are tightened
We estimate effective 4Q11 loan growth of Rmb2.2tn-2.4tn, boosted by
growth in Interbank Entrusted Payments (IEP). If new regulations are
implemented, effective loan growth in 1Q12 could be in line qoq, despite a
higher loan quota. This – combined with the liquidity drain from seasonal
net tax collection and likely still weak FX inflows – could lead to a
moderation of sequential M2 growth in 1Q12. Under the scenario of muted
interbank asset growth and one RRR cut in 1Q12, we could see a
moderation in sequential M2 growth, with the qoq annualized growth
down to 9.5% in 1Q12 from 17.6% in 4Q11, and yoy growth of 11.5% for
1Q12 from 13.6% at the end of 2011. In light of the scrutiny on interbank
assets, we believe the PBOC will need to make a more decisive RRR cut