Fitch warns on wealth management product payouts

Tightening liquidity conditions in China's financial sector could hamper the ability of some banks to meet payouts on maturing wealth-management products on time, Fitch Ratings warned on Friday.

Charlene Chu, Fitch's senior director of financial institutions, said the company estimates that more than 1.5 trillion yuan's worth ($244 billion) of products will mature in the last 10 days of June, and the expected surge in payouts could exert further upward pressure on interbank interest rates.

The overnight rate of Shanghai Interbank Offered Rate (Shibor), calculated by the National Interbank Funding Center, hit an all-time high of 13.44 percent on Thursday.

The seven-day interbank repurchase rate has averaged close to 7 percent since June 6, more than double the year's average to June 5, of about 3.3 percent.

Analysts suggested the hands-off reaction by regulators to the spiking interbank lending rates over the past two weeks had been a deliberate move to pressurize the shadow-financing sector.

Premier Li Keqiang said at a State Council meeting on Wednesday that banks must make better use of existing credit, and step up efforts to contain financial risks, which has been interpreted as a signal that decision makers will not fund the money market to lower lending costs and ease the money squeeze.

"The Chinese authorities have the ability to address the liquidity pressures — but their hands-off response to date reflects in part a new strategy to rein in the growth of shadow finance by constraining the liquidity available to fund new credit extension," said Chu.

"We expect this approach to be more effective and swift in slowing shadow activity than previous efforts, which have focused predominantly on rules and regulation."

Wu Yinzhou, an analyst with Shanghai-based Fulun Consultancy, said the approach had hit the smaller banks much harder than the bigger ones.

"Some smaller banks, especially those aggressive ones whose non-interest income rely heavily on the sales of wealth products, could struggle to pay their liabilities, while bigger Stated-owned banks are not in that much of a rush," said Wu.

As banks prepare their books for half-yearly reviews by the regulators, including the China Banking Regulatory Commission, even those with sufficient funds remain reluctant to lend too aggressively on the interbank market, said one trader at the National Interbank Funding Center in Shanghai.

Although the Shibor overnight rate fell 495.20 basis points to 8.49 percent on Thursday, the largest one-day fall in multiple years, it was still above the monthly average.

The seven-day repurchase rate, a benchmark for interbank borrowing costs, fell to 8.33 percent from Thursday's close of 11.62 percent on Friday.