Why state support is still key to keeping China banks' stability

The PBOC's balance-sheet claims on depository institutions hit US$1.4t as of July.

The PBOC Support from the authorities continues to be important in maintaining stability in the Chinese banking system. Dislocation in funding markets has not become a critical concern for the most vulnerable Chinese banks as Fitch Ratings expects the authorities to remain active in promoting stability.

Here's more from Fitch:

There is increasing evidence of ordinary support through formal channels, such as central bank facilities and interbank lending, aimed at managing financial system risk and controlling financing costs for the real economy.

The People’s Bank of China's (PBOC) balance-sheet claims on depository institutions – banks, credit cooperatives and finance companies – was over CNY9 trillion (USD1.4 trillion) at end-July 2017, six times that at end-3Q14, when the central bank announced significant easing of monetary policy and introduced a raft of new policy tools to manage system liquidity.

The Chinese state continues to provide necessary liquidity to financial institutions and to limit crystallisation of losses on bank balance sheets. The PBOC has been pumping liquidity into the system in increasing volumes and with greater frequency to make up temporary cash-flow shortages at China’s policy and commercial banks.

We believe liquidity support from the PBOC is aimed primarily at achieving two goals:

1. Controlling systemic risk in the financial sector, including by avoiding mass corporate defaults. The central bank appears to be intent on avoiding a repeat of the liquidity crunch of mid-2013, when conditions were so tight that some banks were reportedly unable to meet their daily settlements. Central bank liquidity injections to remedy seasonal problems have supported more stable interbank rates, particularly since mid-2015. Despite talk of tighter credit conditions this year, interbank rates have risen very moderately since 4Q16.

2. Managing funding costs for the real economy and boosting lending, including credit for priority projects and sectors via China’s three policy banks. China remains reliant on new credit growth to maintain the central government’s GDP growth target of 6.5%.